Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘tax policy’

CR reporting; tax policy norm

Corporate responsibility (CR) reporting is becoming more of a norm for MNE’s, illustrated by KPMG’s report as referenced herein.

Apart from policies, such as Human Rights, that should be a basic component of every MNE’s policy and referenced to the UN standard, tax policies are becoming more of a public norm than ever before.

A UK tax risk strategy is required to be published by every significant UK taxpayer by 12/31/2017 on a public website describing the tax risks of the UK group and how they are managed on a macro and micro based level.

Global tax policies are also proactively published by major MNE’s as part of their Best Practices and Enterprise Risk Management efforts.

A basic global tax policy, published or not, should be a primary tool integral to Board and company governance.  Tax risk management, including documentation thereof, will become more of a shout than a whimper by NGO’s, parliamentarians, tax advisors and internal governance standards of every MNE.

Tax policies are also becoming more integrated with business policies in corporate governance.

To the extent policies are lacking in an organization, now is the time to address this important aspect of risk management and Best Practice governance.

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsibility-reporting-2017.pdf

UN: Corp. tax responsibility

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:

http://2xjmlj8428u1a2k5o34l1m71.wpengine.netdna-cdn.com/wp-content/uploads/PRI_Tax-Guidance-2015.pdf

Key points:

  • 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.

Best Practices:

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.

 

New age of transparency / reputational risks

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:

http://www.ey.com/Publication/vwLUAssets/ey-managing-tax-transparency-and-reputation-risk/$FILE/ey-managing-tax-transparency-and-reputation-risk.pdf

Key observations:

  • 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.

The Davis Tax Committee: BEPS Report

The Davis Tax Committee has released its First Interim Report on Base Erosion & Profit Shifting (BEPS), including an introductory document and comprehensive analyses of the following BEPS Action Items:

  • 1, Digital Economy
  • 2, Hybrid Mismatches
  • 5, Harmful Tax Practices
  • 6, Treaty Abuse
  • 8, Transfer pricing re: intangibles
  • 13, Transfer pricing documentation
  • 15, Multilateral instrument
  • Summary of recommendations

The Committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.  Links to the Media Statement, Davis Tax Committee’s website and Report are provided for reference:

http://www.taxcom.org.za/docs/20141223%20Davis%20Tax%20Committee%20Media%20Statement%20-%20Release%20of%20BEPS%20Report%20for%20Public%20Comment.pdf

Comments by all interested parties should be submitted by 31 March 2015.

The documents are a valuable reference in comprehending each of the OECD BEPS Action Items of the Report, not only the viewpoint of S. Africa.  Most importantly, it outlines the tax policies for continued foreign direct investment balanced against BEPS and General Anti-Avoidance Rule (GAAR) initiatives, while providing tax transparency and certainty with a balanced, sustainable tax policy going forward.

Global tax policy in 2014: EY publication

Ernst & Young (EY) has published a very informative study, based on a survey of 830 executives in 25 markets.  The second section of the publication includes analyses of tax outlooks for 38 countries, including BEPS actions.  The 38 countries highlighted in the publication include:

Australia / Austria / Belgium / Canada / Chile / China / Czech Republic / Denmark / Finland / France / Germany / Greece / Hong Kong / Hungary / India / Ireland / Italy / Jordan / Korea / Lithuania / Luxembourg / Malaysia / Mexico / Netherlands / New Zealand / Norway / Panama / Poland / Russia / Singapore / Slovakia / South Africa / Spain / Sweden / Switzerland / United Kingdom / United States / Venezuela

A link to the publication is included for reference:

http://www.ey.com/Publication/vwLUAssets/EY-the-outlook-for-global-tax-policy-in-2014/$File/EY-the-outlook-for-global-tax-policy-in-2014.pdf

The publication includes an introductory section highlighting tax rates and a 2014 tax policy outlook.  The outlook includes the following sections:

  • How countries are adjusting their corporate tax base in 2014
  • Incentives
  • Withholding taxes
  • Transfer pricing changes
  • Interest / Business expense deductibility
  • Changes to tax treatment of losses
  • Changes to CFC rules / thin capitalization

The second section analyzes 38 separate countries, addressing the following topics:

  • Tax rates
  • 2014 tax policy outlook:
    • Key drivers of tax policy changes
    • Fiscal consolidation / stimulus
    • Tax policy outlook for 2014, including political landscape, current tax policy and administrative leaders, key tax policy changes in 2013, country position on OECD BEPS Action Plan, pending tax proposals and consultations opened / closed.

This publication is especially valuable in country outlooks, including the OECD BEPS Action Plan proposals, and should be consulted to develop continued awareness of current and future trends in international taxation.

 

Tax Policy: Interaction of the Main Players & MNE’s

The executive summary of a paper entitled “The Structures and Mandates of Eight International and Regional Organizations That Work on Tax” was published earlier this year by the International Tax and Investment Center (ITIC) with the Vienna University of Economics and Business.  The link to the article is referenced herein:

http://www.iticnet.org/file/document/watch/4008

The executive summary provides valuable insights into tax structures and mandates of various organizations, including the IMF, World Bank and the UN.  The two primary sections are entitled “Who are the Main Players in the International Tax Arena” and “How can Business Interact with Different Groupings?”

The first section includes a description of the breadth of activities for the organizations, including  those of the UN that include transfer pricing, exchange of information, cross border VAT issues, taxes in climate change, financial transaction taxes, tax on foreign direct investment, and natural resource taxation.  The second section is very interesting reading, providing insights into how Multinationals (MNE’s) can proactively interact with the various tax policy making bodies.

The topics of tax policy, and interaction between the MNE’s and the relevant organizations, have evolved into very significant issues in today’s changing tax environment.  Roles in a MNE, and the necessity to proactively interact with such organizations has now become a necessity that will derive mutual benefits and win-win relationships.

 

Tax Policy statement: A foundation of the Tax Risk Framework

EY has put forth a compelling article addressing the necessity of a company tax policy, stating it is not an option to delay action and hope the debate over transparency and what represents a fair share of tax will stop.  The article is referenced by the following link:

http://taxinsights.ey.com/archive/archive-articles/the-future-of-tax.aspx

Key excerpts:

So how can companies adapt to this new landscape and best address the different concerns of these very engaged stakeholders? It starts with formally and carefully defining a company’s tax policy, which gives effective guidance from the board to the group tax function on what the company’s responsibilities and required behaviors are worldwide.

This policy needs to take account of the often conflicting interests of various constituencies, such as tax authorities, investors, employees, the media and the general public. In the future, a business model must adjust to recognize that, while commercial decisions must continue to take account of tax analysis, such analysis itself needs to include wider business risks.

A company’s tax policy will also help in determining how transparent a company wishes to be with stakeholders about its tax affairs. Companies are concerned that stakeholders could misinterpret the complex nature of their tax affairs.

Any effective tax policy needs to strike a balance between clearly communicating the risk appetite and approach of the company, while also managing all costs, including opportunity costs caused by its tax approach and its consequences regarding reputation and the risk of controversy.

 

Best Practice: One of the foundations, and a good starting point for the Tax Risk Framework, is a tax policy.  The policy should be drafted with the knowledge that it is a valuable tool which the tax authorities may request to better understand, and assess, the company’s global tax risk.

 

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