Tax technology: A new imperative

As alternative investments like private equity and real estate become more mainstream, investors have become increasingly tax-sensitive. I’ve noticed that they are focusing more on after-tax returns while demanding greater transparency into tax information. Basically, investors want more detail, more often.

For instance, over the past year my clients have told me they’re dealing with prospective investors asking about tax disclosures and in some cases after-tax returns before they even invest with a particular fund. These investors have become increasingly aware of tax filing concerns that, in the past, they did not care about as much as pre-tax investment returns.

So what is it exactly that investors are demanding? For starters, investors want more frequent access to detailed taxable income information for things such as estimated tax planning and regulatory reporting. Investors aren’t just demanding this information for federal income tax purposes. Tax-exempt investors need to know about unrelated business taxable income, foreign investors require effectively connected income disclosures, and more universally, investors are looking for state sourcing information. Nor is compliance the only driver of demands.  Investors are increasingly using tax as a criterion when evaluating investments, either to avoid costly filing requirements or to evaluate investment returns on an after-tax basis. Funds that can show investors how tax-efficient they are relative to their peers will have a distinct advantage when fundraising in a highly competitive environment.   

So in this regard, tax reporting to investors and tax-efficient investing are becoming business imperatives for fund managers. These activities are now an avenue into improving the overall investor experience – underscoring the need for more integrated data flow from books to tax to investors.   

Using technology to fix the problem

To solve this problem, fund organizations must take steps to upgrade their technology, change the way they prepare and review tax calculations, and focus less on compliance and more on strategic planning, data analysis and investor reporting. The overwhelming trend is to move the tax process to a technology-enabled environment that connects existing technologies to tax-sensitized databases. These databases, in turn, can automate key calculations and provide structure to underlying data.  What this ultimately means is that investors can get more information faster – while tax professionals have more time and data available to focus on strategic tax planning initiatives that could positively impact their funds’ after-tax performance. 

How specifically can technology help? Technology can serve as an enabler in the delivery and analysis of tax information. An asset manager may find that integrating the flow of transaction-level data from financial accounting systems into tax-specific calculation engines can greatly increase the level of frequency and accuracy of information delivered to investors. In addition, the results of these calculations, when stored inside these tax data warehouses, can be more easily accessed and reported upon to facilitate greater planning and analysis. These managers can also use advanced analytics tools to provide real-time access to transaction-level data on an after tax-basis to perform things such as scenario planning, trend analyses, and tax efficiency calculations. Key stakeholders within and outside of tax will have more timely information at their disposal to focus on things such as tax-efficient deal structuring and optimizing the tax efficiency of trading operations. 

The bottom line? Asset managers cannot afford to overlook tax as a key value driver in the investor relations and fundraising experience. Technology for tax is no longer a “nice-to-have” element – rather, it is a must for organizations to ensure that they have the information necessary to make fully informed investment decisions and provide investors with the transparency that they demand.

Michael Shehab is a principal in PwC’s tax reporting and strategy practice.