Questions for the audit committee to consider
- How is management keeping current on tax issues and the potential for changes to its tax policy?
- Does the company have adequate, global resources to address these changes fully?
- Does the company have programs in place to monitor changes to tax policies and compliance?
- Does the company understand how these changes might affect financial reporting and its effective tax rate?
- Are the company's tax disclosures included in its annual financial statements comprehensive and understandable?
Tax requirements and the broader implications are an integral part of the enterprise and should be an essential item on the corporate and board agenda.
Today’s boards need to understand the tax risks for the company — from expiring tax provisions and fundamental tax reform to the changing legislative landscape and increasing cross-jurisdictional cooperation. Here are some of the pressing tax issues for 2011.
Uncertain tax positions: how will tax return disclosure affect the company?
For 2010 returns, the Internal Revenue Service (IRS) is requiring disclosure in 2010 by corporations that have total assets of $100m or more if the taxpayer has recorded a reserve in its audited financial statements for a UTP or has not recorded a reserve because the taxpayer expects to litigate the position. The requirements will be extended to corporations with assets of $10m or more in a phased-in approach over the next four years.
Companies can review UTPs for the current and prior years to determine strategies that can mitigate risk and reduce uncertainty wherever possible and appropriate. It is important for boards to understand the tax risk management strategies, processes and particular transactions that may result in UTPs.
Tax risk and corporate governance: what is the company’s strategy?
CEOs and boards are considering tax risk management as part of overall corporate governance and expanding their focus from issues of tax compliance to tax risk management. Due to the significant costs — both financial and reputational — of "getting it wrong," boards should understand how companies are seeking ways to manage their relationships and risk profiles with tax authorities around the world and take a proactive approach to resolving disputes and obtaining certainty.
There are a number of programs to accelerate issue resolution such as pre-filing agreements, advance pricing agreements and industry issue resolution. Companies that anticipate and plan for controversy are better prepared to address challenges, manage risk, reduce costs and improve their relationships with tax administrators, potentially with significant benefits to their business.
Tax administration without borders: what are the challenges and opportunities?
Governments are adapting to the new environment by collaborating on tax administration and enforcement matters to protect their revenue base and uncover tax non-compliance. Tax commissioners are sharing information across borders and pooling resources to drive better compliance. Information sharing between tax administrations has made global tax risk a corporate governance issue.
More and more companies are taking a holistic look at their global tax profile, making sure that the full range of indirect taxes and corporate income-based taxes are considered and managed strategically. Ensuring that companies have systems, resources, policies and procedures to monitor, assess, and manage tax risk and controversy on a strategic and global basis is becoming an imperative for global companies and their boards.
Fundamental reform: is the company's tax function keeping pace?
The global financial crisis has given rise to calls for tax reform in the US and abroad. Key lawmakers have indicated their intentions to move forward with more hearings and proposals on tax reform next year.
Given the current state of the US deficit and the potential need for additional economic stimulus, pressure to identify revenue raising measures to offset costs will continue. The uncertain status of legislation has created a challenging environment for businesses that are now unsure of such long-standing tax provisions as the look-through of foreign subsidiary earnings in the characterization of dividends and interest and the research and development tax credit.
Information reporting and withholding: is the company ready to report?
When it comes to closing the tax gap without actually raising the tax rate, information reporting and withholding (IR&W) is arguably one of the strongest tools available, including both the enforcement of existing and new provisions:
- Section 1441: withholding of tax on non-resident aliens
- Super Forms 1099: payments made for services as well as goods, materials, inventory and equipment
- Foreign Account Tax Compliance Act (FATCA): IR&W regime for foreign and domestic financial institutions
Complying with each provision requires a significant amount of work and cost and failure to comply will trigger penalties and backup withholding liabilities. While not new taxes, these provisions represent a significant addition to both the risk and the cost of doing business.
As rapidly and dramatically as both US and global tax environments are changing, the issue of tax and its broad implications needs to be added to a comprehensive agenda that will help companies better prepare for the issues ahead.