The referenced link is a Best Practices portrayal of tax risk management and governance overview as published by the Australian Tax Office (ATO).
The outline summarizes:
- Director’s Summary
- Board-level responsibilities
- Managerial level responsibilities
- Tax control framework
- Testing of controls
- Self-assessment procedures
The outline is a valuable review of the tax processes and controls that demand a more formal approach, with the advent of subjective guidelines, anti-avoidance rules, etc.
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 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.
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.
As this news has been widely reported, this controversy highlights the need to aggressively govern the activities of significant Branches worldwide. This issue is a reminder in today’s tax environment of the necessity for diligence and governance for Branch operations. The following ideas are presented for review and comment.
- Review all material on your company’s website re: location of sales activity, associates and job postings.
- Review job titles and descriptions for all personnel in Branches worldwide.
- Compare Branch accounts and related disclosures with actual activities on an ongoing basis for consistency.
- Have a Do’s and Don’ts list that is reviewed annually with individuals having market support activities.
- Align with Global Mobility re: assignments/transfers of individuals to Branches with Sales titles and responsibilities.
- Compare actual activities with the legal constraints of a Branch in the relevant jurisdiction.
- Put a plan in place to regularly determine if a Branch is the best legal form of conducting business, vs. subsidiary, etc.
- Conduct annual trainings at significant Branches to ensure the activities align with the legal form of doing business.
- Ensure the concept of PE is well understood by individuals accountable for the Branch operations.
- What job titles are individuals allowed to include on their business cards?
- How do Branch personnel represent themselves to the external trade?
- Is there an objective benchmark (i.e., number of personnel) for Branches that triggers an automatic review?
- Review the relevant Double Tax Treaty safe-harbor PE provisions.
- Reputational risk: Consider how Branch activities impact the Tax ERM framework, and monitoring controls in place.
It will be interesting to track the activities of this controversy and analyze how to further minimize risks for Branch activities.