Good, Better, Best. The race to set global standards in tax management. KPMG s 2009 Tax Department Survey

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1 Good, Better, Best The race to set global standards in tax management KPMG s 29 Tax Department Survey TAX

2 i i K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Contents Introduction 1 Executive Summary Section I: Pressures and Challenges 5 Section II: Hallmarks of Success 14 Section III: Driving Tax Performance 29 Conclusion 2

3 Introduction In 29, as businesses continued to respond to the global recession, KPMG International commissioned a survey of tax directors in 2 countries throughout Europe, Asia Pacific, and the Americas to find out how tax departments are adapting to current challenges. We believe this is one of the largest global surveys of its kind, gathering the opinions of people in charge of tax policy and day-to-day tax operations in 9 companies. The research consisted of 9 blind telephone surveys of tax professionals world-wide, followed by more in-depth interviews with several KPMG member firms clients and tax professionals. The survey found that since our 26 research, 1 pressure on tax departments has continued. With declining cash flows, caused by the global financial crisis, senior management has looked to tax departments to contribute better cash management, tax planning, and operational efficiency to the bottom line. Tax risk management and governance remain prominent on the tax function agenda within organizations worldwide. Boards, investors, and other stakeholders have turned their attention to the potentially significant impact that tax and the way it is managed can have on their businesses. Similarly, governments around the world have been under significant pressure to address the need for increased tax revenues, a situation likely to continue long term, with tax authorities continuing to step up efforts to improve global cooperation, reduce tax avoidance and evasion, and improve the efficiency and effectiveness of their approaches to tax audit controversies. 2 In this environment, tax departments have found themselves increasingly responsible for maintaining good relations between corporations and a key stakeholder, the tax authorities. 1 The Rising Tide. Regulation and stakeholder pressure on tax departments worldwide. KPMG International 27 2 The Wolf is at the Door, the global economic crisis and the public sector. KPMG International 29

4 2 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y While the survey results showed that tax departments recognize the new pressures they face and are eager to add business value through astute and skillful tax management, many lack the time or opportunity to do so. For many tax departments across the organizational spectrum, the mandate is very clear: do more with less and do it now. We believe this research helps point the way to a new way of thinking about tax management: where risk management and responsible value creation go hand in hand, and the known hallmarks of leading practice can be used to benchmark current performance and provide a framework for applying this new perspective. Number of interviews per country Canada (4) Netherlands (4) Germany (5) Russia (4) United Kingdom (5) France () Switzerland () China (5) Japan (5) USA (15) Spain (4) Italy () South Korea () Mexico () India (4) Hong Kong () Singapore (4) Brazil (4) Australia (4) South Africa (4)

5 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T Executive Summary In this 29 worldwide survey of tax departments in 2 countries throughout Europe, Asia Pacific, and the Americas, we explore the new challenges facing tax directors, CFOs, and boards of directors (particularly audit committees). This study follows a similar global research project conducted in late 26, and country-based surveys in both the United Kingdom in 26 and the United States in 27, enabling us to identify changes. The research points to leading practices and benchmarks that can help provide a road map for improvement. In brief, in 29 businesses were working through their responses to the global recession and, with declining cash flows, senior management was looking to tax departments to contribute better cash management, tax planning, and operational efficiency. At the same time government responses to the global financial crisis around the world suggested there would be a long-term need for increased tax revenues, and tax authorities were stepping up efforts to improve the efficiency and effectiveness of their approaches to tax audit controversies. Tax risk management and governance remained an integral component of the tax agenda. Yet the challenge in 29 was about how to do more with less: how to respond to the demand for better tax risk management, provide more proactive and timely support to the business, and handle greater scrutiny by tax authorities, while dealing with the resource constraints affecting their companies in difficult economic times. In Section I, insight into the key pressures and challenges that today s tax department face is explored via survey responses. In Section II, the hallmarks of success are identified and discussed by looking more closely at the survey data and its implications. In particular, the characteristics of high-performing tax functions are examined to identify their ability to succeed despite challenges. In Section III, Driving Tax Performance is introduced as a new way of thinking about tax management. In this framework, risk management and responsible value creation go hand in hand, and the known hallmarks of leading practices can be used to benchmark current performance and to potentially map a new perspective for improved performance.

6 4 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y

7 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 5 Section I: Pressures and Challenges It s not surprising that the key pressures and challenges facing today s tax departments, our survey respondents report, are a continuation of issues noted in our 26 global survey. However, their relative importance has shifted, reflecting 29 business concerns. Those issues include: The need to free up cash Changing relationships with tax authorities Shifting global controversy patterns Pressure for continued robust risk management Ongoing resource constraints The need for continued focus on core activities. The need to free up cash In today s environment, every business function is under pressure to free up cash and defer expense as much as possible. The tax function is no exception, our survey results show; 27 percent of survey respondents reported that tax deferral/cash savings has increased in importance within the last 12 months while 9 percent of large companies (US$5 billion +) believe it to be the top priority over the next year. Are activities more important, less important, or about the same as they were last year? Cash tax savings/tax deferral 2% 71% 27% Managing tax risk 1% 76% 2% Tax process improvement and technology utilization 2% 75% 2% Accurate/timely financial reporting 1% 7% 21% Minimizing the effective tax rate 2% 77% 21% Integration with business groups and early indication of non-routine transactions % 76% 21% Management of tax authority audits % 7% 2% Tax return compliance 1% 2% 17% Less important About the same More important

