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If your company is considering or conducting an enterprise resource planning (ERP) finance transformation, tax could play a critical role. Many companies no longer approach ERP implementations as a standalone systems upgrade, but rather as an enterprise-wide business transformation opportunity — one that potentially has operating model elements that require tax improvement.
In PwC’s 2023 US Cloud Business Survey, technology and business leaders have landed on a more strategic and sophisticated agenda that helps the business grow stronger by building digital capabilities — like an ERP strategy that can help deliver results. In fact, cloud-powered companies are four times more likely to say they face no barriers to achieving cloud transformation value in a variety of areas.
But what makes up that value? The cloud-powered companies that have reinvented their business through cloud (approximately 10% of those surveyed) cite transformation efforts have provided such benefits as: cost savings, increased productivity, improved decision-making and increased agility. Additional value can be generated when tax is brought in from the get-go, helping reduce the company's overall tax exposure and risk for years to come while uncovering other opportunities or benefits in the process (e.g., tax saving “pay-fors” for digital investments.
ERP transformation can be expensive — but tax may be able to provide cash benefits to pay for part of it. R&D credits can help pay for software development, systems integration and more. With early involvement in the ERP design process, tax can identify the right credits and help you qualify. Tax may need, for example, to help you adjust implementation to satisfy the rigorous “threshold of innovation” test, and help restructure vendor relationships so you “own” more of the risks and rights.
Another source of cash can come from avoiding overpaying of state taxes. Common strategies to avoid unnecessary payments include allocating ERP costs across locations, utilizing tax breaks in some states (such as California) for software delivered online, providing documentation so that certain states (such as New York and Massachusetts) won’t tax the software’s full cost, and unbundling contracts to help reduce sales and use taxes.
When tax provides input into ERP design, so that the new system will serve its needs, it can cut its costs and operational burdens — for itself and for IT. Many legacy systems, for example, depend on customized modifications to provide tax with the data and solutions that it needs. This “technical debt” can be expensive, awkward and hard to upgrade. But new ERP systems can be configured from the start to help tax work efficiently.
Our cloud survey shows that keeping an eye out for tax implications seems to be a blind spot for many of the respondents. Beyond working together when scoping out cloud transformation projects, ongoing C-suite collaboration helps companies get a better handle on how cloud changes an organization’s financial model. Together, CIOs and finance leaders can try to balance the scalability on-demand resources provide with any unanticipated costs. Likewise, they can consider tax dimensions, such as taxable presence and R&D tax credits against federal and state taxes that can offset digital investments.
Implementing tax efficiencies into the ERP design can yield major savings. If the new system provides tax-sensitized data, for example, it can flow straight into tax compliance software and other downstream applications. That can save money and time otherwise spent cleaning and reconciling data. Ready-to-use tax data can also cut costs for co-sourcing and other relationships with external providers. The accuracy, completeness and verifiability of tax data from tax-optimized ERP systems may also help avoid the cost of remediating missing or inaccurate information.
With correctly configured ERP systems, tax leaders can take more effective actions to reduce tax burden going forward. If, for example, tax receives more details more quickly on purchases, taxes paid to vendors or logistics costs, it can more easily prevent overpayments. If your ERP implementation transforms the type and location of internal capabilities, there may also be opportunities to revise tax operating models (such as flows, economics and entity structure) to safeguard associated income from being taxed more than once.
A tax-optimized ERP system can also support a more effective tax strategy. With faster access to more complete and more accurate data, as well as a single source of truth, tax can make more reliable data-driven decisions.
ERP transformation can also be an opportunity to check intercompany transfer pricing arrangements and drive alignment on tax data between planning, pricing, supply chain management and other functions.
ERP transformation could create new tax risks. When you transfer data and processes from multiple legacy systems, for example, you could lose data or fail to reconcile it correctly. Controls, too, may not keep up. Tax’s involvement can help reduce these risks — and work to mitigate existing ones. This involvement should include both input on controls and functionality, and a tax-informed design of pre-tax master data.
If the ERP system is designed with tax’s needs in mind, it can still do more to reduce risks. It can support a faster, more accurate response to changes in state, federal and global taxes — reducing the risk of fines, costly remediations or missing out on incentives. It can help facilitate the correct tax treatment for global processes for indirect tax. By automating parts of data verification and analysis, and by integrating controls that tax helped design, the right system can also help reduce the risk of human error. All this risk reduction could add up to significant savings, by avoiding fines and overpayments.
To realize these opportunities for tax to help pay for ERP transformation, it’s important to give tax a seat at the table early. When tax is involved from the planning stage on, you may be able to access even more R&D tax credits than you had been expecting, with robust documentation to withstand possible scrutiny, as well as additional state and local tax breaks. An early start may also make it easier and less costly to design a system that helps tax do its job better.
Just as important as early involvement is the right expertise — not just for technology questions, but also for big-picture design decisions: which capabilities you should include to help tax consume the appropriate data and solutions at a reasonable cost. You may need, for example, to carefully weigh which capabilities the ERP system should provide to handle global income tax, indirect tax,value-added tax and transfer pricing.
With early involvement and the hybrid skillset of technology and tax input, you could find that tax can be a game changer for your ERP transformation: producing direct cash benefits today, reducing tax exposure tomorrow, while cutting costs and reducing risks for years to come.