12-12-2023
The tax closing process is a crucial but often challenging part of a group's year-end process. We share insights and challenges to be prepared for.
Tax closing process – insights and challenges
The tax closing process is a crucial but often challenging part of a group's year-end process. We share our insights and challenges, such as learning from from the previous year, improving timing, resource allocation as well as data accuracy and documentation.
Tax closing process
The annual (tax) closing process includes the recording of all of an organization’s financial activities over the respective period of time – reconciling accounts, modifying entries, etc. It takes place on a monthly, quarterly or annual basis. After the completion, financial statements including notes are prepared.
For a company, this annual (tax) closing process is crucial and often the most critical phase in the accounting cycle. Within this process a company needs to demonstrate its financial stability and compliance with regulatory requirements. Furthermore, an accurate financial reporting is essential for informed decision-making and helps a company to gain valuable insights into its operations allowing more in-depth analyses in this regard. It assists in making better decisions, discovering areas for development and driving growth.
This process can be challenging for various reasons and at different levels throughout the entire preparation process. Furthermore, as tax is by nature the last step in the closing process, it is often a very time-sensitive part.
The following insights might help to make the process less burdensome.
Preparation
One of the first steps to improve the tax closing process is to plan ahead of time. This includes defining clear step-by-step objectives and a detailed and well-structured timetable, including sufficient time to allow for any unforeseen issues that may arise. It is also useful to start allocating resources needed throughout the whole process early on to ensure that enough resources will be available and that they are allocated in the most efficient manner possible.
Additionally, conducting a hard close or dry run, analyzing financial data and documentation, can help identify key issues and development areas early on. Reflecting and debriefing previous closing processes might also be helpful to identify learning points and areas of improvements.
Data accuracy / documentation
Further important topics for a smooth tax closing process are data accuracy and documentation. Incorrect data or missing information can make it very challenging and often lead to delays. This is why it is key to implement measures for detecting and correcting mistakes (e.g., controls and checks). Data issues can also be addressed by preparing a list of required documents to check the availability of the respective data in due time.
Time constraints
A further crucial topic are time constraints as the tax closing process is by nature the last part of the entire reporting process. In addition, as tax resources are often scarce at the local level, which places an extra burden on finance staff who need to handle the tax closing process on top of their usual work.
This is why it is crucial to efficiently plan and allocate available resources. In this regard, it might also help define issues to work on before the stressing time of the tax closing process itself. And technology can help make the process more efficient and keep the focus on the topics that makes the most difference.
New / ad hoc topics
An additional topic which has to be kept in mind are new or ad-hoc topics that are unplannable. Changes within accounting standards or tax laws which come late in the year might cause issues and can have interdependencies with other workstreams as well. Having issue logs and regular calls or meetings with the various stakeholders in the process helps detect new or ad-hoc topics early on in order to deal with them as soon as possible.
Summary
For a company, the annual tax closing process is a crucial and often the most critical stage in the accounting cycle. It is essential for informed decision-making and helps a company to gain valuable insight into the key elements of the tax balances and expenses. Nevertheless, the tax closing process can be challenging for different reasons and at different levels throughout the entire cycle.
Therefore, it is important to start early on defining clear step-by-step objectives and a detailed and well-structured timetable, including allocating time for unforeseen issues. It is also useful to start early with allocating resources needed and defining the information required and checking whether it is available. In this regard, also the previous year should be analyzed and debriefed in order to make improvements. Technology can also help make the process more efficient and keep the focus on the issues that matter the most.
If you think your tax closing process could be improved but you do not know how or you would like to know best practices and insights from an outside perspective, it would be best to enlist the help of experts.