8 6 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Tax functions are going to need to be very alert to the changing times across the revenue authorities around the world [while] looking after their home country responsibilities and obligations. We just have to accept that revenue authorities are essentially one global club now. Stephen Green, Head of Tax, Australia and New Zealand Banking Group Changing relationships with tax authorities Since tax administration heads from more than countries first met in Seoul, Korea, in the spring of 26 and agreed to work together on ways to improve tax administration and address the significant and growing problem of international non-compliance with national tax requirements it has been clear that tax authorities are looking to work better together, and with other law enforcement agencies, to counter perceived non-compliance. Subsequent meetings in Cape Town, South Africa (January 2) and Paris, France (May 29) focused on how to improve cooperation and transparency between revenue bodies, taxpayers, and tax intermediaries the so called enhanced relationship and highlighted the need for effective risk assessment to better target resources to detect and respond to concerns of aggressive tax planning and tax avoidance. Survey results reveal traditional tax areas such as auditing corporate income taxes and transfer pricing are still the main focus of tax authority inquiry, but other areas of interest are beginning to emerge. Over the past 12 months have tax authorities become more focused on: Auditing corporate income taxes 1% 11% % % 16% Transfer pricing 2% 9% 1% 25% 16% Reviewing business processes and structures 19% 15% 27% 25% 15% Auditing indirect (sales/use, VAT) taxes 14% 14% 6% 2% 1% Auditing payroll related taxes 15% 19% 7% 2% 9% Technology audits 2% 19% 2% 17% 9% Financial (tax and non-tax) management, process risk and controls 17% 17% 5% 24% % 1 Disagree strongly Agree strongly For example, a substantial minority of respondents 26 percent agreed that tax authority audits of technology had increased within the past 12 months. Meanwhile, 2 percent agreed that tax authority audits of financial management, processes and controls had increased during the same period. While tax executives need to consider forward-thinking approaches to effectively manage taxes and fast-evolving tax authority relationships, the underlying question of the speed at which we can expect developments revolves around how quickly and how extensively tax authorities might shift their focus. OECD Seoul Declaration 15/9/6 (see

9 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 7 Shifting global controversy patterns Most respondents reported some sort of controversy activity with tax authorities, although the vast majority believed levels remained the same as compared to a year ago. Is there more, less, or about the same controversy activity compared to a year ago? Indirect tax (sales/use or VAT) 7% 1% 12% Country-based (federal) corporate income tax 9% 79% 12% Transfer pricing % 2% 11% Local (state) income tax 9% 1% 1% People taxes (social security, personal income taxes, benefit plans, etc.) % 6% 7% Customs/duties 7% 7% 6% Less About the same More Based on survey responses, the highest controversy levels exist in the United States, Brazil, the U.K., Canada, and Singapore, while the subjects of greatest controversy involve country-based (federal) corporate income tax, percent, and indirect taxes, 1 percent. In which of the following areas, if any, do you currently have controversy activity with tax authorities? Country-based (federal) corporate income tax % Indirect tax (sales/use or VAT) 1% Local (state) income tax 26% Transfer pricing People taxes (social security, personal income taxes, benefit plans, etc.) 17% 1% Customs/duties 12% % 5% 1% 15% 2% 25% % 5% Multiple responses allowed.

10 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Large companies those with US$5 billion in revenues and above are most likely to be involved in controversy across the board. In which of the following areas, if any, do you currently have controversy activity with tax authorities? $2M $499M $5M $999M $1 5B Over $5B Country-based (federal) corporate income tax Local (state) income tax Transfer pricing Customs/duties Indirect tax (sales/use or VAT) People taxes (social security, personal income taxes, benefit plans, etc.) Numbers shown correspond to percentages of respondents. Colors range from red (lowest percentage) to light green (highest percentage). Multiple responses allowed Most respondents believe tax controversy has not escalated over the past year, but there are some interesting country differences. In the area of transfer pricing, controversy increased most over the last year in Spain, Germany, Singapore, and Australia. Indirect taxes in Canada, local taxes in the United States, and corporate income tax in Hong Kong serve as the primary reason for the increase within those countries. Is there more, less, or about the same controversy activity compared to a year ago? USA Canada Mexico Brazil United Kingdom France Germany Netherlands Switzerland Italy Spain Russia South Africa India China Hong Kong Singapore Japan South Korea Australia Country-based (federal) corporate income tax Local (state) income tax Transfer pricing Customs/duties Indirect tax (sales/use or VAT) People taxes (social security, personal income taxes, benefit plans etc) Numbers shown correspond to percentages of respondents. Colors range from red (lowest percentage) to light green (highest percentage). Multiple responses allowed

