Author: Paul de Chalain (PwC)
Hardly a day has gone by in the last 3 months that we have not seen comment in the marketplace on taxation. Politicians, tax administrations, NGO’s and supra-national organisations like the EU, G-8, G-20 or OECD have committed themselves to fighting tax evasion and tax fraud. It is noteworthy that in some initiatives perfectly legal and acceptable structures are placed on a par with fraud. Companies face reputational risk as new headlines appear weekly in the wake of recent tax scandals involving the likes of Apple and other technology giants. Legislative compliance is waved aside. Instead, the wider external stakeholder audience is provided with information about a company’s tax affairs based on perception, whether wrong or unsubstantiated. The published perception around an enterprise’s corporate tax affairs spreads like wildfire once in the public domain.
The scrutiny has shifted recently from the banking sector to the technology industry. It is only a matter of time before other industries will be exposed to the demands of society that they should be paying more tax. These demands ignore the reality that the international tax system is outdated. The publicity has turned the technology industry into villains – paying the ‘fair’ amount of tax is now a moral and ethical issue, and it is difficult to quantify what a ‘fair’ amount may be. Managing your tax risk and reputation have assumed greater prominence and corporations can no longer point to their good compliance behaviour, proclaiming that they are not only complying with the law but also the spirit of the law. This no longer satisfies the external stakeholders’ need for moral corporate taxpayers and enhanced tax information.
Tax has over the last few years gradually climbed up the corporate agenda at boardroom level and became a top priority for many CEOs. The results of our 16th Annual CEO Survey substantiate the increasing prominence of tax as a CEO priority. They’re concerned about the increasing tax burden, but are also aware of a changing public attitude to tax that is threatening to evolve into an even more stringent tax regime. Tax has become closely tied to corporate reputation. In the current climate and until the world’s governments tackle an outdated international tax system, there are more risks around tax – reputational and strategic – than ever before. These are risks that no business leader can afford to ignore and CEOs recognise that their company’s future depends on their ability to get their strategy right.
While there is no right answer as to what a tax strategy might look like, there are areas which probably should form part of all written tax strategies, including:
- Alignment to the business strategy;
- Corporate Governance;
- Corporate Responsibility;
- Enterprise Risk Management;
- The Total Tax Contribution approach;
- Tax stakeholders and communication with them;
- The role of shadow tax functions;
- The roles of external advisors;
- Tax Function objectives;
- Tax Planning;
- Resource requirements; and
- Day-to-day activities.
The traditional approach to taxation, which focussed mostly on compliance, has evolved into an enterprise-wide management of tax. Tax Executives are now realising that the impact of tax is much wider than just the Finance Function and that tax should be seen as a business risk. There is increasing pressure from a number of stakeholder groups for more transparency around tax reporting, each with a slightly different focus. Investors, customers, the media, civil society organisations and governments all have an interest in the tax contributions but communication to key internal stakeholders, such as employees and PR departments, is equally important.
The OECD report: Co-operative compliance: a framework from enhanced relationship to co-operative compliance will be published shortly and will make reference to the concept of tax control. As Revenue Authorities globally change their approach to a co-operative compliance model, so taxpayers will be compelled to change their approach regarding the management of tax. The implementation of a tax control framework will assist in demonstrating that you are in control of your tax affairs and tax risks. The benefits deriving from a co-operative compliance model which demonstrates that a company is in control of its taxes will be that greater reliance will be placed on the internal processes and control, resulting in less detailed tax audits from the Authorities. It is expected that the OECD report will emphasise the importance of tax control frameworks, how they can be assessed best and what revenue authorities may expect.
The extent to which an organisation is in control of its tax is transparent, verifiable, uniform and comparable through a tax control framework. Taxation does not exist in a vacuum and the framework enforces an integral vision and enterprise-wide approach.
There are many methodologies that can be used to illustrate how a company meets its tax obligations, including country-by-country reporting, an approach championed by various civil society organisations and now being discussed by legislators in some regions. PwC’s Total Tax Contribution approach can help companies identify and measure their overall tax contribution and our Tax Transparency Framework delivers best practice methodologies to help companies communicate about tax. Investing in a Tax Control Framework, which includes a tax strategy, and voluntary transparency and disclosure of tax information, will provide answers to the questions around the amount of tax paid and enhanced tax information.
Stakeholders should be aware of the tax that the company has contributed as a good corporate citizen. A total tax contribution approach enables corporations to disclose information on all taxes borne as well as those collected on behalf of SARS. This would demonstrate that the company is responsible for tax revenues not only in respect of its own profits but as an employer, VAT vendor, etc. What the public should consider to be a ‘fair’ contribution would now be based on a complete picture of taxes paid for all tax types and not just corporate income tax. Traditional Income Statement and Balance Sheet disclosures on tax is limited and in a multi-national context the reader of the financial reports can easily arrive at the wrong conclusion in an effort to reconcile the amount of corporate tax paid with revenues.