The tax department cometh

Firms are increasingly looking to their tax people to uncover additional savings and competitve advantages.

Tax people aren’t known for generating much excitement, but C-level executives are beginning to get charged up about the savings this oft-overlooked group can potentially bring to their organizations.

An Ernst & Young survey of 128 tax and financial executives at public and private Canadian companies indicates that management is increasingly looking to their tax departments to both avert unnecessary costs and identify potential cost savings that did not exist until recently.

According to Mike Wilson, a partner with Ernst & Young, globalization has been a key driver in the tax department’s rise. As firms push their operations into new countries to take advantage of lower production costs, the taxman becomes increasingly important to understanding the tax structures of these nations and ensuring they are used to the company’s advantage.

“The value the tax department brings is anticipating the compliance requirements and additional cash costs [in these areas] and trying to manage…them to make sure the organization actually benefits from the perceived cost of operating in a lower-cost jurisdiction,” he said.

“As the tax costs of conducting business in various jurisdictions has really chewed into the bottom line, I think CFOs and boards have realized that tax can be a significant contributor to the net income after tax — which is really the number that drives shareholder value,” Wilson added.

The report’s numbers reveal that corporations are putting a larger focus on their taxes. Slightly more than half (53%) of respondents expected their tax department budget to increase in 2009, with the average expected increase being 21%. Also, 49% of CFOs and 44% of audit committees expect to increase the time they spend on tax-related matters over the next three years.

The growing complexity around government regulation of corporate tax procedures is also causing the tax office’s star to rise. Increasingly, tax personnel are being called upon to make sure the firm is complying with these regulations, which aim for more transparency around the tax-reporting process.

“That’s important for avoiding penalties and also for protecting the reputation of the organization,” Wilson said.

Firms looking to take greater advantage of their tax arms are advised to first develop a picture of where the tax risks reside within their organizations, Wilson said.

“Who owns them and how are they being managed? How are they being communicated internally to senior management to ensure there is an understanding as to how those risks are contributing to the bottom-line results?”

Wilson also suggest looking for savings opportunities related to taxes and ranking them in terms of potential impact on the organization — both from a bottom-line perspective and from a risk and reputation viewpoint.

Communication is also key, not only upwards from the tax office to the C-suite but also in the other direction, Wilson added. “Make sure the tax group knows how growth is being driven.”