Release date: Sep 14, 2010
Guest: Dean Landry
Running time: 11:12 minutes
By using a proprietary system for identifying tax overpayments, many companies have been able to reduce their effective tax rates significantly. PwC Tax Partner Dean Landry is a co-developer of Direct Tax Review (DTR). In this episode, Dean explains why DTR is needed, notes how the system links accounting and tax information and suggests how companies can benefit from the surprisingly easy process.
Learn about how DTR can provide the missing link between tax returns and underlying accounting information – making substantial tax recoveries possible
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry Lewandowski: Here with us today is Dean Landry, a senior partner with PwC’s corporate tax practice based in Toronto and Halifax. Dean first joined PwC 17 years ago and is with us today to discuss PwC’s unique corporate tax recovery process known as a “direct tax review” (or DTR) which Dean is one of the co-developers.
Thanks for joining us Dean.
Dean: Thanks, Gerry.
Gerry: So Dean, what is this new corporate tax recovery process, DTR, and how was it developed?
Dean: Well, Gerry, first thing I would say is that it’s not really a new process. We’re lucky that we’ve been doing this for over three years now. And the DTR, or the direct tax review, is a really -- a specialized diagnostic review of the underlying accounting information that’s feeding into the tax return.
What we do with respect to this review is we use specialized software and a number of computer assisted audit techniques and analysis tools. And we’re really trying to undertake a form of a reverse income tax audit. What we’re really doing is trying to identify overpayments of capital withholding and, of course, corporate income tax. Really, the way we developed this is back a couple of years ago, I guess almost three and a half now really. It was developed by myself and one of my partners, Scott Greer. Both Scott and I used to be tax directors in large companies and through those experiences we started to really piece together some of the common errors and omissions that were made by companies including ourselves when we were doing tax returns. And we also started to piece together the way the CRA were doing their audits.
And when we started to initially use the audit tool, which is a software called “Idea” that we’ve developed a number of specialized queries around, and what we were doing and what continue to do is use this as initially as an audit defense tool. And once we, sort of, got beyond that, we started to really proactively use our techniques on a prospective basis go to our clients and find these recoveries.
So, it’s really been a very successful process, and as I said, we’ve got a great deal of experience on it now.
Gerry: What kinds of companies would benefit most from a corporate tax recovery review?
Dean: Well, you know, that’s an interesting question. We look for companies that are a little bit larger – normally around the $300 million in sales or more in Canada – and often times, we like to see that they’re either paying taxes and profitable or are soon in the future to be profitable and paying taxes. And, of course, we can use either public or private companies. In fact, we’ve even done this for clients who are in the government sector who have, maybe, taxes in lieu or some other types of taxes that get calculated. It’s really a wide variety of industries. We’ve had a bit of success in manufacturing, mining…we’ve certainly done some work in oil and gas…we’ve done some work in financial services. And as I alluded to, some regulated industries as well.
We’ve done this for a number of companies…really, we like to see companies where they have complex accounting systems. Maybe, you know, they’ve had a lot of change in tax resources or possibly somebody’s recently left…that’s where we get really excited. But, certainly, we wouldn’t limit it to those kinds of clients. We certainly like to look at any larger company with over 300 million in sales.
Gerry: Now Dean, from a client’s perspective, how is this direct tax review different than any tax reviews they may have had in the past? If a tax director already has competent staff preparing and advisors reviewing their corporate tax returns, why would they need a DTR?
Dean: Yeah, that’s a good question, Gerry, and it’s one that we get quite often when we’re trying to describe the DTR. Really the DTR is a much deeper dive than most companies have and tax directors in companies have the ability to do. We go right back to the source information and the accounting and we do a lot of reconciliation between what’s in the accounting information back to what’s in the tax return and, of course, from the tax return back to the accounting. So, it’s that deeper dive and because we have the sophisticated software technology to do that, we’re able to tease out information that most companies don’t have the resources or the tools to do.
It is quite different than your standard review. What we like to say is that we’re adding arms and legs to most tax departments. And, by doing that, we’re able to tease out potential recovery opportunities that they just don’t have the time or resources to find.
Gerry: So tell me about the process. How long does it typically take and will take up a lot of time of myself and/or my staff?
Dean: Really, it doesn’t take very long. The process is divided up into a number of sections.