11 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 9 Looking to the future, the much expanded public deficit may put strong pressure on tax authorities to maximize revenue. Increased controversy seems likely. Loughlin Hickey, Global Head of Tax, KPMG LLP, United Kingdom, observes I expect to see more litigation and controversy in every single country, as tax authorities need to raise more revenue. These country differences may be the harbinger of a trend as tax authorities respond to pressure from their governments for greater tax revenues. Pressure for continued robust risk management Risk management continues to be a top priority for companies. The majority of respondents 76 percent rated managing tax risk a top priority over the next 12 months, and nearly a quarter (2 percent) reported it has increased in importance in the past 12 months. This shows a continued increase from 26 survey data, in which 6 percent of respondents rated tax risk assessment and management as valuable to their organization. As the table below shows, this year s results substantiate that risk management remains a key priority despite the dust settling following worldwide legislative changes aimed at protecting investors. Tax department priorities: How important is each of the following activities in driving your tax department s overall objectives in the next year? Accurate/timely financial reporting 2%2% 1% 2% 6% Tax return compliance 1%2% 1% 25% 62% Managing tax risk 2%% 19% 4% 42% Minimizing the effective tax rate 5% % 2% % 7% Cash tax savings/tax deferral 7% 7% 22% 2% 7% Management of tax authority audits 2% 5% 24% 5% % Integration with business groups and early indication of non-routine transactions 5% 6% % % 26% Tax process improvement and technology utilization 5% 9% % % 24% 1 Not at all important Extremely important Ongoing resource constraints The challenge to secure sufficient financial and physical resources for tax departments persists. According to survey respondents in 26, staffing shortages constituted the third largest (9 percent) problem hindering tax departments. In 29, survey respondents say staffing shortages are the second biggest problem (5 percent), a marked increase from its third place finish only years ago.

12 1 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Only 2 percent of recent survey respondents reported having ten or more fulltime-equivalent (FTE) resources to manage tax obligations on a world-wide basis. What would you say is your approximate, current FTE (full-time equivalent) headcount on a global basis in your tax department? Don t know/refused 21% More than 1 2% 6 to 1 15% to 5 21% 1 to 2 22% None 1% % 5% 1% 15% 2% 25% Moreover, only 11 percent of survey respondents reported that their companies plan to invest in new hires over the next year. What is your expected change in headcount over the next 12 months? Don t know/refused 2% Decrease 6% Stay the same 6% Increase 11% % 1% 2% % 4% 5% 6% 7% There has been chronic underinvestment in tax support systems over many years. The constant pressure to reduce staff size has resulted in greater demands on less staff. When you start losing knowledgeable staff, you put pressure on people and they start missing things. Tax Survey Respondent In addition to a shortage of staff, 29 percent of respondents believe that their organization does not have sufficient operating or administrative budgets, and 26 percent believe that investment in process improvement and technology for the tax function is too low. Exacerbating the problem is ongoing competition for high-level tax talent. According to one American survey respondent, We cannot afford the time to train staff to get them to the level we need. It is increasingly difficult to find candidates who have the skills to match with the company.

13 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 1 Hampering participation Moreover, the resulting lack of available skilled resources is restricting the tax function s ability to participate in major business events. When asked if their company was adequately prepared for a major event such as an acquisition, divestiture business contraction, reorganization, or resource rationalization that occurred within the past 12 months, respondents reporting unpreparedness attributed it to a lack of resources in general (21 percent), insufficient knowledge (21 percent), and a lack of qualified professional staff (17 percent). What are the top five reasons the tax function was not prepared to address major events? Lack of staff/resources in general 21% Insufficient knowledge/expertise in-house 21% Lack of qualified/experienced/professional staff 17% Lack of communication/information 1% Time constraints/change was happening too quickly 1% % 5% 1% 15% 2% 25% Multiple responses allowed. Perhaps even more surprising is the fact that only 2 percent of respondents reported that their companies have ongoing initiatives to address resource and staff constraints.

14 1 2 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y A continued focus on core activities As one would expect, the amount of time spent on the core activities of tax return compliance and accurate and timely reporting remains high. In fact, 9 percent of respondents said they spent either a lot or a huge amount of time on tax return compliance. Responses were similar percent for the amount of time spent on accurate and timely financial reporting. This is significantly higher than 26 survey results, in which these figures amounted to 79 percent and 7 percent, respectively. How much time will the tax department spend on each of the following activities over the next 12 months? Tax return compliance 2% % 2% % 2% Accurate/timely financial reporting 4% % 2% % 2% Managing tax risk 4% 9% 4% % 2% Cash tax savings/tax deferral % 1% % 26% 2% Management of tax authority audits 7% 1% 4% 26% 2% Minimizing the effective tax rate 9% 16% 7% 2% 16% Tax process improvement and technology utilization 7% 1% 6% 22% 16% Integration with business groups and early indication of non-routine transactions 9% 16% % 24% 12% 1 No time at all A huge amount of time Given the current economic environment, the potential for increased audit activity by tax authorities, and continued scrutiny from outside stakeholders of tax as an important component of overall management, it s not surprising that the amount of time spent on these areas increased. Since responses were consistent across all company sizes and regions, indications are that considerable time will be dedicated to these areas for the foreseeable future. The priority-versus-time gap Interestingly, despite their increasing importance as priorities, less time was reported spent on cash tax planning/tax deferral and minimizing the effective tax rate than might be indicated by their relative priorities. While 65 percent and 67 percent of respondents rated cash tax planning/tax deferral and minimizing the effective tax, respectively, as high priorities, only 46 percent and 9 percent, respectively, reported spending a lot or a huge amount of time on these activities.

