Analyzing Your Tax Accounting System

The fundamental objective of your tax accounting system (TAS) is to interpret every financial transaction in your company in a way that minimizes the amount of taxes paid to federal, state, local and foreign government. And keeps you out of legal trouble, of course. There is no justification – ever – for breaking the laws. Especially, the tax laws. It is simply not worth it.

Therefore, your TAS is essentially an investment project, with all usual KPI – NPV, IRR/MIRR, etc. It can also be viewed as a separate business (which is quite accurate because in most cases, tax optimization is outsourced to a specialized tax advisory firm). Which must be highly experienced and competent, of course. Obviously, these KPI must meet the usual requirements for acceptance of an investment project.

As any investment project, your TAS must have solid financial and operational plans supported by a detailed, comprehensive, accurate and up-to-date description of how exactly your TAS makes money for your company by minimizing your tax burden.

Due to very specialized nature of tax accounting and optimization, you never analyze it alone. You will need to bring in a highly competent and experienced partner – tax advisor and independent auditor of tax accounting systems.

Who will obviously need not just your tax information, but also a detailed, comprehensive, accurate and up-to-date description of your TAS. As well as of your tax accounting and optimization methodology. Which must be highly efficient, of course.

No less obviously, your TAS must match your corporate financial strategy and be tightly integrated into your strategic plans and risk management system (managing risks of legal action against your company, that is). It must also match your declaration of corporate identity, mission and vision statement and your corporate culture and code of conduct.

The latter requires some explanation. It is obvious that you must use all legal means of minimizing your tax burden – otherwise you will simply miss your fundamental corporate objective of maximizing your shareholders’ value. How ethical are these means, are an entirely different matter.

Your DCI, corporate vision and mission statements and especially your corporate culture and code of conduct postulate (explicitly or implicitly) a certain code of ethics (both corporate and personal).

You must make sure that this written or unwritten code (the former is obviously better) accepts the notion that your company can, must and will use all legal means of minimizing your tax burden – regardless of how these means are viewed by any well-known and established ethical system.

In other words, there must be no contradiction between your corporate ethical code and your corporate tax optimization strategy. Because such ethical contradictions inevitably lead to what is called ‘corporate hypocrisy’. Which will be very harmful to employee morale and your relationships to your stakeholders and thus to your financial value generation.