This is a newsletter from
J.D. Choi of
Tax Technologies, Inc. to tax
professionals whose interests are improving the tax management processes.
Table of Contents
- Data Collection Strategies
1. Data Collection Strategies - It is time to learn from the experience...
Now that the compliance season is over, many companies are reviewing data collection issues again. Especially
with the new compliance requirements for Controlled Foreign Partnerships, companies are wondering what to do
with their Form 8865 compliance. So, I will discuss a little bit about how to make data collection easier and
more effective in light of the "Best Practice" parameters.
If you would like to see a summary of compliance requirements for the Form 8865, please check our website
www.TaxTechnologies.com under the "Download" page.
Also, with the fast approaching year-end, I am sure the tax planners are busy looking for the numbers
for the year-end planning transactions. So, I will also discuss some tips and techniques that may save you
a little bit of time.
Finally, we have a new member joining our firm. If you would, please extend your warm welcome to Jeff
Wenger, our Chief Technology Officer.
Data collection
On the issue of tax data collection, companies are all over the place. For the most part, companies are
using some form of an electronic package. While most use Excel based packages, some use database programs
such as products offered by FastTax and CORPTax, others use mainframe-based systems and, finally, some
still use hard copy paper-based tax packages.
Although most of the data collection systems adequately serve the purpose of collecting the data, in
terms of the "Best Practice" measures, some score higher than the others. Technology should not be the
primary way to measure the Best Practice although employing proper technology is critical to achieve some
degree of efficiency. For example, I have seen a mainframe based tax data collection system that is far
better than most other data collection systems although it is based on old technology. On the other hand,
I have seen a web based system with an ODBC compliant database that is very difficult to use and performs
poorly. So, my point is "it is not necessarily the technology that makes the data collection system good
or bad."
In determining what makes the data collection system score high on the Best Practice scale, I believe
the following are the parameters:
1) Design
Most of the tax process related issues are not inherently intuitive. It is especially true to the users
of the tax data collection systems. Unlike the tax compliance systems that generally have one group of
users, tax accountants, the data collection systems have at lease two different groups of users - people
reporting the data and the people using the data. Inherently, there is a significant difference between the
two in terms of their tax knowledge. Thus, it becomes very important that the design of a system takes into
account the differing knowledge levels of all the users of the system.
2) Data Definition
Most of the data collection systems I have seen are adequately defined for each company's compliance
efforts. There are issues, however, that are rather common amongst most data collection systems. The single
most significant issue relating to the issue of data definition is "Redundancy". Most of the systems can
actually reduce the data being collected, while adequately supporting the tax compliance.
For example, the data required to report the intercompany transactions on Schedule M of Form 5471 is
generally the same information that is required for Section 482 analysis. Further, some of the subpart F
income characterization is based on the same set of data. Since Section 482 analysis requires more detailed
data than both Schedule M reporting data and the data to support subpart F income analysis, you can avoid
having to collect the same information for the Schedule M and subpart F income calculation if you define
one good set of Section 482 data in a comprehensive data collection system.
Another significant issue is the use of US accounting and tax terms without clearly defining them for
the users. Because most of the international tax compliance data needs to be collected from foreign locations,
it is very important that the terms (and accounts) are clearly defined for the people who are reporting the
data.
3) Standardization
In order to maximize the processing efficiency, it is very important that the data collection system is
standardized so that a large volume of data can be processed at one time. As explained below, the data
transfer becomes much easier if the data collection system has been carefully standardized. The standardization
also makes the data collection package easier to use for all participants.
4) Validation
In order to achieve a high degree of accuracy and avoid redundancy in data request, the data collection
system should have its own validation. It simply means that the data collection system should interact with
the users and warn of any inconsistencies at the same time as the data is captured.
5) Task Administration
As mentioned earlier, tax process is not an intuitive process. Data collection system is no exception.
Thus, it is very important to let the users know the beginning point, ending point and every points in
between. It is equally important that the data collection system facilitates communications among different
users of the system. Thus, a good data collection system should have a status check for all the tasks that
need to be completed.
6) Data Transfer
The single most important benefit for using an ODBC compliant database technology platform for your data
collection system is it simplifies the extraction and transfer of data to other systems. This can also be
achieved with Excel based data collection systems in much the same manner as long as the data structure is
standardized.
7) Pre-population of data
Most companies already have some form of ERP system or multiple systems. Although I do not believe it is
necessary as a general matter, I do believe it is helpful to download the information such as US GAAP based
trial balances into the data collection system before the package is sent out to the field. I hesitate
slightly to recommend this because many companies are in a state somewhere between a mixed bunch of legacy
systems and multiple ERP systems. Under a non-standardized financial reporting environment, it may be
difficult to have the data downloaded into data collection system and it may not be worthwhile to invest in
the effort.
I have not gone into the details of each element because it would be very boring to go through this
e-mail. However, the above parameters should give you some idea as to how well your data collection system
would score on the Best Practice scale.
Overall, the companies appear to favor Excel based data collection packages over database based data
collection system for its simplicity and ease of use. If you would like to see an example of an Excel based
data collection package, please call us at (866) 239-4884 or send me an e-mail (Choi@TaxTechnologies.com).
Re-use of compliance data
The life cycle of tax goes from planning to planning: planning - implementation - compliance (and audit) -
planning. Thus, the end of the compliance season is an excellent time to reflect on all the tax issues that
were brought up during the compliance and incorporate into your tax planning for the next tax cycle. In
order to support tax planning scenarios effectively, the compliance group must be able to provide solid
factual data to the planning group.
In general, most companies are getting the planning data from the tax return data and financial reporting
systems. Most are doing a large portion of the work manually. One way to shorten the cycle time to provide
the planning data is to automate the extraction of the relevant tax compliance data. This dynamic extraction
allows for an iterative process of analyzing tax planning scenarios yielding a more accurate projection of
the tax results.
Most of today’s tax compliance software products are based on database technologies that allow for this
type of extraction. To proceed, contact your vendor asking for their database schema. This will allow for
you or your staff to write database scripts to extract the desired information. If you use an older product,
such as ITMS, that does not support today’s database technologies (ODBC or OLEDB), you should still be able
to extract the needed information if you are willing to do more homework and target specific information you
want to extract from the database.
Creating at least one planning database at the end of compliance cycle helps shorten the cycle time
needed to provide the tax planning data. Again, it is not the technology that makes it better or worse.
Even if you create an Excel file with most of the compliance data download, that is far better than having
to look for the information every time you need it.
One practical tip for international tax planning: most of you already have built an international tax planning
database as part of the compliance. Since most of the software companies use the tax basis asset allocation
method for interest expense apportionment, all the E&P information is (or should be) in one place. Thus, if
you add the tax information with the data that is already available, you could build a fairly simple planning
database for the repatriation planning scenarios.
Please welcome our new member
Please welcome our Chief Technology Officer, Mr. Jeff Wenger. Jeff is well-versed in Internet development
strategies and has joined us from Arthur Andersen. He has substantial experience with the development of tax
and financial systems and complements our team extraordinarily well. If you would like to see more details
about his background, please visit our Corporate Information section and click on the "Executive Leadership"
page.
Check out our bulletin
Check out our bulletin to see if you would like to list a job or would like to find a job. Since most of our
visitors are from big four accounting firms and international tax people from corporate tax departments, it would
be a good forum to recruit employees for international tax jobs. So, if you have an opening, send us an
e-mail. We currently have one international tax manager position listed for a Fortune 200 company and we also
have been informally working with a few clients to help them find international tax people.
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Regards,
J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451
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