TaxMatters@EY - May 2013

Facing up to tax risk

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Extract from T Magazine Issue 10

Tax risk and controversy have never been higher on the corporate agenda. As governments around the world battle to restore public finances to health, they are doing all they can to raise tax revenues, close loopholes and share information that will lead to better compliance. As prominent taxpayers, companies are firmly in their sights. Tax legislation is becoming more stringent and many administrations are subjecting companies to more frequent and aggressive audits — sometimes jointly with one or more overseas tax administrations.

The public mood toward corporate tax has darkened. In the current environment, barely a day goes by without another multinational company being vilified in the media for taking an overly aggressive approach to tax planning. Campaign groups are also becoming increasingly vocal in their accusations. This negative attention can have serious reputational damage, even if the tax strategies that companies have adopted are completely within the law. With the economic recovery still highly fragile, few companies can afford the negative publicity that these campaigns and media coverage bring.

In some markets, companies also have to contend with a highly uncertain and unpredictable tax environment. Legislation can change quickly, and sometimes in unexpected ways. Companies may find that a structure that was perfectly legal and uncontroversial when they first set it up subsequently proves to be problematic when rules are changed, sometimes even retrospectively.

This is particularly true in rapid-growth markets, where the tax system is less mature and where legislation may be more dynamic and fast moving. Dealing with such an uncertain environment creates major headaches for tax and finance departments, and also means that companies can lack the certainty they need to make long-term investments.

The severity of the risk environment means that tax must now be a topic for frequent board discussion. Companies must ensure that their tax strategies are appropriate and suit their risk appetite. They must also be aware of the tax risks associated with any new investment, particularly in unfamiliar markets. This calls for frequent communication between tax directors and the senior executive team, as well as a platform for discussing the implications of tax risk issues at board level.

It may even call for new roles to be created, such as a head of tax controversy with a specific mandate to take a proactive approach to identifying and managing tax risks. Without these mechanisms in place, companies are running the risk not only of penalties and fines, but also of severe reputational damage.

In the 10th issue of T Magazine, we explore how tax risk and controversy have changed since the financial crisis. We look at emerging risk areas and explore how the relationship between companies and their external stakeholders, including the media, tax administrations and campaign groups, is evolving. Perhaps most crucially, we examine how companies are identifying and managing these risks.