The responsible tax debate is gaining momentum in the face of greater pressure for public transparency and accountability, increased reputational risks for larger businesses, new regulatory and reporting obligations and mounting pressure on governments to reduce deficits and create economic stimulus. Chris Morgan, Head of the EU Tax Group at KPMG, examines the key driving forces behind this debate.
In the last few years, a number of factors have brought about a sea change in the area of tax planning and tax management. With a greater focus on responsible tax and accountability, companies now face significant pressure to present their tax strategies in a more transparent way. At the same time, the role of the Chief Tax Officer (CTO) has evolved, requiring today’s CTOs to communicate more effectively with the board.
Several different pressures have led to this shift. The financial crisis was a clear trigger: against a backdrop of falling tax revenues and government cuts, there has been an obvious impetus to make sure that companies and individuals are paying their fair share of tax. This has been compounded by the efforts of numerous parties, from bloggers and commentators to activist groups.
NGOs such as Christian Aid and Oxfam have focused on the question of responsible tax, while media focus has rallied public opinion. At the same time, efforts by the government to modernise the tax system and create more competitive rules – while enforcing those rules more stringently – have played a role in influencing attitudes towards tax. The question of tax avoidance has also been picked up by the G20, leading to the OECD’s recent report on Base Erosion and Profit Shifting.
The net effect of this changing environment is that the incentives for engaging in tax planning have been reduced: the risk of getting things wrong has made many companies – and indeed advisors – conclude that tax planning should not be attempted.
Against this backdrop, Tax Directors and Chief Tax Officers face considerable challenges. For one thing, CTOs are experiencing a significant shift in their role within the organisation. In the past, the role of the tax director tended to be highly technical. Today, with compliance becoming more automated, tax directors are increasingly focusing on strategic activities, such as communicating externally as well as with the board.
At the same time, greater board level interest in tax means that the role of the CTO needs stronger communication skills and greater levels of flexibility than in the past. Historically, the board has had limited involvement in tax issues. However, in order to adopt a responsible tax approach – and embed it fully within the organisation – companies need to have in place a proper policy or strategy, with agreement at board level about how this will be implemented.
The current focus on responsible tax is also resulting in greater levels of subjectivity, presenting CTOs with additional challenges. While paying tax due is clearly essential, the CTO also has a duty to shareholders not to overpay. The amount of tax that a company needs to pay is determined not only by legal requirements, but also by the company’s tax policy, strategy or stance.
In light of the responsible tax debate, CTOs need to be certain that they have chosen the right approach for their organisation. The policy or strategy should be consistent with the overall ethos of the company: an aggressive tax planning strategy might be suitable for a company which regards itself as highly competitive, but not for a company which is primarily community focused.
As well as choosing the right approach, companies need to be prepared to explain and defend their stance in public. With a number of responsible tax initiatives currently underway – such as the recently launched All Party Parliamentary Group on Responsible Tax – companies need to engage with stakeholders and provide greater levels of transparency on their approach. In particular, companies need to be prepared to answer additional questions from investors and shareholders, such as requests for the company’s OECD country-by-country templates.
While some companies may be reluctant to release this information – and may have legitimate reasons for this – they need to be able to explain their reasons in a credible way and consider how else they might be able to provide the relevant information. Without a significant effort to comply with responsible tax practices, there is a risk that further regulation could result. This could create an additional compliance burden in a one-size-fits-all format, which might not be suitable for every industry.
Attitudes towards tax planning and tax management have shifted considerably over the last few years. Both companies and advisors need to make sure they are part of the solution - not part of the problem. In order to achieve this, and avoid an ever increasing tide of regulation, companies need to engage fully with stakeholders. Above all, they need to be able to explain clearly what they are doing and why.
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