Ever since Sarbanes-Oxley dragged tax departments into the limelight, the dynamic between tax leaders and finance chiefs has been evolving apace. How do things stand now? I asked Jacien Steele, tax partner with Deloitte Tax LLP. A main focus of Steele’s role at Deloitte is on elevating the tax agenda in the office of the CFO.

BizTaxBuzz: How do you see the evolving dynamic between tax leaders and the CFO? Where do you see it breaking down?

Jacien Steele: The good news is that communication between tax leaders and the CFO has been improving. There’s been an evolving regulatory continuum mandating dynamic interaction between tax leaders and the CFO, as we first saw with Sarbanes-Oxley and the enhanced internal controls focus, and then with the adoption of ASC 740’s accounting for uncertainty in income taxes (formerly FIN 48). Effective communication between tax leaders and the CFO continues to gain momentum.

Where we see the dynamic breaking down is when there’s a failure by either side to understand the full spectrum of benefits that can be achieved through systematic communication between tax leaders and the CFO, versus limiting communication to what’s mandated by regulation. So it’s not so much a breakdown, but more a failure to achieve optimization through best practice.

BizTaxBuzz: Is the movement of tax leaders toward a more strategic role still gaining momentum, or has it stalled?

Steele: The pace at which tax directors move to more strategic roles is specific to each individual situation, and it depends on both environmental factors and individual skill sets. My experience suggests that it’s still gaining momentum in most organizations. The opportunity curve may have flattened, but that’s to be expected because it was so steep to begin with.

Where I see the momentum accelerating at its most rapid pace is in environments where the tax director’s strategic role moves beyond interacting solely with the finance function, and into interacting with the operating functions. The strategic Holy Grail is for tax to own dynamic customer relationships with operations and to be fully integrated with business strategy, in addition to maintaining a strong relationship with finance.

We’re hearing from many CFOs that they feel it’s their responsibility to connect tax with the business and demonstrate how tax is integral to the business strategy. In leading organizations, tax has become connected to the business — not just to finance. This can occur most quickly where there’s strong sponsorship from the CFO.

BizTaxBuzz: What are the areas in which CFOs tend to be underinformed about tax issues?

Steele: Each of the three areas I’d suggest are generally forward-looking areas. First, forecasting the effective tax rate, as it relates to how changes in the business forecast or financial forecast impact a company’s ETR. For example, a company’s total worldwide income forecast might remain unchanged, yet there could be a shift between U.S. and non-U.S. income.

Second, CFOs need help in determining the impacts of proposed or enacted legislation or regulation on tax.

And third, I’d say that measuring the ROI of investments in tax resources — knowing whether the return on investments in the tax function, and/or tax resources, is appropriate or comparable to peers.

In each of these areas, it’s not that the CFO lacks knowledge or judgment, but rather that he or she hasn’t been adequately informed to be able to make strategic business decisions. A lack of adequate communication can be an impediment to setting strategic priorities and making sound investment decisions.

BizTaxBuzz: What steps can CFOs take to improve their performance in the tax area?

Steele: CFOs should, first of all, define appropriate success criteria and benchmarks for the tax department.

In addition, they should identify an effective framework for evaluating and communicating tax issues, not only with the tax function, but also with operating management and the board. One framework that we’ve found to be effective in serving multiple constituencies is what we call “The 4Rs.” This shapes discussions on tax matters around Rate (i.e., effective tax rate), Risk (which includes financial statement risk; tax technical risk; and the impact on customers, vendors, and employees), Resources (both internal and external necessary to implement, maintain, and sustain), and Reward (cash tax, tax rate, and deployment of savings).

Also, CFOs need to establish regular communications with the tax leader. Often, finance chiefs want to set the parameters for when they should be involved in tax, which may not be an optimal approach. Rather, they should set routine opportunities to communicate with the tax leader, irrespective of whether there’s a significant tax issue, and eliminate the reliance on someone else to make the judgment call as to whether the CFO needs to know.

BizTaxBuzz: What are some steps tax leaders should take to improve communication and alignment with the CFO’s objectives?

Steele: Tax leaders should make sure that they understand the business strategy in a tax-neutral base case. What would the company do if there were no tax ramifications?

It’s a good idea to establish and nurture internal customer relationships throughout the organization, not just with the CFO but also with operations and other supporting functions. And they’ll want to make sure that there’s alignment of tax communications with the CFO’s objectives around whatever framework they choose, such as the 4Rs I mentioned earlier.

Recently, a client completed the acquisition of a major company that had significant state tax controversies. The client’s tax leader believed that the company could realize favorable outcomes with the state taxing authorities if certain large controversies were litigated. But the CFO’s objective was to reduce overall tax uncertainties through a negotiated resolution and to settle the controversies for potentially larger tax payments as opposed to litigating them — taking into account not only the potential for cash outlays for the taxes, but also the time, effort, and costs to litigate.

This demonstrates the importance of communication between the tax leader and the CFO to avoid a misalignment of the CFO’s objectives and the actions of the tax function. The CFO sought to manage the tax risk, reduce the investment in resources necessary to litigate, and was willing to settle for a less favorable reward than what otherwise could have been achieved through litigation.

Tax leaders often want to arrive at the exact right answer. But business leaders need to apply judgment to balance the direct and indirect costs of actions with the desired outcomes. Tax leaders and CFOs should jointly define the efficient frontier so that they can calibrate the appropriate investment in tax resources with the best possible ROI for the enterprise. ###