Businesses have not always given Tax Risk Management the attention it merits. There have been a number of developments, both locally and internationally, that resulted in Tax Risk Management gaining momentum insofar as importance is concerned.
The profile of tax has become much more visible not only from an investor and board perspective but also from a tax authority and public perspective. This is even more prevalent in South Africa where we have seen a declining economy and increased revenue collection targets. There are a significant number of taxes that companies are exposed to and the tax values are enormous. In some cases the tax bill (including direct taxes, indirect taxes and employees taxes) that an organisation should manage could be as much as 40% to 50% of the organisation’s turnover. This makes the reason for the heightened interest in Tax Risk Management more apparent.
Tax has acquired moral, ethical and social dimensions that are seldom discussed or considered. In particular, there has been a growing demand by external stakeholders for greater tax transparency on all levels including the taxes paid and the way in which taxes are managed within an organisation.
Stakeholders want to know “what is an organisation’s tax contribution?” and “what is the organisation giving back to the country and community in which it operates?”.Tax transparency has been receiving a lot more airtime in South Africa. In the 2016 Budget Speech, Minister of Finance Pravin Gordhan stated that:
“With effect from 2017, international agreements on information sharing will enable tax authorities to act more effectively against illicit flows and abusive practices by multinational corporations and wealthy individuals.”
Globally tax transparency has been receiving a lot of attention. The OECD Base Erosion and Profit Shifting Project states in Action13:
“The Base Erosion and Profit Shifting (BEPS) Action Plan adopted by the Organisation for Economic Cooperation and Development (OECD) and Group of Twenty (G20) countries in 2013 recognised that enhancing transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other BEPS-related risks is a crucial aspect for tackling the BEPS problem. Against that background, the September 2014 Report on Action 13 (the “September 2014 Report”) provides a template for Multinational Enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business the information set out therein. This report is called the Country-by-Country (CbC) Report.”
Apart from the OECD actions to improve tax transparency, governments are looking at introducing legislation to improve transparency and Tax Risk Management. Aspart of the measures to progress large business tax compliance, Her Majesty's Revenue and Customs (HMRC) issued a document entitled: Improving Large Business Tax Compliance. This document states the following:
“To respond to the challenges described in Chapter 1, the Government proposes to introduce a legislative requirement that large businesses must publish their tax strategy as it relates to or affects UK taxation. The strategy should be formalised, articulated and owned by an Executive Board member within the business.”
The attitudes of governments, regulators and tax authorities towards tax governance and Tax Risk Management are changing (and rightfully so). Regulators and tax authorities are increasing their scrutiny of the approach companies take regarding the management of their taxes. Minister of Finance Pravin Gordhan stated the following around governance:
“The issues around tax, tax compliance, and tax planning need to be on the corporate governance agendas of company boards. SARS hoped to do a lot more to interact with companies and boards to expose them to what was happening elsewhere in the world on the one hand, but also to indicate the urgency for them to bring tax onto the corporate governance agenda.”
We are also seeing legislation aimed at “testing and evaluating” certain aspects of an organisation’s Tax Risk Management, in particular, the recent amendments to the Tax Administration Act relating to legal privilege, prescription and documentation gathering. In some cases one could go so far as to say that this Act may inadvertently punish inadequate Tax Risk Management.
It is not only important, but necessary. The implementation of a Tax Risk Management framework should not only promote governance and address as well as reduce tax risks, but may also create value, for example:
Based on the above, to list a few, Tax Risk Management is not just a “nice-to-have” but an essential must have in any organisation. Quite simply, Tax Risk Management is the right thing to do. The ultimate challenge for the tax executive is, however, to be able to provide comfort that the Tax Risk Management framework is indeed implemented, tested for compliance and adhered to throughout the organisation.