The latest EY tax risk and controversy survey series, entitled A new mountain to climb, provides some insights re: preparing for and proactively management tax / reputational risks. A link to the report is provided for reference:
Click to access ey-managing-tax-transparency-and-reputation-risk.pdf
- Media coverage of how much companies pay in tax / low effective tax rates is extensive, although engaging with the media is seen by many companies as a “no-win” situation.
- Leading companies have transformed the process of communication for tax risks and controversy to internal and external stakeholders.
- Transparency is providing information to tax authorities re: how much tax is being paid in other jurisdictions as a tool to decide if the company is paying enough tax in their jurisdiction.
- Global disclosure and transparency requirements will continue to grow in the next two years.
- Transparency readiness of companies is a significant and underestimated need.
- Direct ERP access by tax authorities represents a next phase of risk assessment.
- Transparency readiness can help mitigate reputation risk.
- Reputation risk strategy elements:
- Actively monitor the changing landscape.
- Assess readiness/desire to respond.
- Enhance communication with internal and external stakeholders.
- Gain insight into the total tax picture through the lens of public perception.
- Decide with whom the company wishes to communicate.
- Embed reputation risk thinking into core business strategy.
- Transparency is the new norm, and (media) reputation risk may be a permanent risk.
Transparency demands have created a new toolbox required by all multinational organisations.
A tax policy and reputation risk strategy should be essential tools in a comprehensive tax risk framework. The EY report is required reading for all parties interested in learning more about tax risk trends and Best Practice ideas to proactively address the new world of transparency.
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.
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.
Click to access 2015G_CM5706_TP_Angolan%20TAs%20apply%20penalties%20for%20failure%20to%20file%20TP%20documentation.pdf
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.
EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management. The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.
Click to access ey-managing-tax-transparency-and-reputation-risk.pdf
- More than 60% of companies believe that engaging with the media is a “no-win” situation.
- Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
- 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
- 94% of respondents expect increased growth in global disclosure and transparency initiatives.
- “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively, Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
- Multiple transparency initiatives are succinctly depicted in a table on page 9.
- Transparency will be the new normal.
- Quality information requires quality data.
- Transparency readiness is a significant and underestimated need of companies.
- Transparency readiness assessment questions are posed for consideration.
- Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
- Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
- Six proactive actions to consider:
- Actively monitor the changing landscape
- Assess readiness, and desire, to respond
- Enhance communication with internal and external stakeholders
- Develop steps to prepare the total tax picture
- Decide with whom the company wishes to communicate
- Embed reputation risk thinking into core business strategy
This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively. Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.
A recent Accounting Today article cites the uneasiness of corporate tax leaders re: reputation risk.
Excerpts from the article:
- The company’s tax policy and principles are being enhanced with greater detail for clarity and transparency
- Communication of tax strategies to the Board is becoming a primary focus
- Tax controversy alignment with the Board is being communicated more frequently
- Increased objective to develop more co-operative working relationships with tax authorities
- Tax risk is an integral part of decision-making
A link to the article is attached for reference:
As BEPS Actions are currently being transformed into final Guidelines, the subject of reputation risk would be a worthy topic of focus in the interim to be prepared for an uncertain, complex and disparate trend in the world of international tax.
The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties. A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.
“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”
management and minimisation strategies.http://www.lapfforum.org/news/lapff-seeks-tax-transparency-from-ftse-100
This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc. This topic relates directly to reputational risk, and should be aligned with the Board and senior management.
KPMG has provided a valuable reference re: 2015 audit committee topics, providing insight into company risks and the importance of governance.
The following extract, from the report provided as reference, addresses tax risks in the following manner:
Pay particular attention to the global “tax transparency and morality” debate being driven by notions of “fairness”and “morality,” and consider the impact of tax risk on the company’s reputation.Tax is no longer simply an expense to be managed; it now involves fundamental changes in attitudes and approaches to tax globally. Ensure that tax decisions take into account reputational risks and not simply whether the company has technically complied with tax laws. Monitor OECD and governmental efforts globally to address perceived transfer pricing abuses. Help shape the company’s tax risk appetite, and establish a clear communications protocol for the chief tax officer to update the audit committee regularly. Help ensure the adequacy of the company’s tax resources and expertise globally.
Click to access audit-committee-agenda-2015.pdf
Highlights of future trends:
- Reputation risk
- OECD monitoring
- Transfer pricing abuse
- Tax risk appetite
To the extent the Audit Committee has not inquired into BEPS, tax risk frameworks, OECD Actions and transfer pricing governance, a proactive effort should immediately begin to align the Board with the MNE’s tax risk posture and ongoing governance. It is imperative a robust tax risk framework is established and communicated effectively.
