ERP associated with lower taxes, more aggressive positions

Companies that implement enterprise resource planning systems tend to pay fewer taxes, possibly because they also tend to take more aggressive tax positions.

This was the conclusion of a study recently published in the journal Accounting Horizons, co-authored by Stephanie Walton of Louisiana State University, Patrick Wheeler of Florida Gulf Coast University and Yiyang Zhang of Youngstown State University. The researchers used ERP implementation data from Global Software Leads — a private ERP list service firm, containing information on ERP implementations by U.S. firms from 2001 through 2009 — as well as Compustat observations from 1997 to 2017. The final sample includes 5,554 firm-year observations from 1,246 firms.

What they found was that those with ERP systems tend to take a more active role in tax planning, as they have more information available that lets them find additional tax savings, averaging about $9 million. By having newly accessible firm-wide data, companies are able to use tax strategies that may not have occurred to them before.

"We find evidence that the tax function benefits from an increased ability to acquire, assimilate and transform firm information from an ERP system, enhancing tax planning activities and resulting in lower long-run cash effective tax rates post-adoption. Specifically, we note that following ERP system adoption, firms have an average tax savings of $9.24 million," said the study.

However, the study also found this same availability of data that enables more effective tax planning also leads companies to engage in more tax avoidance and adopt riskier strategies, which could jeopardize the long-term sustainability of the business. They found that companies that adopt ERP systems are more likely to have significant year-to-year variations in how much they pay in tax, which researchers believe indicates they're taking aggressive tax positions.

Further, if the company is foreign, it's more likely to engage in sheltering activities, which the researchers said can be seen as an alternative measure of tax risk. These activities include, but are not limited to, things such as transfer pricing, corporate owned life insurance transactions, offshore intellectual property havens and cross-border dividend capture.

"We expect that ERP systems enable the exploitation of information about firm activities, resulting in the greater use of risky tax sheltering opportunities," said the researchers.

They found a correlation between ERP implementation and tax-sheltering activities.

"Firms are more likely to participate in tax shelters post-adoption, increasing corporate tax aggressiveness," said the paper.

The researchers concluded that evidence exists to show that ERP implementation can benefit the tax function, but these benefits must be tempered with attention to risk, lest the business takes positions too aggressive to avoid notice from authorities.