Tax takes the spotlight

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Tax directors at today’s power and utility (P&U) companies are moving away from a custodian’s role to becoming more of a real-time commentator and advisor to management. Stefan Waldens reports.

Historically, the tax director was a technical expert within the finance function. Focusing on technical reporting, compliance and tax planning, the function had little alignment with the rest of the business.

But times are changing. Today’s tax directors must play a more strategic role. The pressure to perform is particularly high for those operating within the power and utilities sector, which faces many transformative changes.

Drivers of change

The shift in the P&U tax director’s role has been largely driven by:

  • Economic volatility, which brings cost pressures to utilities and leads officials in many countries to be more aggressive in seeking tax revenue.
  • Increased regulation, creating a more complex compliance environment for P&U companies through Sarbanes-Oxley in the US, similar laws in other jurisdictions and more restrictive energy regulations.
  • Globalization, forcing the tax director to manage the tax implications of intercompany transactions and arrangements on an international scale. P&U companies must be particularly vigilant regarding the potential risks of (unwanted) permanent establishments.
  • Improved technology such as smart meters and big data, which mean that controls and processes that gather data – for risk management or any other reason – can now do so in real time.

The huge transformative changes currently taking place in the P&U sector are forcing tax functions in P&U companies to evolve much more quickly. The tax director is now closely aligned with top management and involved in almost all important business decisions.

Identifying risks and opportunities

Tax is not driving the significant changes currently facing the sector, but it is critical to the success or failure of the initiatives designed to address these changes.

Utilities face big decisions about:

  • Divestments
  • Restructuring
  • Investments
  • Analysis of potential governmental grants
  • Raising capital
  • Rollout of smart grids

The tax function must ensure these decisions are made in the most tax-efficient way and deliver the required planning certainty for the organization.

Business models should be tax efficient but not too aggressive. Tax directors must also consider the impact of public scrutiny and ensure that tax decisions do not risk the company being seen in a poor light.
While a big part of the tax directors’ role is to ensure these business decisions contain no tax “showstoppers,” it is important that they are seen as enablers, creating opportunities to take action and add value.

We see many tax directors at the world’s biggest utilities making a tangible difference to their organization through reshaping their policy regarding transfer pricing – that is, the price at which companies or divisions of a multinational group transact with each other.

By aligning the transfer pricing policy to the organization’s business model, the tax department can substantially reduce risks, ensure consistency and compliance, and strongly support business decisions and incentives.

These developments point to tax directors playing a greater role in risk management and intercompany effectiveness. This involves enhanced interaction with other parts of the company, moving them out of their traditional silos and toward being partners with other leaders in the business.

The CEO and CFO now expect more from the tax function than the traditional goal of “no surprises.” Reporting on the past now goes hand in hand with future planning.

Deeper knowledge of the business

To deliver on these objectives, tax directors must acquire a deeper knowledge of the business, align with operational aspects and work closely with a range of back office functions.

Strong leadership and clarity of vision around the tax function’s role are crucial. But while these “softer” skills may be increasingly vital, so is the need for high-quality, accurate and complete data.

Tax directors need to embrace technology to enable them to fulfill their traditional duties and effectively manage compliance and planning.

Make a bigger contribution

The P&U tax director’s role is now broader, higher profile and more commercial.

While the pressures are greater, so are the opportunities. Tax directors prepared to broaden their scope and align with the broader business will be recognized for both their traditional and their new responsibilities - and will be equipped to make a bigger contribution to their company.

How we can help

Our Tax teams offer advisory and compliance services related to business tax, human capital, indirect tax, international tax and transaction tax. We support tax directors at P&U companies, providing them with the tools and methods they need to realize the potential of their role.

For more information

Tax directors: shifting from custodian to advisor

Read our T magazine article Tax directors: shifting from custodian to advisor.