Gone are the days when taxpayers can feel comfortable by merely
ensuring that their tax planning is legally defendable. Now the questions are
turning to whether taxpayers and in particular, corporates are paying their ‘fair
share’ of tax. The vexing question of course, is what is “fair” and in whose
The overall tax burden and attendant compliance issues are
increasingly considered to be a significant threat to growth. In PwC’s most recent annual Global CEO Survey, 62% of chief
executives (CEOs) conveyed their concern about it compared with 55% a year
earlier. Against this backdrop, it is not surprising that Lloyd’s Risk Index
2013 recently rated tax risk as the number one business risk (moving up from 13th
position from the previous survey in 2011).
Striking the right balance between these seemingly opposing demands
for corporates to pay their ‘fair share’ of tax (i.e. tax risk) and reducing
the overall tax burden is crucial for many economies and their taxpayers. What
can treasurers do in this environment? Metaphorically,
if the treasury function is at the heart of an organisation, pumping cash
through its various organs, then tax is one important artery and is prone to
clogging if not managed effectively. Both need to work efficiently if the
business is not to be deprived of much needed lifeblood to meet growth
objectives. A treasury function’s cash flow and risk management strategy can
ill afford to ignore the impact of tax, particularly in a rapidly changing and
increasingly ‘hostile’ tax environment.
Treasury needs to help embed an awareness of taxation issues
in the DNA of the organisation. In fact,
corporate leadership should be ‘RAR-ing’ (refer below) to provide the right
direction, to strike the right balance between optimising shareholder value and
good corporate citizenship. RAR stands
for Responsibility, Authenticity and Resilience and these RAR principles may be helpful to achieve that
A corporate has responsibilities towards many stakeholders –
broadly maximising the value for shareholders as well as other stakeholders in society,
which includes its customers, bankers, government agencies and, indeed, the community
at large. A genuine commitment to, and awareness of, social objectives should
generally lead to improved reputation and branding, which in turn can help to
bring down costs (e.g. with suppliers, lenders, investors and others due to
lower ‘risk premiums’) and possibly, increased revenues (e.g. with customers and
governmental support). Thus, in the long
run a corporate’s social commitment should further the objective of maximising
profits for shareholders and in a more sustainable manner.
Conversely, a more profitable organisation can better meet
social responsibilities; hence, a corporate need not panic in the present
environment and suddenly refrain from pursuing acceptable tax planning strategies.
The question is how ‘acceptable’ those strategies will be viewed, now and in
due course, by stakeholders.
Taxation costs need
to be managed and controlled like any other business costs. However, with tax
assuming a much higher risk profile within organisations, the tax and treasury
functions should articulate the need for getting tax into the boardroom agenda.
The board may well choose to delegate oversight responsibility to a tax committee
with representation from tax, treasury, the chief risk officer (CRO) and other key
stakeholders. Audit committees can also be expected to take a keen interest. In
this brave new world a robust tax control framework, key tax risk identification
and periodic reporting to the board executives have become important aspects of
As noted, tax needs to be embedded into the DNA of organisations,
with the support of top management. For example, group-wide internal controls,
policies and procedures should position and require the tax function to have
early involvement in reviewing significant new investments, businesses
structures, transactions and processes working alongside treasury and other functions. The treasurer does not need to become a tax
expert but should understand the key issues involved, not only to achieve better post-tax cash flows but also more
robust short and long term cash forecasting – both crucial for business and growth plans.
Instituting a coherent ‘code of conduct’ can be an important
part of an organisation’s tax control framework. As an example, PwC has a global
tax code of conduct which specifically does not advocate planning arrangements
(even if these are legal) where:
- The arrangements have no commercial purpose
(other than tax avoidance).
- The resultant tax outcomes are inconsistent with
the intent of the rules.
- The arrangements lack the necessary economic
substance (as required by the relevant rules).
Even before the heightened media attention on tax planning,
deficiency in tax-related internal controls has been a key reason for restatementsof financial accounts.This
carries a serious risk of undermining the authenticity of the accounts as well
as the finance, tax and treasury functions.
To add to this, the new morality-driven environment requires management to
go beyond the control framework and engage with external stakeholders. Such
engagement can help immensely in dealing with external misconceptions.
Many tax authorities across the globe have initiated
taxpayer relationship programmes to encourage open dialogue with larger taxpayers.
Such taxpayers may proactively engage with the tax authorities to build
confidence and trust. Advance rulings or advance pricing arrangements also help
to give credence and authenticity to a taxpayer’s tax planning. However, while
engagement is generally desirable, it is also necessary to consider these
programmes in the context of the issues and countries involved. There is no denying
that different views of fairness could well arise across countries creating
concern, debate and cost. Stock-taking on how to deal with transparency on key
matters is a useful exercise in this respect.
Corporates can also engage with international bodies through
various forums such as the Organisation for Economic Cooperation and
Development (OECD), which is driving the comprehensive action plan (CAP) on Base
Erosion and Profit Shifting (BEPS) commissioned by leaders of the G20 economies.
The BEPS project is likely (in the authors’ view) to drive significant changes
in cross border taxation or the manner in which tax authorities operate or view
certain structures. So while existing structures might have been perfectly
acceptable and tax efficient in the past, it is quite conceivable that they may
be regarded as ‘aggressive’ and unsavoury tax planning going forward.
A corporate should
also consider a framework to communicate (in an authentic and impactful way) its
total tax contribution effectively to both external and internal stakeholders. The
concept of total tax contribution extends well beyond corporation tax and
includes other elements of tax paid by organizations, such as social security
tax, custom duties and value-added tax (VAT). The benefits and further details of
such framework can be found here.
Finally, corporates need to be resilient in the current fiscal climate. There is likely no ‘quick
fix,’ with the OECD CAP process expected to take its due time and many countries
could act unilaterally in the meantime (and possibly, even opportunistically).
In summary, corporates’ tax and treasury functions will have
their work cut out. In this changing environment, the best in class functions
will have to take charge of their tax control framework, authentically engage with
stakeholders and pursue available means to mitigate their tax exposures. Otherwise,
it will be exceedingly difficult to weather the tax storm.
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