15 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 The survey results seem to suggest that many tax functions struggle to provide the wider support their companies need because of the heavy demands of providing core compliance and reporting activities. There are many reasons for the allotment of substantial time and effort to compliance and reporting. Typically, these can include: Complex or disparate accounting systems that may require tedious and timeconsuming manual manipulation to produce tax relevant information Incomplete or poor quality data Non-standard processes that require extensive follow-up and verification Catch-up or remediation where the tax function is out of the loop on business decisions and developments. These and other circumstances hinder the ability of the tax function to provide wider support that enhances the organization s capacity to predict and respond to business events. Thus, while the priorities may be understandable given compliance obligations, the survey data suggests a mismatch between the importance accorded to tax planning and the time spent on it. Important underlying questions appear to still exist, including: How efficiently is time being spent? Should there be a greater shift in priorities? In an effort to further explore these discrepancies, we set out to assess whether some companies were, based upon survey respondents, succeeding in shifting the balance of priorities and, if so, to understand better how these high-performing tax departments not only were managing the change but continuing to improve the balance. To do this required first understanding the characteristics of high-performing tax functions as defined by the survey results. Next, it was important to identify what actions they are taking to succeed in this challenging environment in order to establish the potential underlying drivers of business value that obtained this result. These findings are explored in Section II.

16 1 4 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Section II: Hallmarks of Success In this section, we take a closer look at the survey data and its potential meaning in order to try to identify the hallmarks of leading practices and, in particular, the characteristics that distinguish high-performing tax departments from their peers. Respondents reporting strong risk management activities along with high prioritization of value-added activities and extensive participation in company projects outside the tax function were identified as high-performing tax functions. We broke the responses down into quartiles, with those companies within the first quartile deemed to be high-performing tax functions. Next, based on the survey data, we sought to understand what high performers were doing to help their teams succeed. Once the underlying value drivers were identified, we put them into a contextual framework that offers examples on how to apply these drivers to enhance performance within the tax function. Overcoming barriers So how do leading tax functions overcome the pressures on compliance activities and position themselves as key partners with business and finance functions? What allows them to balance the management of tax risk and compliance with opportunities to add value from the perspective of both technical tax matters and business developments? Based on the survey data, key themes emerged. High-performing tax functions appear more likely: To be focused on, and have invested in, getting the basics right through standardization of processes and technology To have developed, communicated, and actively deployed a coherent and documented tax governance and risk strategy that is consistent with broader business governance and risk frameworks To actively seek participation and influence and monitor their performance in adding value to the business To actively consider how to match resources to required skills, activities, and priorities. The data shows that there is little difference between sector or company size in terms of where high-performing tax functions are likely to emerge. Why might this be the case? Large companies may have greater resources to invest in technology, staff, and high-quality advice. On the other hand, large companies often struggle with organizational complexity and legacy systems from acquired companies. There is also the risk that the tax function becomes more remote from operational management the larger a company becomes. In mid-market companies the tax function is often more closely aligned with the business. While there may be different drivers for change, the survey data suggests that tax functions that perform well on standardization and risk also perform well on supporting the business and value added activities. This suggests that high performers recognize that sustained performance improvement is about synergies, not trade-offs.

17 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 5 Getting the basics right standardization is key The survey reveals that tax functions in the top tier of good practices are more likely to be highly standardized in tax processes, structure, and reporting lines. Of the high performing tax functions, 9 percent indicate they have global standards for their tax policies and procedures, compared with 25 percent of the lowest tier. Do you have global standards related to tax policies/procedures in place? Quartile 1 9% Quartile 2 71% Quartile 55% Quartile 4 25% % 2% 4% 6% % 1% The four quartiles are defined in the footnote below. 4 4 The four quartiles were determined by selecting the companies with the highest (best) composite scores for managing risk, adding value and participating in company initiatives. These companies were ranked in order, from those with the highest scores to those with the lowest scores. Quartile 1 represents the top 222 respondents, Quartile 2 represents the next 22 respondents, Quartile represents the following 222 respondents, and the bottom-quartile 4, represents the last 22 respondents. Together the four quartile represent the total 9 respondents.

