Working with EPM Cloud, but not sure what Tax Reporting is?
With Oracle’s new EPM Enterprise Cloud offering last year, many clients who would previously not have purchased a separate TRCS subscription, now have full access to all EPM modules (now known as business processes) including Tax Reporting. If you are in this situation and don’t yet have a clear understanding of what this Tax Reporting module is or what it can do for your organization, this post is for you! I will try to demystify tax for EPM administrators and project leaders, and help you understand how tax reporting requirements integrate with the overall financial close.
The calculation of the tax provision is the main requirement Tax Reporting addresses. What I mean by tax provision is all the information disclosed in the financial statements, including the tax expense on the P&L, the tax payable / receivable and deferred tax asset / liability on the balance sheet, plus all the additional details to explain these numbers. This is critical to the overall financial close as these figures are typically some of the largest in the financial statements, and investors and auditors will pay attention to them. Your tax team will want to have strong support for these figures, but too many companies (including surprisingly large ones) still use Excel as their main calculation engine.
This seems simple, but there are three factors that make tax provisioning challenging:
- Intersection of finance and tax rules: the tax provision figures appear on the financial statements and are governed by accounting standards (US GAAP or IFRS), but the rules for calculating tax depend on applicable tax laws. For example, the notion of deferred tax is entirely due to differences between GAAP rules and tax rules, where GAAP and tax disagree on when tax should be accounted for and when it should be paid; this creates a temporary GAAP/Tax difference which generates a deferred tax expense and a deferred tax asset or liability. To complicate things even more, these tax laws vary for each country and state in which your company operates, which means clients need a global process to collect input from their local countries and aggregate and translate all this data at the group level.
- Timing of data: tax provision calculations depend on underlying accounting data, and for these calculations to be accurate you need to wait for the final accounting figures. For example, the largest driver for the tax expense is usually the net income before tax, but this is usually final only very late in the overall financial close cycle. Likewise, other tax calculations depend on accounting data and can only be finalized late in the process (e.g. dividends, bonus compensation, etc.). But close calendars keep getting shorter and shorter, so to accommodate this, clients usually prepare a first draft of their provision early in the close cycle and make adjustments when new data is available.
- Organizational: tax departments are usually part of the finance organization, but often operate with different people, different systems, different timelines. That’s not a problem when filing tax returns, but in the middle of the financial close when the tax provision needs to be produced very quickly based on accounting data, it is best for tax and finance to work together with integrated calendars and systems.
EPM Cloud Tax Reporting helps with these three challenges.
Data and task management
Being part of the overall EPM Cloud suite, Tax Reporting is naturally connected to other finance systems. Using Data Management, it can access data from any ERP and from the other EPM Cloud business processes, such as Financial Consolidation & Close and Planning. This helps address the both the organizational and timing challenges by allowing data to flow quickly and with little to no friction. Contrast that with the amount of effort tax would have to go through to update all their book data if their provision was done in Excel and you start to see the value of a modern tax provision software. Using Task Manager, tax and finance processes can be even further aligned by synchronizing the tax provision workflow with the overall close, for example alerting a tax analyst when a certain accounting task is complete.
Centralized data fostering collaboration
As discussed above, tax provisioning for global companies usually requires collaboration among dozens or hundreds of contributors in local countries and at the group level. Tax Reporting provides forms and reports for each analyst and manager to input and review the data they are responsible for, and all this data is stored in a secure central database which ensures that everyone is sharing the same live information (not sending disconnected spreadsheets by email), and this data leaves an audit trail if needed. On forms, where preparers can enter their data, they can also enter comments and attach supporting documentation for reviewers. Once complete, they can promote their data, letting reviewers know that they are done.
To accelerate the provisioning process, Tax Reporting also provides a Tax Automation engine, which gives a tax-user-friendly way to define rules to automate the provision calculations. Many of the items that are needed for the provision are coming from the difference between GAAP and tax, and these can often be calculated based on a balance or a change in balance in income statement or balance sheet accounts. Because the tax rules are different by country, these automation rules can be defined at the global, jurisdiction, or entity level.
And for many tax users, one of the main benefits they realize when using Tax Reporting is the ability to use Smart View! For many of them, it is the first time they can slice and dice their data, do everything that pivot tables can do (and some more); all that without leaving the comfort of spreadsheets! And Smart View is also a great way to handle the data that cannot be automated: Smart View formulas are a great way to link spreadsheet where these adjustments are tracked to the provision system where they are tax-effected, translated, and consolidated.
If you are an EPM administrator or project manager, I hope this helped you get a better understanding of what tax provisioning is and how EPM Cloud and Tax Reporting can help. If your company already purchased EPM Cloud, but you haven’t yet implemented Tax Reporting, you may want to talk with your tax team about this. I am always happy help, if needed.
In a future post, I plan to go over the other tax requirements that EPM Cloud can address, such as country-by-country reporting (CBCR), transfer pricing, and tax forecasting.