The expression “tax-aware” describes companies that have made substantial progress integrating their tax function into strategic business decision-making.
CFOs and other finance executives at tax-aware companies recently reported that greater integration of tax information into business activities results in significant bottom-line benefits, including improved financial performance and higher earnings per share (EPS). These and other findings are part of a research report – based on surveys of, interviews with, 105 senior finance executives – prepared by CFO Publishing in conjunction with Vertex
The research shows that tax-savvy companies routinely integrate the evaluation of tax implications into business-related activities, such as:
- Making major operating decisions;
- Committing to major transactions;
- Developing new products/services;
- Expanding marketing activities to new types of customers;
- Intensifying companywide efforts to manage risk; and
- Decision-making related to merger and acquisition (M&A) activity.
The consideration of tax in business decisions was negligible within non-tax-aware companies surveyed. These companies only considered tax implications one third of the time when making M&A and other major transaction-related decisions.
Becoming tax-aware requires a new mindset, one that routinely includes tax impacts when making business decisions. If a company wants to become more tax-aware, it can start by doing the same things that those organizations do. According to the research, tax departments within tax-aware companies:
- Are engaged throughout the company building relationships and learning the business operations (as a trusted business partner);
- Ensure that all material business decisions are evaluated with the net after-tax impact while understanding that the final decision may be the best overall after-tax business decision (and not only the best tax answer);
- Leverage technology tools to assist with their routine functions and activities;
- Leverage technology tools to share with their colleagues various “what-if” scenarios that strengthen “go vs. no-go” decision-making; and
- Position themselves as a value-added function rather than a back-office cost center.
In my experience, leading tax departments work diligently to foster trusted, value-added business partnerships across all functional areas. After a tax function demonstrates added value once, I’ve see their business partners immediately come knocking again.
It’s also wise for the tax team to proactively seek opportunities to provide tax input on a strategic decision – rather than waiting to be asked. When these opportunities arise, it is important for the tax team to take the words of FedEx Chief Accounting Officer John Merino to heart: do not "let the tax tail wag the dog!”
When tax stubbornly tries to force the best stand-alone tax decision (without partnering to understand the best overall, tax-aware business decision), they tend to be viewed as the team that kills the deal, as opposed to the team that adds value. This view prevents tax from getting invited to the decision-making table again.
As a valued business partner in tax aware companies, the tax function educates and advises other functional areas on the tax impact of a decision (and the multiple scenarios that can arise from that decision) so that the ultimate decision yields significant bottom-line benefits.