18 1 6 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y High-performing tax functions are also almost twice as likely (69 percent) to have a headquarters tax function that manages and directs tax activities as the lowest quartile (7 percent). Does your tax department structure include a headquarters tax function that directs, manages or coordinates the global tax function? Quartile 1 69% Quartile 2 64% Quartile 52% Quartile 4 7% % 2% 4% 6% % Refer to footnote 4 to reference the determination of each of the four quartiles. The data also indicates that high-performing tax functions are more likely to have finance leadership (i.e. CFO, Treasurer, etc.) that drives standardization in the global tax function with top tier tax functions ranking finance leadership at.5 out of a possible 5 (where 5 means they drive it relentlessly) compared with a ranking of 2.5 in the lowest tier. To what extent does finance leadership for your company drive standardization of the global tax function? Quartile 1.5 Quartile 2. Quartile.1 Quartile Scale = Low driver 5 = High driver Refer to footnote 4 to reference the determination of each of the four quartiles. When asked to rate the level of standardization for their tax function globally in terms of tax personnel responsibilities and lines of reporting, (e.g., all local tax resources report to a regional director, who reports to global tax, etc.), more than 9 percent of top tier tax functions said there was standardization in both responsibilities and reporting lines versus 62 percent in the bottom tier.

19 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 7 We also asked survey respondents a series of questions concerning the extent to which various tax processes were standardized across their tax function globally, the results of which are consolidated in the following chart. High-performing tax departments report the highest degree of standardization for the annual income tax accrual or provision process, followed by highly standardized tax compliance and quarterly income tax accrual processes. For all quartiles, standardization of processes related to forecasting tax rates ranked lowest. Which processes are standardized across your global tax function? 4.2 Provision to return reconciliation Compliance Annual provision/accrual Quarterly provision/accrual Forecasts of tax payments Forecasts of tax rates Quartile 1 Quartile 2 Quartile Quartile 4 Scale = Low standardization 5 = High standardization Refer to footnote 4 to reference the determination of each of the four quartiles.

20 1 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Finally, in addition to a high level of standardization, top quartile tax departments (97 percent) also rated their processes as better integrated globally, such as using a common source of data and sharing data across processes, than lower quartile tax functions (59 percent) rated theirs. How would you rate the level of integration across these processes for your tax function globally? Quartile 1.9 Quartile 2.7 Quartile.4 Quartile Scale = Low integration of processes 5 = High integration of processes Refer to footnote 4 to reference the determination of each of the four quartiles. We have a more complex structure [today] and yet we re able to get our international piece of the tax return a month earlier than normal, because of all the [standardized] processes we ve put in place. Christopher Thompson, Director, International Tax, Cooper Industries Why might standardization be so important? Without a solid foundation in place, it can be difficult (and arguably unwise) to deliver robust tax planning and other strategic tax initiatives. Jose Aldrich, KPMG LLP U.S. Area Managing Partner, Latin America Tax explains, Once you have standardized a process, the expected outputs are known and it is easy to identify variations or unexpected results. Technology can be used to monitor results and as a tool to investigate variations. And, of course, standardized processes help deliver efficiency and free up valuable time necessary for business support and effective tax planning. Standardization also helps facilitate a more complete and accurate understanding and communication of tax matters across global organizations, which in turn can add value by improving timeliness, efficiency and transparency and reducing risk.

21 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 9 In fact, notwithstanding that not all tax functions are achieving high degrees of standardization, it is highly valued across the board, with 67 percent of the survey population noting that it significantly reduces or elimates risks. Based on your experience, do you believe standardization reduces risk? (Rate on a scale of 1 to 5, where 1 = does not reduce risk and 5 = eliminates risk.) 5 Eliminates risk 25% 4 42% 24% 2 5% 1 Does not reduce risk 4% % 5% 1% 15% 2% 25% % 5% 4% 45% 5% Process and technology improvements remain important Tax departments in general are pursuing process and technology improvements, with 7 percent of survey respondents indicating that tax process and technology improvements are important or extremely important in driving their tax department s overall objectives in the next year. These initiatives may arise from standardization initiatives, the increasing availability of tax-specific software packages or a desire to reduce risks associated with the use of spreadsheet-based computations and reporting. Tax department priorities: How important is each of the following activities in driving your tax department s overall objectives in the next year? Accurate/timely financial reporting 2%2% 1% 2% 6% Tax return compliance 1%2% 1% 25% 62% Managing tax risk 2%% 19% 4% 42% Minimizing the effective tax rate 5% % 2% % 7% Cash tax savings/tax deferral 7% 7% 22% 2% 7% Management of tax authority audits 2% 5% 24% 5% % Integration with business groups and early indication of non-routine transactions 5% 6% % % 26% Tax process improvement and technology utilization 5% 9% % % 24% 1 Not at all important Extremely important

22 2 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Overall, 62 percent of respondents say they have, or are planning, process improvement projects and 5 percent have, or are planning, technology-related improvement projects. Which of the following types of projects are in progress or under consideration within the tax function? Better training for existing staff 65% Process-related improvements 62% Technology-related improvements 5% More outsourcing or co-sourcing/loaned staff 21% Other 6% Refused % % 1% 2% % 4% 5% 6% 7% Multiple responses allowed. Furthermore, high-performing tax functions were more likely to pursue process and technology enhancements than those in the lower quartiles. How likely is it that you will pursue process and technology enhancements? Quartile 1.5 Quartile 2.4 Quartile. Quartile Series 1 Refer to footnote 4 to reference the determination of each of the four quartiles. While this year s survey shows a modest change from the 26 results (in which 65 percent of respondents said they were planning tax process improvements and 51 percent planned tax related technology improvements within 12 months), process and technology improvements clearly remain an important priority.

