Avoid Taxing Problems When Making IT Buys

Large companies could lose millions by ignoring the tax implications associated with major IT buys, a new report warns.
Posted March 11, 2005

Roy Mark

Companies could be losing millions of dollars every year by not factoring tax considerations into IT purchases, according to a new report by IDC and Deloitte Consulting.

The report says with the emergence of Sarbanes-Oxley and HIPPA regulations, new management groups focusing on compliance, risk management and taxes are increasingly joining the traditional IT, finance, human resources, legal and operations teams.

However, according to the report's survey results, of all these functions, tax ranked dead last in frequency among those participating in the IT acquisition process. As a result, companies that fail to include the tax function in the IT purchase decision process may 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 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," Raffi Markarian, a principal with Deloitte Tax's ERP integration services practice, said in a statement. "Major IT purchases . . . are often expensive undertakings; in many cases tax savings could significantly offset the total cost of ownership and accelerate the return on investment."

There are multiple tax considerations related to IT purchases. 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.

"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," said John Norkus, a Deloitte principal. "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.

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