Tricia Schafer-Petrecz: I’m Tricia Schafer-Petrecz, Public Relations and Social Media Lead at Vertex. You’re listening to Tax Matters, a Vertex podcast.
In this episode, business writer Eric Krell speaks with Vertex Chief Tax Strategy Officer Michael Davis for an initial discussion on the vital concept of tax intelligence. Michael is responsible for advancing the company’s business and technology strategies to enable next generation corporate tax transformation. Prior to joining the company in 2018, Michael was a Vice-President and Corporate Officer at Nestlé Holdings. He has extensive experience in tax planning, compliance, audit controversy, provision and operations, as well as tax data management.
Michael explains what tax intelligence is, why it varies for different tax management activities, and how it helps tax functions make the leap from cost centers to profit centers. Michael also touches on the important supporting technologies and relationships that both enable and advance tax intelligence. Now, I’ll turn it over to Eric and Michael.
Eric Krell: Hi, Michael. Let’s start today by telling me what you mean by the term tax intelligence … and then we can get into some of the different flavors, or variations, of it.
Michael Davis: Today, that’s the word that’s used – “tax intelligence,” or maybe “tax insight.” I’ve been in tax for 35-plus years, and back in the old days we used the term “tax diagnostics.” You got a hold of tax data and you thought, OK, what do I do with this data now? You would query it, clean it up, filter it and get additional information from it. So five or 10 years ago, tax data was more of a diagnostic tool. Today, we refer to it as insights and intelligence. And today, the question is: What more can I find out because I have this data? The big win is: How do I influence behavior? Of course, you can use the data to correct something and that’s perfectly fine, but it’s kind of a one-off. Or, you can learn from the data by gaining insights that influence your team. And, of course, tax is a team sport, so you often involve areas well beyond your tax department. IT, finance, human capital, risk, treasury and other areas and departments can all be involved in helping tax produce more value in a very efficient way. When you can get data that can help you do that and influence behavior, that’s what I mean by tax intelligence.
Eric Krell: Now, when we talk about tax intelligence, it’s a big concept, and it means different things to different people within the tax function, depending on their responsibilities. Tell me a little bit, at a relatively high level, about the different variations of tax intelligence—what it means to different audiences within tax?
Michael Davis: You can break up a tax department—and most do—into three categories: planning, compliance and audit defense. And of course, compliance is key, because if you have a great planning idea or you’re trying to drive a certain audit outcome, you have to complete the tax return in the appropriate way. So most of us focus heavily on the tax compliance first and try to get that return accurate – filing accurate and timely returns is a mandate for all tax departments. But if you can get data and insight that help you speed up the compliance process, improve the efficiency of the tax department, and maybe shrink the footprint of people who support tax beyond the tax department—such as those in finance, IT, human capital and the business units, as I mentioned – then you can start re-investing that time savings into planning. That investment will eventually produce better outcomes in audit.
You want to get that return right-sized. You want to prepare an accurate return that helps you pay the lowest legally allowable tax that can be supported if an audit occurs. And that’s where insight and intelligence from better data can help. It lets you build efficiencies into compliance, get to the accuracy level you’re looking for, and then drive more planning to produce better audit outcomes.
Eric Krell: When we spoke before, you talked a little bit about how those different types of tax intelligence are cumulative. In other words, compliance has a certain collection of data that the folks doing compliance need to make better decisions. Audit defense needs its own set of data, but it also needs to be aware of the data needed for compliance. Planning needs its own data plus the other data sets. Tell me a little bit about why that is and how that works.
Michael Davis: There are unique skill sets in each of those areas. Many times, a tax professional will have heavy compliance responsibilities to begin with and then work toward a higher-level position with audit responsibilities or doing some planning or reviewing of compliance. If your responsibility is to prepare returns accurately and timely, you’re all about getting quick and accurate access to data and then understanding anything that’s new or different in the business. That way, you can appropriately record that in your return. That’s why those interactions with business units and other functions are very helpful…You’re all about getting the data quickly, recording it appropriately on the return. And you’re always looking for anything new or different … because those variables impact your tax return. You go talk to the business unit or talk to IT, or talk to whomever regarding those changes. And the sooner you can get that information, the better so that you can have that conversation and not be hurried to prepare the return and so forth.
So, that’s compliance—it’s about getting correct data, quickly, and knowing what’s going on in the business. Now, your supervisor is going to be reviewing that return, and many times, that supervisor may also be defending it in audit. As that supervisors, you want to build better tools so you have more insight and intelligence… You don’t want to have to duplicate what the tax preparer did, that’s not a good use of your time. So, the question is: How do you provide data, insights and intelligence to the reviewer so that he or she can review that return in 10 minutes vs. the five hours it took the compliance person to prepare the return?
