Every company has several areas that are the realm of specialists - people with knowledge so obscure that nobody outside of their department seems to have any idea of what they do. Sometimes this knowledge is of strategic importance - they guys working in R&D, for example. Other times, it's business critical, which means that it's important to the smooth functioning and profitability of the corporation. But in these cases it almost always means that people - even senior executives - give the work of these people little thought. The tax department traditionally has been one of these areas but, thanks to changing accounting rules and governments' desire to increase revenues, that seems destined to change in the United States. It's time to take taxes out of the closet.

Taxes are one of the biggest expenses companies incur and tax codes are convoluted in the extreme. This is true for both income and sales taxes. Add to that accounting rules and the timing differences they create between when companies recognize income tax expense for book purposes and when they actually pay them and you have a complex problem that has an ongoing, material impact on a company's reported earnings and cash flow. Tax-related issues are now one of the most common Sarbanes-Oxley compliance issues. The impending change from US GAAP to IFRS will give rise to even more complexity, more changes and the challenge to determine how to optimize your company's tax position.

How does the board, the CEO and the CFO know that they have optimized their tax exposure? Especially since in just about any company with 1,000 or more employees and even smaller ones that operation multi-nationally, corporations are constantly making decisions that affect their tax expense?

To start, you shouldn't be doing this with spreadsheets. Taxes are a multi-dimensional issue, requiring companies at times to juggle issues of timing, where transactions occur, how they are effected and with which legal entities. Desktop spreadsheets are two dimensional and therefore require vast amounts of ingenuity to produce analytical models that ultimately are too brittle and too time consuming to support the kind of decision cycles companies now confront. Spreadsheets are error prone, lack transparency and therefore are an ongoing audit headache as I have pointed out earlier. Taking taxes out of the closet means taking the analysis and calculations out of spreadsheets and into dedicated applications. This is not a matter for the tax department alone (which probably doesn't see that there is a spreadsheet problem) and should examine the technology needed. This should be a matter for review by the CEO, CFO and the audit committee of the board.

Let me know your thoughts or come and collaborate with me on Facebook, LinkedIn and Twitter.

Regards,

Robert D. Kugel - CFA - SVP Research