Managing tax transparency and reputation risk
Tax risk series – third edition
Companies face more reputation-related tax risks than ever, according to our report, A new mountain to climb. Public opinion is driving political action and requiring a higher threshold than complying with the letter of the law.
Constant scrutiny from stakeholders, especially news and social media, has businesses concerned about protecting their brand. If a company doesn’t proactively manage the increased reputational risk posed by the ongoing ”fair share of tax” debate, its image can be quickly tarnished.
In our survey of 962 tax and finance executives in 27 countries, we found:
- 89% of those who worked for the largest global companies said they were somewhat or significantly concerned about news media coverage, how much companies pay in tax or their seemingly low effective tax rates. In 2011, fewer than half of companies said they were similarly concerned.
- 94% of the largest companies having an opinion on the matter think that global disclosure and transparency requirements will continue to grow in the next two years.
- 83% said they regularly brief the CEO or CFO on tax risks or tax controversy.
- 43% said they regularly brief the audit committee.
- 65% of survey respondents said they have developed a more structured approach to managing their public tax profile in the previous two years.
Greater transparency on the horizon
As stakeholders become more concerned about where tax revenue is coming from, more tax transparency obligations are being put in place. At the same time, governments have opened their lines of communication and are now exchanging more information related to individual and corporate taxation.
From forthcoming country-by-country reporting rules proposed by the OECD under Action 13 of its Base Erosion and Profit Shifting project to a new package of tax transparency proposals from the European Commission, what a business tells one government about its taxes, it will soon be telling all.
Preparation, communication and flexibility are instrumental for businesses facing this new transparency environment.
- Robust processes and oversight
- Watertight documentation and audit trails
- Leading operational systems
- World-class data management systems
With these elements in place, new reporting obligations can be met with less disruption to business activities. Furthermore, the appropriate communication tools can be developed to help mitigate future reputational risks. Such readiness will also help companies to communicate more effectively internally as well as externally.
Six tactics to help you prepare:
1. Actively monitor the changing landscape.
Track media coverage and social media channels. This may require closer collaboration with communications and PR functions within the enterprise.
2. Assess your readiness to respond to reputational risk threats.
Understand whether you have complete visibility of tax structures and taxes paid wherever you operate. Know whether taxes paid are in line with your business results. And know whether the board has an agreed-upon strategy and plan of action for responding to a negative story.
3. Enhance communication with internal and external stakeholders.
Communicating effectively about your company’s total tax picture, tax policies and overall tax profile is critical to successfully managing tax reputation risks. Be sure your company is prepared if a crisis were to come about.
4. If appropriate, prepare a total tax picture
The development and sustenance of an accurate total tax picture often sits at the heart of a tax reputation risk strategy. It incorporates much more than listing of taxes paid around the world, instead presenting deeper insights on why a company operates where it does, why it is structured in the way it is and how it manages its tax department.
5. Decide with whom your company wishes to communicate about tax.
Beyond governments, investors may want to know how the OECD and other reforms will affect your company. You may wish to assure employees your tax policies are sound. You may also decide to adopt a media strategy.
6. Embed reputation risk thinking into your business and decision-making processes.
In the current environment, tax issues can emerge from almost anywhere. Be sure to factor reputation risk into your business operations and focus on case-scenario strategies.
Don’t leave your company’s reputation to chance. To thrive in the current reputation risk environment, it can be useful to define yourself before others define you.