Audit Committee Bulletin: October 2013
Tax planning in the spotlight
At a time when many countries are dealing with deficits, austerity measures and declining living standards, the tax paid by large corporations has become a matter of intense scrutiny.
This attention can affect a company’s reputation and shareholder value. Companies that are not perceived to be paying their “fair share” of tax in any country are becoming the focus of negative attention from regulators, the media, pressure groups and the general public.
By ensuring greater awareness and involving the audit committee, executives can address the issues raised by this increased focus on tax, such as possible threats to reputation and shareholder value.
Managing tax risk
The audit committee should ask whether their organization has a clear and up-to-date understanding of its tax risk profile. Managing reputational tax risk starts at the C-suite and board level with a clear articulation of a business’s overall tax risk policy.
Tax arrangements should be aligned with this policy and should be assessed in light of the perceptions of the public and the revenue authority. The tax director should be well equipped to explain difficult issues in a non-technical way, so that the right judgments can be made by the board.
It may be timely to review existing tax arrangements to ensure that they remain aligned with how the group operates commercially, and are consistent with the group’s current view of tax risk.
The international tax system
Several questions have been raised as part of the fair tax debate over whether aspects of the current system of taxing multinational corporations are still fit for purpose.
Many countries are reviewing their tax laws and treaties to determine whether they are still effective when applied to today’s business models. But the unintended consequences of any unilateral action — including double taxation and increasing uncertainty — could damage world trade and further complicate the settling of disagreements between sovereign governments.
Companies need to keep up to date with this changing environment and how it may affect them.
Transparency and disclosure
The debate over fair taxation has increased the appetite for information about how much tax organizations pay in both their headquarters location and in other countries.
Country-by-country reporting of tax payments has already been adopted by the extractive industries. With support from the EU, it is also set to become a requirement for banks. However, many organizations are concerned that enforcement of raw country-by-country reporting requirements across all sectors would add little, if any, to understanding of their tax affairs.
Greater transparency with the tax authorities could give companies a platform from which to secure more certainty on their tax positions and accelerate the settlement of any tax-related disputes.
Based on their own specific circumstances, companies can also decide whether they want to make any additional public disclosures related to their tax policies and profile. They can also determine whether these disclosures should be included in their financial statements or by way of separate reporting.
Five action items for audit committees
Audit committees that keep these five actions at the front of their minds will be in a good position to help their organization respond to this growing challenge:
- Make sure that your organization has a clear and up-to-date understanding of its tax risk profile.
- Involve leadership. In an environment where tax is a potential source of reputational risk, some tax issues will need to be addressed by the board and audit committee, not the tax director alone. Make sure that your organization assesses the potential for reputational risk in all aspects of their tax architecture.
- Be alert to changes in the tax system and how they may affect your organization. Make sure that your organization understands how tax authorities' attitudes might be changing and the potential impact on its business or reputation. In particular, bear in mind the possibility that traditional interpretations of tax law and practice may change, and that a structure or tax authority ruling accepted in the past may not be accepted again today.
- Don't wait for legislation before considering whether additional transparency with the tax authorities on tax matters might improve your organization's profile.
- Focus on compliance. Your company needs effective tax processes, controls and information to identify its potential exposures and to monitor timely filings. Efficient and effective compliance and reporting could help to resolve any tax disputes around the world in a more timely manner.