Scope for Savings

There are three sides to the picture on tax that CIOs ought to consider. First, CIOs often go wrong by failing to understand that potential tax benefits differ from all other categories of operational savings in being time sensitive. Unless those benefits are considered during the early stages of the acquisition process, organizations may fail to account properly for such benefits and thus may lose them forever. And organizations that fail to reap tax benefits are just as likely to fail to estimate their real tax exposure.

"The bottom line is companies are leaving money on the table and, at the same time, potentially increasing their risk of tax non-compliance," says Raffi Markarian, a principal with Deloitte Tax LLP's ERP integration services practice. "Major IT purchases such as SAP implementations are often expensive undertakings; in many cases tax savings could significantly offset the total cost of ownership and accelerate the return on investment [ROI]."

Second, many CIOs fail to understand the many ways compliance failures can leave corporations seriously exposed. Studies in the US and empirical evidence in Australia show that the bulk of the effort of corporate tax divisions is spent in the reconfiguration and manipulation of financial information outside of the normal financial environment to create tax returns and tax data. Deloitte's Morrison says there is a strong ROI case for concentrating on making the corporate ERP implementation "tax smart".

"[With a tax smart system] you can have a smaller tax team because it's predominantly automated, or the tax team that you've got can focus a lot more on the tax saving ideas. Either way you are going to be more productive," he says.

When it comes to tax benefits, the size of potential savings varies. In purely domestic implementations, the recognition and timing of deductions equates to a modest 3 to 5 percent of project costs - significant if not exciting. International implementations provide numerous opportunities to recognize the intellectual property (IP) created and to use these to increase deductions worldwide, Morrison says.

"In an international implementation you can create deductions equal to a major portion of the project value and significantly reduce the net cost of the project. I've seen projects where the savings have been as high as 40 percent of the project cost," Morrison says. "One US-based company of which I am aware did a $US2 million implementation which, when taking the IP into account, was revalued at $US8 million - that is, the additional value covered the entire initial cost of the project."

Morrison says on the process side, it only takes a very small error on a very large number of transactions to amount to a very large sum of money. "If you pay GST on every transaction and you didn't have to, that can mean substantial amounts of money for large organizations. So what would seem a minor thing to a non-tax person can accumulate into quite a significant, in fact a material amount for a large organization," he says.

But Morrison says without a doubt the most ignored area is the intellectual property component that is involved in almost every IT project - the third area that CIOs frequently overlook. IP is rarely identified, almost never valued and organizations seldom consider how best to take advantage of it from a tax perspective.

"Particularly in the context where there is an international project, you can make a decision as to where you locate that intellectual property and how it's then charged around the group, which gives you a great opportunity to manage the value of intellectual property in an investment context and also to minimize withholding taxes that you might pay in some jurisdictions," Morrison says.

"With regard to something that's totally domestic, it's a little bit more difficult to identify and put a value on the intellectual property and claim capital allowance deductions such as the write-off of the copyright associated with that intellectual property but there are circumstances where you can do it. And if you don't look for those opportunities up front you will lose them."

However, companies also tend to overlook the up-front deductions that can be available when legacy systems are being written off, he says.