The RobecoSAM 2014 Corporate Sustainability Assessment, referenced herein, introduced tax strategy criteria in their scoring to address critiques of MNE’s tax structures, tax reporting transparency and tax risks.
The publication discusses reputational risk in its new survey questions and is very informative re: companies not yet having a tax policy, as well as asking relevant questions addressing the license to operate in a country, relationship risks with host country and economic development risks in regions where the company is operating.
Click to access CSA_2014_Annual_Scoring_Methodology_Review.pdf
Tax strategies, policies and the perception gap are increasing in importance worldwide, with a kindly reminder for the necessity of developing a comprehensive tax framework that is flexible with today’s challenging international tax environment.
The enterprise risk management analyses for a MNE should have an integrated tax risk framework, coupled with functional interface between common risks that are multi-faceted.
Click to access 2012-13-Canadian-tax-governance-survey.pdf
This insightful survey, published by Ernst & Young, polled Canadian executives from 120 companies to review the tax level awareness in organizations. The findings include the following observations:
- 56% of non-tax business unit leaders are unfamiliar with risk management policies.
- 7% of time spent by the tax function is devoted to tax risk management reporting.
- 15% of tax risks and opportunities are identified timely.
- Over 50% of the respondents are planning to improve existing tax risk policies and procedures.
- Significant areas of tax risk requiring improvement include transfer pricing processes and controversy, foreign tax planning, and legal entity accounting.
The findings should be compared to current Best Practices within every organization. Some ideas for consideration include:
- Develop / review the Tax Risk Management Policy.
- Communicate all significant tax risks, and corresponding Tax Risk Management Policy, to business leaders globally.
- Prioritize tax risk awareness, including reputation risk, in business reviews and training.
- Measure the time spent by the tax function on tax risk awareness and internal controls. (Refer to 23 June blog posting)
- Develop a system to measure tax risks on a quarterly basis to address potential issues timely.
- Conduct tax risk workshops with the business leaders.
- Review significant risks, noting areas for improvement, and establish a timeline to address such risks.
- Address tax risk management as a priority agenda item for the global tax function.
- Develop an efficient process to address tax controversies around the world.
Tax risk awareness is a critical issue that should be prioritized within an organization, ensuring alignment with the CFO and Board of Directors.
Tax jurisdictions and authorities are increasing their global focus in all aspects of tax risk, most recently promoting Beneficial Ownership transparency rules and other initiatives at the G8 Conference. Conversely, multinational tax teams should also be increasing their resources, and time spent, on addressing global tax risks, enhancing internal governance including a Tax Risk Framework / Policy, scenario planning, and informing the business.
We can view this correlation as the increased significance of tax risks, including reputational risk, compared to tax resource allocation for risk governance. It may also be beneficial to distinguish internal and external tax resources used in the risk methodology. The comparison may provide interesting results, from which the proper emphasis could be used to form additional Best Practices. This comparison could also be viewed in contrast to tax compliance and other tax projects for additional perspective.
I invite your comments on this thought, and Best Practices that you can share.
In continuing verbal encounters by Google UK before the Parliament’s Public Accounts Committee (PAC), it is interesting to note the following in the above article, supplemented by similar language in the related articles cited below:
- The company evidently stated that “We are selling, but not closing.”
- The article cites the fact that a review of LinkedIn profiles revealed sales activities were conducted by employees.
- The article does not provide the reader a concise description of PE, or its safe harbors in Double Tax Treaties: re: “preparatory and auxiliary activities.”
This arduous lesson in reputational risk reinforces the need to ensure Best Practices are in place for PE, as posted in a prior blog.
It is a very interesting point that LinkedIn profiles were reviewed to further examine potential sales activities carried out in the UK. A company cannot control the social network profiles of its employees, although it should be very clear in everyone’s job description what is, and is not, allowable for marketing or sales activities. The Do’s and Don’ts List should be signed annually as a reminder to employees of their responsibilities and limitations in scope.
A company with significant Branch activities should be reviewing how written statements, including emails, are communicated in discussions of sales, market support or promotional activities.
The statement “We are selling, but not closing” brings a substance vs. form argument into the subjective definition of PE, an argument that is not helpful in forming objective arguments by the company or tax authorities. Therefore, a company should examine its Best Practices to increase its objective PE evidence, in substance and form, in preparation for controversy.
Does your Tax Risk Policy include any statements re: whistleblower activity, and how such activity should be addressed?
Finally, a company should conduct an annual audit of its significant Branch activities, in possible coordination with internal audit, to further minimize its PE (and reputational) risk on an annual basis.