23 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 2 1 Only 26 percent of the respondents worldwide indicated that level of investment in these projects remains too low although more than one third (%) of respondents in the United States, Canada, Mexico, and Russia indicated levels as too low. At face value, this suggests there is still some work to do for many companies. Is the level of investment in tax process improvement and technology for the tax function...? USA Canada Mexico Brazil United Kingdom France Germany Netherlands Switzerland Italy Spain Russia South Africa India China Hong Kong Singapore Japan South Korea Australia About right Too low Too high Numbers shown correspond to percentages of respondents. Colors range from red (lowest percentage) to light green (highest percentage) Balancing risk and value A continuing challenge for tax departments is to balance the potential value from planning opportunities with a proper focus on tax risk management. Survey results reveal that tax functions that perform well in adding value through tax planning and business support also tend to have a clear governance and risk management framework in place. Based on the survey data, these organizations shared the following risk management practices: A documented tax risk management process A tax strategy consistent with the overall business strategy Guidance from corporate leadership directly to the tax department regarding tax risk and strategy A formal tax risk management policy, adopted and reviewed by the Board within the last 12 months A tax department representative on the company s risk management committee Placing a high value on managing tax risk. High-performing tax departments outranked their peers across all categories as shown in the table on the next page. In some cases the distinction is marked, for example 9 percent of tax functions in the highest quartile have a documented tax risk management process compared with only percent of the functions in the lowest quartile and 91 percent had a formal tax risk policy adopted by the Board versus only percent in the lowest quartile.

24 2 2 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Does your current tax function include the following? 91% Board has reviewed tax risk strategy in past 12 months 9% 9% 59% 57% Tax representation on Risk Mgt Committee 2% 16% % 5% Provided strategic guidance 16% % 65% 9% Global standards 25% 55% 71% 91% Board-adopted risk policy % 4% 59% 9% Consistent strategy 5% 7% 94% 9% Documented process % 55% % % 1% 2% % 4% 5% 6% 7% % 9% 1% Quartile 1 Quartile 2 Quartile Quartile 4 Refer to footnote 4 to reference the determination of each of the four quartiles. While the high performers outrank the general survey community across all categories, the wider group of respondents also shows good progress in this area over the last three years. Overall, managing tax risk is viewed as having greater importance throughout the entire survey community. Two-thirds (66 percent) of all respondents have a documented tax risk process up from just over 5 percent in 26. More than 5 percent of survey respondents reported that Boards and corporate leadership also have been more involved on a global basis in providing strategic guidance on tax risk, a considerable jump from the 7 percent reported in 26. Tax is taking a more prominent role on risk management committees, with 5 percent of companies reporting that they have a tax department representative on their risk management committee today versus only 26 percent three years ago.

25 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 2 Which of the following statements are true of your company? (all respondents) We have a tax strategy that is consistent with our overall business strategy 4% The firm used its external auditor for tax services within the past 24 months 77% The tax department has a documented tax risk management process The company has a risk management committee 6% 66% We have global standards related to tax policies/procedures 6% The board and/or corporate leadership has provided strategic guidance directly to the tax A tax department representative is currently on the company s risk management committee The board has reviewed the company s tax risk strategy in the past 12 months The board has adopted a formal tax risk management policy 51% 5% 49% 4% In the past 24 months, the firm has reduced and/or stopped the use of its external auditor for tax services 25% % 2% 4% 6% % 1% Adding value through participation and influence In addition to focusing on governance and risk, high-performing tax departments were also able to focus on providing value in a turbulent economy. For leading tax functions, participation and integration with wider business initiatives appears to be an important goal with high-performing tax functions placing a high value on integration with the business (95 percent) compared with the lowest quartile (77 percent). How important is business integration and early indication of non-routine transactions in driving your tax department s overall objectives in the next year? Quartile 1 4. Quartile 2.7 Quartile. Quartile Scale = Not important 5 = Very important Refer to footnote 4 to reference the determination of each of the four quartiles.

26 2 4 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y These tax functions consistently categorized themselves as integrally involved in corporate projects such as Enterprise Resource Planning (ERP) implementations or reviews, shared service center implementations, and process improvement initiatives including process and controls documentation and testing, internal audits, mergers and acquisitions, cost control activities, supply chain management, and project management initiatives. Top quartile tax functions participated in 97 percent of such relevant projects compared with less than two-thirds (64 percent) for the lowest tier. Does your tax function actively participate in major corporate projects? Quartile 1 97% Quartile 2 7% Quartile 4% Quartile 4 64% % 2% 4% 6% % 1% Refer to footnote 4 to reference the determination of each of the four quartiles. If the tax function is going to take responsibility for managing items, it will have to have a far more real and direct interface with the operating, finance, and IT departments. Tax people have to go out and actually spend time with the business. Tax Director, a FTSE 1 company At companies that were less involved in corporate projects, the pressures of reporting, compliance, and managing tax audits may have crowded out the ability to participate despite the value enterprise system implementations can impart to the tax function. There is also the question of how easy it is for management to understand how much cash has been saved or deferred to a future period by a skilled tax director or to quantify the financial and reputational risks of tax opportunities. That can make it difficult to make the case for investment in the area of tax function operations. Many of those we interviewed acknowledged that they struggle to communicate complex tax issues in a way that is succinct and clearly articulates both tax risks and rewards. Richard G. Fishman, Vice President, Treasurer and Chief Tax Counsel of Albemarle, says, [We] know the value of what we do, but it is often hard to translate that into language a non-tax person understands. This raises the question of how successful tax functions have been historically in communicating the business value they deliver.

