Tax robots need human help

In the past few years, the Big Four accounting firms have started to introduce automated systems for calculating alternative investment funds’ tax adjustments and filing their annual tax returns. By 2020, they plan to transition most of their clients from Excel macro driven tools to these more efficient systems.

At Citco, we have also been investing in business intelligence systems for tax reporting. Our systems provide fund managers with quarterly tax reports for management information and planning purposes.

However, like the accounting firms, we have discovered that tax robotics alone can’t deliver the promised efficiencies. Legacy processes allowed skilled staff to multi-task, cleansing the data while preparing the tax calculations in Excel. If data is simply downloaded in its original form from administrator to auditor, then problems arise. 

To prevent these issues, the investment fund’s transaction data needs to be understood, analysed and cleansed before the robot sets to work. Client/administrator operational models need to be evaluated and adjusted. Tax data must be reviewed on a periodic basis, with tax specialists at the administrator advising clients and accountants how to book certain transactions. This calls for ongoing cooperation among funds, their administrators and the accounting firms.

Funds’ transactions are complex

Tax advisors have tended to underestimate the diversity of data among their various clients. They think tax software is a solution but forget that the underlying transaction data differs. It is not homogenous. What works for one fund does not work for another.

Fund managers tend to have varied business processes behind transactions and corporate actions. How they book financial derivatives like swaps and other securities for NAV purposes may make a big difference for tax purposes. Similarly, there is a need to treat various complex equity and debt securities differently as the tax impact from dividends and interest are not the same.

When it comes to the corporate reorganisations that some alternative funds specialise in, such as bankruptcies or mergers, understanding the tax implications can require a great deal of labour. Similarly, fund reorganisations can be complex, crystallising or not capital gains or losses.

Skilled staff are required to cleanse data 

At Citco, a model is emerging where we collaborate with fund managers and accountants. First, our staff cleanse data before using robotics to help our clients with tax calculations throughout the year. Our automated systems also provide quarterly analysis of tax reporting. Then at year-end the task is turned over to the accounting firms for them to file the year-end tax returns. 

Today, the major accounting firms and administrators are having a dialogue about how to introduce robotics. At its core is an acceptance that data complexity means that human intervention is a vital component of tax calculations for alternative investment funds.

8th March 2017

Our contacts

Lev Shoykhet

Lev Shoykhet

Head of Tax Services, Fund Services

T+1 201 793 5500
LNew York