Tax Decision Making and Role of Analytics

Most of us are still unaware of the role of management decision making capabilities in decisions related to the taxation and its impact on overall investment. Tax is one of the key factor for making any investment decision since, it is a mandatory expense incurred by anyone without getting any specific benefit (especially in a country like India). Thus, it is very important on the part of management to choose wisely their decisions in light of the tax impact of any decision they choose.

In present scenario as well, even the companies are very proactive in managing their cross-border transactions and planning tax on an overall basis, still there is need of managing the tax at a micro level for each transaction entered into by the company.

For instance, in India, a company providing advertisement services that includes both rentals for placing hoardings as well as printing of hoardings and brochures can issue a consolidated invoice for both the services and can ask the client to withhold tax @2% under Section 194C (Work Contract) against 10% under Section 194I(Rental). This will impact the cash flows of the company and it can reduce its opportunity cost significantly.

Actually most of the MNC’s although account for opportunity cost while making decision regarding investments, fails to do opportunity costing during the course of project.

So, the next question arise, how to make a good tax decision? In India, most of the decision making is done either by companies own senior management or by any known consultant since, most of the local business groups rely on the traditionally set up of bookkeepers or Chartered Accountants. But is this enough? Do these people have good insight about tax decision making? The answer in most of the cases seems negative.

The traditional ways of managing the company’s accounts as well as taxation in the present scenario of changing tax laws seems of little help. Thus, the companies must look at an alternative approach to enhance their insight on tax perspective in order to take business decisions which are tax efficient and improves the overall return on investment thus, helps a company to take a competitive edge on peers!

Tax analytics has quickly emerged as a mindset change from "what I need to do" to "what I need to know," using more granular enterprise data as the foundation for tax decisions. Most of the BIG 4 accounting firms has already setup a specific team on tax analytics.

Analytics is the discovery, interpretation, and communication of meaningful patterns in data. Especially valuable in areas rich with recorded information, analytics relies on the simultaneous application of statistics, computer programming and operations research to quantify performance.

Use of analytics and technology in data related to the tax of the companies help the companies not only to take a tax efficient decision but also mitigating the risks of litigation involved with it.  

There is an increasing urgency around transforming tax to elevate the function’s capabilities to match other areas of the business that have already transformed. The goal is to elevate tax’s focus from backward looking activities to being a forward looking strategist and to partner with the business.

Since, tax processes are data intensive and repetitive, it make them candidate for tax analytics. Analytics can help business to transform its key processes to be tax efficient as well as provides a visualization for a better understanding of tax position of the companies.

Thus, one should look the tax function from this perspective in order to perform better in this competitive world!