27 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 2 5 According to the data, however, top quartile tax functions actively identify value drivers for their companies and monitor their performance. Almost 5 percent of top quartile tax functions use internal tools to monitor their performance, another 17 percent use external tools, while 22 percent of these tax functions are in response mode and another 11 percent are trying to identify measurement tools. What tool/framework do you use to explain and monitor the scope of activities the tax function needs to provide sustainable value to the business? Quartile 1 22% 5% 17% 11% Quartile 2 % 6% 14% 16% Quartile 4% 9% % 14% Quartile 4 46% 29% % 1% % 2% 4% 6% % 1% Respond to questions Internal tool External framework Looking for tool Refer to footnote 4 to reference the determination of each of the four quartiles.

28 2 6 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Other value drivers included tax deferrals or reductions of cash outlays for taxes, minimizing the effective tax rate, and accurate financial reporting and tax compliance. In terms of the future importance of tax activities, top quartile companies placed more emphasis on allocating future resources and effort to cash tax savings and minimizing effective tax rates than lower tier companies. How do you rate the future importance of the following tax activities? 4.5 Managing risk Process and technology improvement Managing audits Cash tax savings Minimizing effective tax rate Compliance Financial reporting Quartile 1 Quartile 2 Quartile Quartile 4 Scale = Not important 5 = Very important Refer to footnote 4 to reference the determination of each of the four quartiles. When looking at the overall survey results, 7 percent of respondents indicated that maximizing cash flows and minimizing the effective tax rate are important in driving their tax department s overall objectives in the next year; 4 percent indicated they plan to spend more time on tax planning relative to other regulatory and compliance activities during that same period.

29 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 2 7 Matching resources to priorities In the quest to balance the risk-versus-value equation, it is likely that sourcing will play some role in an organization s development of an actionable cost reduction/ business rationalization strategy. Sourcing often can be an effective way to reduce the cost of non-core activity while maintaining access to highly skilled resources. As tax functions face the potential for resource reductions and cost cutting measures, outsourcing functions for resource scalability or labor arbitrage is growing in popularity; 52 percent of companies with current or ongoing projects in place to address resource constraints outsource some or all of their tax functions. Which of the following types of projects are in progress or under consideration within the tax function to address resource or staffing constraints? Outsourcing/co-sourcing 52% Accounting service center 22% Other finance resource 22% None 26% % 1% 2% % 4% 5% 6% Multiple responses allowed.

30 2 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Although the survey results are neutral on the issue of increased use with only 9 percent of respondents indicating they plan to increase the amount of work they outsource/co-source over the next 12 months KPMG member firms experienced a significant uptick in demand for outsourced tax services in 29. The demand is being driven by a business need to match permanent full-time equivalent positions to the ongoing strategic needs of the tax department, with the ability to use flexible models for seasonal or periodic resource demands. When we looked more closely at the data for high-performing tax departments, it appears that those in the top quartile are 1 percent 15 percent more likely to use outsourcing to carry out tax department responsibilities. It appears that companies able to achieve the risk/value balance they seek, look to sourcing as part of their overall strategy to match resources to required skills, activities and priorities. Do you use outsourcing/co-sourcing to carry out tax department responsibilities? Quartile 1 6% Quartile 2 51% Quartile 51% Quartile 4 45% % 2% 4% 6% % Refer to footnote 4 to reference the determination of each of the four quartiles.

31 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 2 9 Section III: Driving Tax Performance The survey data indicates that companies that are successful in managing the balance between risks and opportunities also distinguish themselves by anticipating and preparing for specific pressures directed not just to the tax function but also to the broader business. They have their eyes above the horizon to chart a way forward for the tax function, seeking to efficiently deliver day-to-day compliance and reporting responsibilities while focusing on the right balance between tax risk and value. Is it possible to derive hallmarks of success that might help others to validate and inform their own performance and plot the way forward to even greater success? In the KPMG paper Tax in the Boardroom, 5 we noted a trend toward more Board engagement with tax as a key business issue. In The Governance of Tax, 6 the paper that followed, we discussed an approach for helping tax functions respond to these changes; in particular, how they needed to take account of a wider group of stakeholder expectations. This survey and the examples of leading practices the research has revealed (see Section II) give us a solid footing on which to continue turning concept into reality. With that in mind, we have developed a framework that not only provides a summary of the hallmarks of leading practice a sense of what can be achieved but that also helps companies to establish where they want or need to be in relation to leading practice, and thus, which gaps to address first. 5 Tax in the Boardroom A Discussion Paper, KPMG International, 24 6 The Governance of Tax A Discussion Paper, KPMG International, 27

