You can’t tax what you can’t see

You can’t tax what you can’t see

Stephen Callahan and James Gordon discuss the Corporate Tax Avoidance interim report recommendations, including transparency and CbC reporting.

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A businessman flipping through the pages of a tax report

The Senate Inquiry’s Interim Report into Corporate Tax Avoidance (the Report) arrived amidst a media frenzy this week. A reported 1.2 million viewers tuned into Seven’s Sunday Night ‘Corporate Tax Dodge’ exclusive, while Q&A's debate on the topic generated up to 800 tweets a minute. Corporate tax has clearly reached critical mass in capturing public attention.

The report’s key focus was on transparency, including recommendations that the new voluntary tax transparency code be mandated, and Country-by-Country (CbC) reporting excerpts be published. At this stage however, it remains unclear to what degree the report’s recommendations will be adopted.

The Report also noted a change in focus of Australian boards at some multinationals, from maximising profits in the Australian operations, to instead following their parent’s instruction to do the opposite – reflecting increased global connectivity of the multinational’s operations. This observation underpins a trend, both in Australia and abroad, of considering the responsibilities of local boards in managing the local business to deliver a local profit – and to pay tax on that profit.

The ATO’s new Corporate Governance guide suggests that Australian boards articulate and own a clear risk appetite for Australian tax, and implement testing to ensure its operation in practice. The guide also suggests publication of this in the company accounts, effectively expanding transparency to include ‘how’ tax is managed, as well as ‘what’ tax is being paid.

The UK is considering mandating publication of ‘how’ type documents, including a UK-specific tax risk appetite and evidence of application in practice. This is shining a spotlight on the effectiveness of local boards in decision making around UK tax matters, similar to the Senate’s focus here in Australia.

Consequently, we are starting to see a process of decentralising tax governance by wrapping tax decision making into the ambit of local boards.

Continuous self-assessment surveys of large and medium businesses on tax management conducted in recent years by KPMG Australia have indicated that some companies feel less prepared for this ‘how’ type tax transparency:

  • Less than one-third (31%) reported to boards on tax matters under a process which had been set by the board.
  • Nearly half (47%) of respondents replied that they were not fully confident that their internal controls were appropriate for the size and complexity of their company’s operations.
  • Only 7 percent had understood and documented their controls across all end-to-end tax processes.

With the eyes of millions and the tweets of thousands now focusing on tax, reputation-conscious boards cannot take their eyes off 'how' they pay tax, since this often determines 'what' tax they pay and 'where' they pay it.

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