Tax Smarts

Organizations commonly find the financial information produced by their existing financial system requires significant manual manipulation in order to present or provide the information required to fulfil the tax obligations of the organization, including the calculation of the tax provision and the compliance function; that is, production of tax returns and monthly BAS forms.

"This in itself creates a tax risk in that there are often significant gaps in internal controls. It leads to difficulty in defending tax positions and it is in itself a labour-intensive costly process to obtain the information," Osborne says.

"It is possible and highly desirable at the time of the implementation of a new ERS system to incorporate the tax requirements within the system itself. This can involve processes from the relatively straightforward, including having the system calculate the GST, to more complicated income tax-related matters, including issues such as book/tax depreciation, legal entity P&L/B/S, CGT on disposals, intangibles/amortization, foreign exchange transactions, tax loss management, R&D and transfer pricing, by way of example.

"Incorporating 'tax smarts' into the system can significantly reduce the cost and effort required to produce information required to assist with the tax budgeting process, the tax provision and the compliance process, freeing up resources to focus on more effective tax planning for the organization."

Other areas of tax saving are also commonly left on the table in significant IT implementations. For example it is common for data to be transferred from one database to the new system, making the old system redundant. Given that the old system is now no longer in use, the tax law allows for any residual capital value that has not yet been written off to be claimed as a deduction.

In Osborne's experience this rarely occurs. The implementation of a new system also provides an opportunity for proper fixed asset cleansing, and Osborne says Deloitte finds these projects often generate significant deductions from the fact that there are assets on the register that no longer exist, and are therefore eligible for immediate write-off.

Cross Border

If the IT implementation crosses border then the issues are magnified but so are the opportunities. In addition to dealing with each of the similar issues outlined above in the various jurisdictions in which the implementation is taking place, there are some overriding issues that are also worthy of consideration.

Transfer Pricing There may be different types of intellectual property created as a result of a various copyright items and processes arising directly or indirectly as a result of the IT implementation. Where such IP is of benefit to the group across the regions, the jurisdiction that owns the IP is of great importance as it can significantly affect the tax profile of the group.

The ownership of the intellectual property gives rise to income from the exploitation of that property and as such the jurisdiction where the IP is owned is entitled to receive royalty payments from other countries that utilize the intellectual property. An example might be training manuals created.

Multi-jurisdictional R&D Another significant issue in multi-jurisdictional implementations is the R&D tax concession. Most jurisdictions have an R&D tax concession, and while the core rules across the various jurisdictions are relatively similar, there are some differences in the various systems that can lead to significant tax savings for the group. For example some jurisdictions will allow for R&D on expenditure in relation to software development for in-house purposes whereas others would only allow the concession to apply where the software development is to be on-sold. Some jurisdictions allow R&D concessions to apply to the maintenance of the software, others do not. It is possible to locate the development and the maintenance functions in appropriate jurisdictions such that the R&D concessions are maximized, of course having regard to commercial imperatives of the organization.