BoardMatters Quarterly, June 2013

Multinational companies and the taxes they pay

Growing reputational risks

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Forward View by Tapestry Networks

The amount of taxes that multinational companies pay and the ways in which these taxes are managed across the world are under the most scrutiny in recent memory. Some lawmakers, under pressure from budget deficits, are focusing on whether companies are paying their “fair share of tax” even as many governments acknowledge that certain elements of their tax laws may be out of date.

Revenue bodies in many countries are sharing information about taxpayers with each other at an unprecedented level.

Social justice groups, angered by cuts in services, are even more critical. The news media, often relying on the first two groups as sources of information, have taken up the cause by accusing companies of tax avoidance.

As this intensity of scrutiny continues to build, changes in tax policy may follow.

In February, the Group of 20 nations welcomed the work of the Organization for Economic Co-operation and Development (OECD) in developing a plan to address perceived weakness in key cross-border concepts that they believe allow companies to shift profits between jurisdictions for “tax avoidance” purposes. The OECD will present its long-term action plan in July1.

The EU has just announced the intention to legislate for greater transparency through country-by-country reporting, although the exact form that this will take, what information it will cover and who it will apply to are still not clear2.

In addition, revenue bodies in many countries are sharing information about taxpayers with each other at unprecedented and still increasing levels.

Audit committees want to gain a better understanding of the increased complexity around tax matters. With the potential reputational risks that arise as a result of the combination of global tax policy changes, enhanced tax enforcement and more intense scrutiny of corporate tax strategies, many audit committees are moving tax and managing tax risks up their agendas.

At our recent client event, 100% of companies polled said they have adjusted their risk parameters in response to recent developments, while 88% have changed the way in which they communicate about taxes internally.

To better manage tax risk, some audit committee chairs suggest the following:

  • Understand the company’s tax strategy and propensity for risk. Be comfortable with the level of information you currently receive from the tax function.
  • Engage in regular discussion with management about tax risk. It is important to understand any risks related to your company’s tax strategy.
  • Ensure that tax processes and controls enable the company to effectively meet its tax compliance and reporting obligations.
  • Evaluate whether the level of tax paid in all jurisdictions is in line with your business results and ask if that can be construed otherwise. Are there indicators that may suggest your company’s tax payments are lower than current economic conditions suggest they should be? If so, why?
  • Know all of the taxes the company pays or remits. Most of the current debate is focused on business income taxes, but companies collect a lot of indirect taxes on behalf of governments and also make significant economic and social contributions.
  • Draw on the expertise of the external audit firm. One audit committee chair remarked, “I give credit to the auditors. They spend a lot of time on tax issues, in reviewing our positions and talking to us about the risks associated with them. They will tell us when a position is aggressive.”
  • Examine the company’s tax resources. The variety of tax risks for a company that operates in multiple markets presents significant challenges for the tax department. Audit committees should have an understanding of the resources that their companies are devoting to managing these tax risks and how tax departments are best organized to respond.
  • Proactively build relationships with tax authorities. Audit chairs we spoke with stress the importance of understanding the relationships the company has with tax authorities and adopting programs designed to help corporate taxpayers.
  • Ensure that external information about the company’s tax position is appropriate and consistent not only in the annual report, but also on the company’s website, in press releases, in recruitment advertising and in other communications of all types.

The variety of tax risks for a company that operates in multiple markets presents significant challenges for the tax department.

In summary, a convergence of factors, highly active lawmakers, inquisitive journalists, and emboldened activists are heightening reputational risks for companies that may possess a lower effective tax rate than their competitors.

As the center of financial risk oversight, audit committees will want to ensure that they fully understand the company’s tax strategy and that the company has a plan to mitigate risks that may result from that strategy. As one audit committee chair noted, “You need to weigh the reputational risk against the tax gain, and be prepared to defend your strategy.”

1 "BBC, “G-20 vows to combat corporate tax avoidance,” 17 February 2013

Forward View is prepared by Tapestry Networks. Tapestry Networks organizes and leads nine audit committee networks with the active support and engagement of EY that collectively consist of 150 individuals, who chair more than 200 audit committees and sit on more than 380 boards at some of the world’s leading companies. EY refers to the global organization of member firms of EY Global Ltd., each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm in the US.

Used by permission of Tapestry Networks. This article may not be reproduced, distributed, displayed or published without the express written consent of Ernst & Young LLP and Tapestry Networks.