Audit Committee Bulletin: October 2013

Tax planning in the spotlight

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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