Don’t Ignore Tax Implications During Technology Purchases
A survey of more than 200 senior IT and finance executives by IDC Research and Deloitte Consulting LLP, Factoring Tax Savings into the IT Acquisition Process, reveals that less than 30 percent of respondents consult with their tax department during the technology purchase process. As a result, companies may be losing millions of dollars in potential savings, both immediate and long term, by ignoring U.S. and foreign tax considerations.
Moreover, companies that fail to include the tax function in the IT purchase decision process may ultimately end up with financial systems that are inadequate in addressing their compliance, planning and tax reporting needs. This, in turn, could result in underpayment of tax in certain geographies -- and substantial fines and penalties.
"The bottom line is companies are leaving money on the table and, at the same time, potentially increasing their risk of tax non-compliance," said, Raffi Markarian, a principal with Deloitte Tax LLP's ERP Integration Services practice. "Major IT purchases, such as an SAP implementation, are often expensive undertakings; in many cases tax savings could significantly offset the Total Cost of Ownership and accelerate the Return on Investment (ROI)."
There are multiple tax considerations related to IT purchases. How a company plans to use its new system is key to understanding tax integration capabilities. For example, financial systems must be designed to adequately address the company's compliance, planning and reporting needs to avoid under or overpayment of taxes. Some tax issues may be straightforward, but more often are complex in nature. Typical areas to be considered are:
- Sales tax overpayment
- Property tax reduction
- Research & development tax credits
- State and local training grants
- Tax law changes
- Value Added Tax
With the emergence of Sarbanes-Oxley and HIPPA regulations, IT acquisitions have become increasingly complex. Teams are no longer comprised of simply IT, finance, HR, legal, and operations. Now, functional groups such as compliance, risk management, and tax have a place at the table. However, of all these functions, tax ranked dead last in frequency among those invited to participate in the IT acquisition process.
"Financial systems need to be designed and implemented to adequately address a company's compliance, planning and reporting needs," said IDC's William Roch. "Multinational companies have a major challenge in tracking the many laws and regulations placed on them by the large number of jurisdictions where they do business."
The survey results highlighted a variety of reasons for ignoring tax considerations. More than a quarter (27 percent) of executives surveyed assumed that "tax issues are covered by legal, procurement, etc." The same percentage did not "consider [tax] to have a material impact." Seven percent were completely "unaware that there might be an impact."
"IT executives need to consider all potential areas for tax savings by including tax professionals at the very beginning of the acquisition process," added John Norkus a Deloitte Consulting LLP principal and leader of its Revenue Enhancement integrated services. "There appears to be no one reason why they are not involved, but the impact on the bottom line is clear."
Conducted late last year, the survey included responses from more than 200 senior finance and IT executives representing companies with annual revenues ranging from $500 million to greater than $10 billion. All respondents were very involved in the acquisition process, with 70 percent identifying themselves as either the decision-maker or part of the team making the final decision. The executives were drawn from a broad array of industries, with only financial services and manufacturing each exceeding 15 percent of total responses.
A complete copy of Factoring Tax Savings into the IT Acquisition Process is available at www.deloitte.com/us/IDCsurvey.