Biz value-add

Have investors been asking for greater transparency on your tax liabilities and tax planning? Can you confidently respond to stakeholders' questions on overall tax expenses and liabilities? Do you have a clear and up-to-date understanding of tax expenses? Can you analyse effective tax rate? Have tax issues in subsidiaries caught the management and Board unawares in past years? Managements routinely face these issues when companies have business interest in multiple countries and do not have a robust tax reporting process.

Historically, tax accounting and compliance processes have grown organically; incorporating changing business and reporting demands, often in a reactive way. Some of the challenges typically experienced are:

Non-existent tax accounting policies and practice guidance;

Inconsistent application of the relevant accounting standard;

Variations across jurisdictions in the training, expertise and experience of those preparing or reviewing calculations;

Limited ability to compute deferred tax balances and reconcile effective tax rate with adequate explanations;

Complicated consolidation process with limited audit trail;

Tracking developments in the tax and accounting domain, and assessing their impact on tax obligations.

Companies should examine carefully how their tax function is organised, staffed and integrated within the internal control system, to ensure tax reporting is achieved smoothly, efficiently and accurately. The key ingredients of a robust tax reporting system are governance, people and infrastructure.

Governance involves creating a reporting framework that focuses on ownership, policies and responsibilities. Companies should develop a core team for tax and finance, which is well versed in tax reporting aspects such as current tax provisions and deferred tax computation. There should be well-defined policies mandating reporting deadlines, review protocols and documentation standards.

People are the key to the success of any process. Apart from a tax specialist, it is important to have people with the right expertise in tax accounting and reporting. This is critical when a company has to report under multiple GAAPs such as Indian GAAP and IFRS. The company should invest in training employees or seek expert assistance for its tax reporting.

The infrastructure in use for tax reporting can directly impact accuracy and timeliness. Use of a non-standardised form for compiling data and the absence of documented methodologies for tax computation can result in delays and errors. Lack of audit trails for reporting tax assets, liabilities, income and expenses can call into question the internal control systems. Companies should put together a tax reporting manual with information on standardised forms for collating data, principles for computing income tax balances under various GAAPs and policies for probability analysis for tax litigations. Internal checks and controls are needed to compute tax balance sheets and effective tax rate reconciliations.

Tax reporting not only supports financial reporting and tax compliance, it also adds value in meeting business strategy by providing inputs on the tax and accounting implications of various transactions. One should also remember that tax reporting is not a year-end exercise but a dynamic, continuous process. Invest in strengthening this process to reap its full benefits.

(Pankaj Chadha is partner in a member firm of Ernst & Young Global. )