32 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Establishing the framework The starting point is simple: leading organizations achieve a balance between risk and value that matches their strategic approach, and they do so from an operational platform that is effective and efficient. The focus on efficiency and effectiveness and risk and value is a constant. It is a platform, not a fixed base but rather an exercise aimed at continuous improvement and rebalancing as events disturb the equilibrium and new leading practices for performance improvement in tax emerge. Driving tax performance MANAGING RISK High-performing teams A common purpose Efficiency Enabling technologies Driving business value through tax Embedded processes Effectiveness Influencing stakeholders Timely and accurate information One view of performance CREATING VALUE To help achieve and maintain such a balance, some or all of the following building blocks may need to be put in place: The strategic goals and objectives of the tax function need to be clearly aligned with those of the wider organization so there is a common purpose. The tax management strategy needs to be made operational in a way that can be monitored and sustained over the longer term. This can be achieved through embedded processes.

33 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T 1 Audit committees within Boards are getting more visibility into the tax function and what s going on. I think you re going to see that boardroom connectivity within the tax function will drive behavior to best practices tax directors who don t want to deal with the audit committee, who want to keep their heads down, may not have that option if this direction continues. Greg Engel, Tax Insurance Sector Leader, Partner, KPMG Effective tax management requires data to be produced, exchanged, and made available to the right people, at the right time and in the right format. The requirement is for timely and accurate information. In order to monitor effective tax management there must be clarity over what is required and how performance will be measured, through agreed KPIs, so that there is one transparent view of performance. Tax functions need to understand the aspirations and constraints of relevant stakeholders and communicate with them effectively in order to help achieve their goals this includes the capability to influence stakeholders. Getting the basics right is fundamental, but labor intensive processes consume valuable resources and increase risk. Processes that can be automated should be through the use of enabling technologies, whether that is existing Enterprise Resource Planning (ERP) systems or use of tax software. The right formula is needed. Tax is complex and requires the careful judgment of trained professionals. Effective tax management needs the right people doing the right things. Those people need the right skills, the right resources, and the right reward. The Driving Tax Performance framework has particular resonance in view of the implications of the recent economic downturn. These are likely to include a greater ongoing focus on operational taxes and transfer pricing as means to protect and widen the tax base. 7 These taxes are embedded in the business operations and financial systems. And it is likely that tax authorities internationally will continue to increase their level of cooperation and focus in shifting the burden of tax assurance onto companies. We would expect leading organizations to consider and manage the potential implications of these developments, and to influence their course, by integrating their approach to tax into their wider performance driven business models. 7 KPMG s Corporate and Indirect Tax Rate Survey, KPMG International, 29

34 2 K P M G 2 9 T A X D E P A R T M E N T S U R V E Y Driving Tax Performance in Action A company had operations in many international locations. As a result of new regulations in the U.K., the group needed to certify that it had established and maintained accounting arrangements capable of supporting accurate tax returns across all the major direct and indirect taxes. The group recognized that similar regulatory changes were emerging in China, the Netherlands, and Australia. They needed to be able to respond to a similar problem in multiple locations, each of which possessed its own regulatory nuances. Conclusion As our survey results show, 29 was a challenging year for tax departments and companies overall. Reflecting a turbulent economic environment, the key pressures and challenges facing the tax function identified a consistent theme: to accomplish more using fewer resources. Perhaps more than ever before tax departments were called on to elevate their efforts to contribute better cash management, tax planning, and improved operational efficiencies and effectiveness and to do this on a global scale amid an ever-changing regulatory environment and significant resource constraints. Nevertheless, some companies appeared to successfully achieve a balance between risk management and adding business value. These companies begin to show us what the hallmarks of successful tax management might be, and how successful risk management and responsible value creation can go hand in hand. Their success provides a template others can use to assess their current performance and determine the necessary actions for improvement. We call this template Driving Tax Performance a framework to help tax departments shape and achieve their business goals. Using the Driving Tax Performance framework, the group built a common approach that they could adopt across their international operations. It would require fine tuning at the local level to comply with local requirements. This survey and its analysis were conducted by the following KPMG tax practices: Global Tax Outsourcing, Global Tax Transformation Services, and Tax Management Services.

35 G O O D, B E T T E R, B E S T T H E R A C E T O S E T G L O B A L S T A N D A R D S I N T A X M A N A G E M E N T

36 kpmg.com For further information on the data presented in this paper, please contact: Brad Brown Partner, Global Tax Transformation Services KPMG in the U.S Paul Harrison Partner, Tax Management Services KPMG in the U.K () paul.harrison@kpmg.co.uk Chris Scott Partner, Global Tax Outsourcing KPMG in the U.K () christopher.scott@kpmg.co.uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The material contained within draws on the experience of KPMG tax personnel and their knowledge of local tax law in each of the countries covered. While every effort has been made to provide information current at the date of publication, tax laws around the world change constantly. Accordingly, the material should be viewed only as a general guide and should not be relied on without consulting your local KPMG tax adviser for the specific application of a country s tax rules to your own situation. 21 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. 992 KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.