We have an IT process where we download the information into our software and this is something that our folks are very familiar with doing. That process we work with the IT group and quite often we can actually use the same downloads that are being used for the CRA audit. That part of the process usually is done within the first week or so and it doesn’t take that much time during that period.
The second part of the process, what we do is we have a planning session. That usually takes about a half a day or a day of our time and the client’s time. And really, what we’re trying to do is do a really great audit plan. In order to perform an effective audit, you have to spend some time understanding the client’s accounting and just trying to get some knowledge of the client. So, that part of the process usually takes, as I said, half a day or a day.
In the meantime, in parallel, we’ve gathered up a lot of information from the client. We have high-speed scanners and staff that go in and copy a lot of the hard copy information, tax returns, financial statements, tax preparation files…those kinds of things. So after we’ve done our planning session we’ve got the hard copy information, we’ve got all the downloads, we’re really pretty autonomous. We wander off, do our analysis and after a period that ranges between five to eight weeks, we come back and provide potential recovery opportunities for our clients. For some of our larger clients it can take more time than that but typically, it’s sort of a five-day week process.
Now, one of the things you asked me, Gerry, and I’m glad you did, about how much of an impact does this have on our client’s staff. As I said earlier, we like to say that we add arms and legs to our client, we’re really not leaving a very heavy footprint. In fact, I’ve got a number of citations where clients have said exactly that. I’ll read you one here, in addition to a number of other benefits that were provided by the DTR, the last sentence in this citation the client says: “I was really shocked at how little of my time was required for the review.” And that was from a large mining company where we successfully found some money for them. And as I said, it’s a pretty typical response to our program.
Gerry: Dean, as a tax director, how could I benefit from such a corporate tax review if all it does is identify mistakes that I have made in the past? What is the value proposition I can take to my boss, a CFO or controller?
Dean: Well, the first thing I would say is in doing many, many of these reviews over the past three years, and also my experience as a tax director, what I can tell you is it’s very common for there to be what we like to call a “disconnect” between the accounting function and the tax function. And what we mean by that is that it’s really not possible for either area to do a deep dive for purposes of preparing a tax return into the accounting information. Neither function area has the time or resources to do that. And that’s a systematic issue that is very prevalent all over Canada. And, actually, based on the information we’ve developed, all over North America and probably other parts of the world as well.
So, that disconnect between accounting and tax is where we play. What we like to say is it’s really not anybody’s fault….that there’s information buried in the accounting that hasn’t been taken into account when the tax return’s being prepared. It’s really just systematic. Unfortunately, every company that we look at has that same issue. And that’s really where we’re trying to add value. It’s in that niche.
Gerry: Based on what you’ve just said, what are some of the types of recoveries that you have realized for your clients?
Dean: Well, we’ve looked at many different recoveries. Quite often we spend a lot of time on the add backs. Most of what we find are permanent differences. And, as I said, they’re really items that are buried in the accounting. Quite often we’re finding, for example, capital items that have been treated on accounted income or vice-versa in foreign exchange accounts. We find things in depreciation accounts and fixed assets…certainly capital taxes. We’ve found items in partner distributions and all sorts of non-deductible reserves.
So, really, what we’re trying to do is, as I said, is get to the underlying information. Most of our focus is on permanent differences. It really is not only a cash benefit, but also an earnings benefit for our client.
Gerry: And finally Dean, public companies are interested in positive financial results and not just cash tax savings that may be realized through CCA reclassifications and timing differences…does the DTR deliver these financial statement benefits?
Dean: Yeah, that’s right Gerry. We talked just a second ago about how our focus is on permanent differences, not on timing differences. We’re lucky enough that the way we plan and perform our audits really does allow us to focus in on those kinds of savings. So it really is, as I said earlier, it’s not just a cash tax benefit for our clients. It really is an earnings benefit. It allows them to basically reduce their effective tax rate by finding these items. And so, most of our clients have that as a focus area and really, if you think about a tax function, that’s the primary focus area – finding ways to reduce your effective tax rate. And the DTR is a really positive and effective tool to help our clients with that.
Gerry: I’d like to thank Dean Landry for sharing his perspectives on the direct tax review. For additional information on PwC Canada’s tax services, please go to pwc.com/ca/tax.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.