The reviewer is looking for accuracy as well as for any indicators that might trigger an audit. What might auditors ask? They usually ask: “What part of the business has grown a lot?” or “What’s changed?” The compliance person knows that and is documenting it and recording it, and of course the manager will then follow up on that and may prepare some additional documentation that supports it. If the company is audited, the reviewer can speak to the changes or the differences that occurred.
Eric Krell: Tell me about the planning-related tax intelligence. That seems like a big area. If you would, talk a little bit about how you used it in your previous role in industry.
Michael Davis: Planning is the real differentiation for all of us in tax. If you haven’t done so already, that’s where you can really make the transition from being seen as a cost center to being seen as a profit center. You can really add high levels of value through planning. In other areas of tax such as compliance and audit, you can pay accurately, file timely and support it in audit, but you still may be seen more as a cost center, as a back office. When you can make the transition to planning, you really can start to drive greater value – as well as greater investment in the tax department. To do that, you need good data. You need to be insightful, you need to be informed and you need strong relationships outside of tax. You need to have those relationships with the business units and finance, IT – all over the company. Again, the whole idea is that if you can produce accurate and more efficient tax returns and then get them through audit in a more efficient way, you can reinvest more of the tax function’s time in relationship-building. You can invest more time in interacting with others throughout the company who will provide you the insights you need to continually improve your planning.
There’s only so much you can do with the compliance data. Yes, the data will tell you things. And, yes, you want to access and clean that data to learn what has changed. Once you have that insight, though, you need to ask: OK, now who do I engage with? Who do I have relationships with that I can quickly talk to in order to find that out if there is an opportunity to plan accordingly to minimize our taxes? At a minimum, you want to accurately file, but if you can really get into the proactive planning side, you can minimize taxes by being more informed before a business unit is created, before the company starts to sell in a new location, before you start to use other vendors or a different supply chain. All these things have been taking place because of COVID. If you’re already at that level where you have strong relationships, and if your data reflects that these changes are going on, you know who to speak to regarding what’s happening, or they know to contact you. In these situations, you can use obviously your data as well as your relationships to build greater insight, greater intelligence, better planning and ensure that your tax department is viewed as a profit center—a value creator—vs. a cost center.
Eric Krell: Most tax functions do all, or at least most of these activities: Compliance, audit, and planning. You look at those activities in terms of ratios, and you’ve told me that it’s important to calibrate and recalibrate those ratios. Can you tell me why that is and how that works?
Michael Davis: In my prior life at Nestlé, we always assessed how much time was spent on planning, how much time was spent on compliance, and how much time was spent on audit. At Nestlé, we made a significant number of acquisitions. Sometimes it was two or three in a year. We acquired companies like Purina, DiGiorno Pizza and Gerber Baby Food – and I led the tax integration team on those acquisitions. One of the things we would do when integrating a new tax function was to breakdown their activities into those categories: How much effort was put into to planning, compliance and audit defense? We wanted to understand why those percentages were the way they were. There is no one-size-fits-all ratio that applies to all companies. That’s because there are always unique changes occurring in any company—new ERP systems, new businesses, new way of selling and so forth … A lot of people talk about having a ratio of 30% planning, 40% compliance and 30% audit. I’ve learned over the years that your ration fluctuates each year, depending on the company’s performance and activities.
Eric Krell: Let’s finish today by having you touch on how technology can help tax functions access and work with tax intelligence.
Michael Davis: This is a great subject and something that I spent a lot of time with prior to joining Vertex. I spent a lot of time in technology, and working with IT… It’s important to align that work with human capital considerations so that you engage bright minds—very capable tax professionals with great technology skills. That way, you can really make the transition from cost center to profit center. Tax technology obviously has a role in collecting data. We’re all used to working with data now, and many of us have people within our tax departments who are dedicated to managing and analyzing data. Now that you have the tax data, the question is: What do we do with it? This is where it starts to get into the insight and intelligence side of it. It’s all about using data not just to defend, or possibly to give me a little more knowledge on my preparation—but how do I get in front of this data and learn how to not only read it and act on it, but maybe I can even influence it by getting that insight, getting that intelligence?
Let’s say a company makes a decision to expand its factory or to move a business to another state. You can start to use the tax intelligence to say, Hey, the tax in this state is lower, but this would be treated differently over here… The idea is to have tax technology that lets you access and analyze that data. You also need to have the ability to use that tax intelligence to provide greater insight and greater intelligence with respect to how to run the business…That’s the big transition, from cost center to profit center. In a profit center, tax engages uses its insight and intelligence to help the company run the business as opposed to recording what the business did. When you do that, you’re in a different place—a better place.
Eric Krell: Michael, thanks so much. This was an excellent introduction to tax intelligence, and I look forward to following up on the conversation in the future.
Michael Davis: Thank you very much, Eric.
Tricia Schafer-Petrecz: Thank you for listening to Tax Matters, a Vertex podcast. Check back here for more episodes soon.
Note: This interview has been edited for clarity.