With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase. One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.
For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.
For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward. This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.
It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.
Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.” The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance. Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.
A link is attached for reference:
- Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
- Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
- ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
- Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained.
- A step plan to engage companies:
- Identify red flags, including a formula to measure tax gap
- Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.
Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.
The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.
The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external. To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world. Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.
KPMG’s Chief Tax Officer (CTO) Insights provides Best Practices for improving relations with key stakeholders, including sample metrics that are a valuable working tool.
- Regularly scheduled meetings should be scheduled.
- Individualized dashboards should be presented for different stakeholders.
- A Tax Value Report should be presented once or twice a year, including important metrics as cash tax savings, cash flow processes and people initiatives.
- An on-boarding program for new stakeholders should be developed.
- Sample metrics may include
Similar to a tax risk framework that is shared with the larger business and finance leaders, a CTO’s Best Practice tools provide win-win opportunities to interact with key stakeholders and provide assurance for the importance, and recognition, of the tax function in a multinational organizaiton.
KPMG has engaged with several UK headquartered multinationals to address how to proceed with future, and dissimilar, demands for transparency. Although focused on UK based organisations, the framework promotes valuable Best Practices that can be used globally. A link to the insightful article is provided for reference:
Five themes for a tax disclosure framework:
- Strategy/policy and approach to tax
- Tax policy
- Tax planning and risk approach
- Engagement with tax authorities
- Tax risk governance
- Link between tax strategy and governance
- Tax compliance and tax risk monitoring
- Non-compliance governance tools
- Business model
- Overview, including tax attributes for effective tax rate and cash taxes
- Transfer pricing overview
- Operations in low tax jurisdictions
- Tax contribution
- Data/narrative re: sales, profits and taxes paid
- Types of taxes paid and use of a company’s profits
- Specific information related to material issues
- Tax losses/carryovers
- Tax incentives/holidays
- Material items, such as pension contributions
The above issues exemplify the difficulty in developing a comprehensive framework, or flexible tool, to meet the varying transparency demands resulting from OECD, EU and UN guidelines and unilateral legislation efforts around the world.
The most important point is that the timing for the thought processes for a tax disclosure framework is now; there are no signs of the demand for tax transparency diminishing.
EY’s article highlights the importance of planning a proactive risk strategy re: reputation risk. A link to the article is provided for reference:
- Six distinct actions
- Actively monitor the changing landscape
- Assess readiness/desire to respond
- Enhance communication with stakeholders
- Drill into the details to prepare the total tax picture
- Decide on whom communication is to be established
- Embed reputation risk into daily business strategy
- Questions for self-assessment, gleaned from this topic:
- Who monitors media coverage of the company
- Who monitors social media channels re: the tax function
- Who monitors new tax disclosures to assess trends and new compliance requirements
- Is the tax structure transparent re: taxes paid by country
- Do profits and taxes paid align? If not, rationalize the gap
- Who follows tax litigation in each jurisdiction
- Is the (tax) risk officer aligned with tax strategies
- Are Board members aware of new documentation requirements to assess tax strategy around the world
- Has the legal team been educated on BEPS actions and related company strategies
- Is there a metric to measure reputation risk
- What new disclosures are taking place
- Will the company address questions from the public
- Should more tax information be disclosed to mitigate reputation risk
- What information is shared with investors; does the current process need to be reviewed
- Is tax risk an element of every new business initiative/strategy
- What functions are aware of BEPS and the changing landscape
This article is a snapshot for an increasingly important risk: a company’s reputation. As new tax disclosures emerge around the world, interrelated with Board awareness and acknowledgment, it is imperative that the subject of reputation risk is addressed as an immediate priority by all companies. As soon as there is damaging press, truthful or not, it may be too late to respond.
This subject is also of importance for tax administrations: tax information is confidential and technical areas may be unclear, thus a company’s rights should be protected while an issue is raised, investigated and ultimately resolved. The tax administration’s reputation risk is also of paramount importance, as it looks to increase trust and establish an understanding of a company’s functions, assets and risks within the relevant jurisdiction.
Deloitte’s Audit Committee Brief includes a summary and questions outlining Risk oversight and Tax considerations for audit committees. A link to the publication is provided for reference:
- Audit committees may have a risk committee (Will this be a continuing trend?)
- Tone at the top is imperative for effective risk oversight
- Insightful questions for consideration:
- What internal controls are in place to address significant tax risks?
- Is there a clear approach and justification for where risk issues are placed?
- Is there a widely communicated process to quickly bring risk-related issues to the Board?
- What issues should the audit (risk) committee be aware of when evaluating potential risks?
Risk governance is rapidly becoming the new norm, both by tax administrations to understand and rate risks of a taxpayer as well as an effective tax risk policy and framework for a multinational to identify and mitigate risks. This trend will require additional resources to fulfill such commitments, immediately and ongoing.
The Angolan transfer pricing documentation submission deadline was 30 June 2015 re: tax year 2014 for large taxpayers. EY’s publication provides details on the recent enforcement penalties, including business limitations and reputational risk considerations notwithstanding the insignificant penalty amount for late filing.
Key observations / lessons learned:
- Insignificant monetary penalties due to non-filing or incomplete transfer pricing documentation may be a consideration in modifying a standard OECD documentation template based on cost/benefit. However, other factors that may be ignored in this analysis may have more inherent risks for consideration.
- Business and reputational risks should be an essential input for filing complete, and accurate, transfer pricing documentation. As countries seek to individualize such documentation, this task is more timely and costly, although ignoring such nuances may prove to be damaging.
- In Angola, the list of non-compliant taxpayers are provided to the National Bank of Angola (via requirements of a Presidential Decree). Accordingly, inclusion on this list may limit foreign exchange transactions ongoing.