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XBRL in Tax Compliance

Where business made easy

Extensible Business Reporting Language

The much publicized and discussed eXtensible Business Reporting Langugage (XBRL) has been conceived in 1998, and is attributed to the work of Charles Hoffman, a CPA at Knight Vale and Gregory firm in Tacoma, Washington. Currently XBRL International is comprised of more than 500 companies and agencies, and is represented by jurisdictions, whose responsibility is to promote XBRL within particular regions of the world, introduce financial specifics, and seek adoption by the local business and technology communities. With the current financial crisis and continuous drive for financial transparency, XBRL is being viewed as the silver bullet to provide every investor with the information that they can understand, analyze, scrutinize, and ultimately live with. So why did we call this article, first in a series of articles designated to compliance, "XBRL in Tax Compliance"?

In order to answer that question we must quickly recognize the benefits of XBRL and which government regulated bodies might enjoy the very benefits. So without any further ado:

  • XBRL uses W3C standards to define taxonomies and instance documents to represent financial information
  • Taxonomies contain concepts (also thought of as data dictionary) and relationships between concepts
  • Instances are collections of business facts (values of concepts defined in the corresponding taxonomy and placed into specific contexts)
  • Contexts provide further affiliations of these business facts with the business entity, time period, actual or projected, and so forth
  • XBRL allows easy and automated comparison and analysis of filings based on the same taxonomy (for different entities, time periods, product lines, etc.)

What is so different about Tax Compliance?

Now back to the focus of our discussion. Almost any business activity in a modern enterprise results in an imposition of tax by federal, state or local jurisdiction. We are not going to discuss the laws of taxation - after all, there are much more prominent experts in this field, but we will turn the attention to the most obvious objectives associated with taxation: accuracy, traceability, and predictability. The accuracy will be provided by unambiguous data point definition as well as well defined sources of the information. Since most of the values used to calculate and report taxes are, in turn, derived, capabilities of the compliance system to trace such values all the way to the original or atomic information elements is essential. This proves especially true in the case of an internal or external audit.

Finally, if the business rules and formulas used to assess taxes are documented, coded, and understood, it is relatively straight forward to predict tax liability where and when a business transaction is taking place.

Challenges for XBRL in Tax Compliance

Let us review and address the jurisdictional hierarchy in the United States to demonstrate the main challenges XBRL faces in the world of tax compliance and how we can overcome those obstacles. According to Avalara, there are more than 12,500 North American sales tax jurisdictions and, unlike US Treasury or the SEC, not a single agency that drives the process of harmonization. What does it mean it terms of XBRL? Hundreds and even thousands of non-compatible taxonomies that represent transactional tax information.

What complicates things even further is the fact that many derived business facts are conditional and frequently derived from other facts. In the current state of XBRL Formula specification, formula chaining is not supported. Moreover, producing a filing is a process, with multiple levels of reviews, approvals, checks and balances. XBRL instance is the result of this process; however, the specification does not address this subject of information governance, or: WHO should have permissions to modify WHAT constructs and WHEN?

A solution to manage this complexity comes in a form of business rule engine integration, business process management system, and other more sophisticated processing techniques. However, dealing with the taxonomy that represents information demands for state and local jurisdictions is a job of tax researchers and information architects, armed with content management systems and taxonomy design tools.

Interacting with Data

Within the compliance preparation life cycle there are numerous steps where a person needs to review the information. Whether it is a provision of supplementary facts, verification of accuracy, correction of an error, or authorization of the documents, the information must be in a format convenient for human utilization. Furthermore, this information can be interactive or static, thus leading us to the use of computer screen or paper as the data rendering formats. We will talk about rendering technologies in the next section, but for now let's focus on what is so critical about the interaction itself.

Remember that we talked about traceability and accuracy. These two concepts become especially critical here since the information comes from a human, not a computer repository. To provide users with a high productivity, dependable environment, the system must advise on a range of possible values, alert if an unusual or outside of the trend information is entered or certain thresholds are violated, demand approval from a higher ranked individual, and so forth. These helpers will be provided by the XBRL taxonomy itself, auxiliary contexts, and reference materials available.

Presenting the Information

It would not be wise for us to talk about transparent information and demand proprietary screen rendering technologies, so we will focus on the most widely used type of application - your favorite internet browser. W3C publishes browser popularity statistics which demonstrates that choosing browser independent technology is the key to satisfying the majority of users. Our favorite technology at the time of this writing is Adobe Flex, an open source framework that offers excellent application building capabilities, is browser independent, extremely fast, and offers dynamic and interactive presentation capabilities. Flex interacts with web services, consumes XML in its native form, and is supported by Adobe, one of the largest technology companies in the world.

Printing, as old school as it is, comes in two different flavors. First, is a free form printing of whatever your screen, report, or any other data stream contains onto paper, with its physical limitations. The second is far more complex and implies that the layout of the document must conform to the government agency's demanded layout or tax form. These forms impose sequence in which data elements appear, relationships and calculations within the form itself, generation of additional artifacts as business rules require (example: attach Schedule, Worksheet, explanation if you answered "yes"...). All of these specifics make rendering of XBRL onto a government form a complex but manageable task.

Let's Build Something Together (wait that's Lowe's slogan)

In the subsequent articles I will provide an in-depth analysis of the taxonomy building architecture for transactional and income tax calculation and filing, business rule and formula integration for bi-directional validation, and of course, our favorite - rendering of information for screen and paper.

Michael Roytman (mroytman@vivatconsulting.com) is CTO of Vivat, Inc. http://www.vivatinc.com/

Vivat offers Compliance as a Service solutions for tax and accounting, financial, and healthcare organizations. Seamless integration of processors, business engines, complimented with security and entitlement services in a pay as you go deployment model.

Visit our web site to learn about solutions and expertise that Vivat offers to organizations in your industry.

Author: Michael Roytman
Article Source: EzineArticles.com
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