IN-HOUSE TAX DIRECTORS AND BOARDS: BEWARE OF THE TAX RISKS AHEAD
Author: Ine-Lize Terblanche
Our article takes in-house tax directors and members of tax boards through the risks and their obligations in an ever-changing environment.
The job of the in-house tax director is growing harder every day ? from the threat of increased taxes to more aggressive enforcement across the African continent. We take a brief look at what an in-house tax director and a company?s governing board must consider to ensure proper tax governance and to mitigate the tax risks ahead.
Corporate taxes in the spotlight
According to the International Monetary Fund the tax landscape has been profoundly affected by COVID-19 in three significant ways, with lasting implications. They predict the following:
There will be an increase in intolerance for aggressive tax minimisation by large taxpayers ? however legal it may appear.
Developing countries are likely to see a significant decline in their average tax-to-GDP ratio in 2020 and onwards. In addition to emergency funding, even more effort will go into longer-term fiscal sustainability and the importance of improving domestic revenue mobilisation.
The fundamental work already being carried on in many lower income countries to reform and build tax collection, tax modernisation and tax governance capacity will become an even higher priority, as it is central to a development strategy aimed at delivering on the United Nations Sustainable Development Goals.
The Global Forum on Transparency and Exchange of Information for Tax Purposes, in its Tax Transparency in Africa 2020 Report, also indicates the urgency with which key elements of a functional infrastructure for exchange of information is being implemented. For instance, the exchange of information networks of African countries have expanded significantly to 3 262 bilateral relationships compared to 2 523 in 2018. More African countries are using cross-border exchange of information requests in their tax investigations. The number of exchange of information requests sent increased by 48% between 2018 and 2019, which translated into additional tax revenue. Between 2014 and 2019, a group of eight African countries identified $189 million of additional taxes in this manner.
?Now more than ever, the work on increasing transparency is important for Africa, and the collaborative efforts of ATAF and the Global Forum will ensure that African countries increase their exchanges of information, while contributing to the fight against illicit financial flows.?
? Logan Wort, Executive Secretary of ATAF
At the 4th High-Level Tax Policy Dialogue of the African Union in August 2020 Victor Harison, the Commissioner of Economic Affairs for the African Union, called on African countries to participate towards vigorous tax policy aimed at multinational companies, so that profits from their wealth can be shared more equitably on the continent and to strengthen domestic revenue mobilisation.
People, planet and prosperity: Tim Mohin, the outgoing Chief Executive of the Global Reporting Initiative, called on business leaders, stating that ?they need to take off the blinders and realise that corporate (and investor) interests are served only when companies consider, and meet, the needs of all its stakeholders and not just its shareholders, meaning that business leaders need to manage a fine balance between profit and purpose?.
The King IV Report on Corporate Governance (King IV Report?) recognises companies as integral parts of the broader society. Also, King IV defines corporate governance as the exercise of ethical and effective leadership by management towards the achievement of defined governance outcomes: ethical culture, good performance, effective control and legitimacy.
Being socially responsible includes being a responsible and transparent taxpayer. There is a widespread perception that not all companies pay their fair share of taxes. Many stakeholders that argue this point often leave out the fact that businesses contribute to society in many ways, not just corporate income tax. In the past year regulators and policymakers have demonstrated a growing desire to address the connection between financial risks (including tax) and environmental, social and governance related concerns. They also call for organisations to consider appropriate steps to publicly demonstrate their commitment to adding value and building trust. Consequently, the governing body should oversee and monitor how the consequences of the organisation?s activities and outputs affect its status as a responsible corporate citizen. This includes having targets and measures agreed with management, related to a responsible and transparent tax strategy. Simply paying tax “that is due” is not enough, if a business? behaviour does not stack up to public expectations.
According to the Principles for Responsible Investment these are views shared by institutional investors who may have the means to steer companies to focus on genuine economic activity as opposed to tax behaviour that can negatively impact their profitability and sustainability and reduce wider portfolio returns. There is an imperative for long-term institutional investors to understand aggressive tax practices within their investments, support a shift away from tax practices that are short-term and unsustainable, advocate the creation of a level playing field in tax policy matters and communicate expectations to companies in order to drive broader societal and economic objectives.
Although 2020 is a uniquely challenging year, these are just some examples indicative of an even more challenging tax environment for taxpayers going forward. Tax risk is an inherent part of doing business ? it is not possible to reduce tax risk completely, given the changing landscape. However, effective tax governance should be on the agenda of the in-house tax director, with accountability of the governing board to work towards building justified trust in the economies in which they operate. Organisations need to be aware of their exposure and ensure that effective tax risk management ? aligned with an enterprise-wide governance, risk and assurance framework ? is embedded in the culture and day-to-day activities of the business.
What are the pertinent questions that governing body members and in-house tax directors should ask in this context?
Is the company?s position on tax ethical and effective in light of the changing tax landscape and priorities?
It is well known by now that the King IV Code? requires of the governing body to be responsible for a tax policy that is compliant with the applicable laws, that is also congruent with responsible corporate citizenship and that takes account of reputational repercussions. This implies that ethical values are applied to decision making and tax conduct to balance tax compliance with business activities and ethical, societal and sustainable development-related expectations. It can include the organisation?s tax principles, its attitude to tax planning, the degree of risk the organisation is willing to accept and the organisation?s approach to engaging with tax authorities. In addition it implies that those responsible act with due care, skill and diligence and take responsibility for anticipating, preventing or otherwise ameliorating tax risk.
The organisation?s tax strategy, in line with the organisation?s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process.
Are there appropriate processes, projects, programmes and initiatives that support adherence to the approach to tax set by the organisation?
Without a formalised tax control framework and generally accepted tax risk management principles it is challenging to keep a finger on the pulse of what is happening within the business and how it impacts tax.
The tax control framework should be a best fit for the organisation to proactively address internal and external tax risk, with clearly defined roles and responsibilities at an executive level, within specialist tax functions that facilitate and oversee tax risk management and compliance and at the level of line functions that own and manage risks. Due consideration should be given to who in the organisation is accountable for tax governance and it is important to satisfy the degree to which the highest governance body in the organisation has oversight thereof.
The success of the tax control framework in achieving its objective will be determined by the manner in which it is communicated and embedded across the organisation and whether it is regularly evaluated, monitored, tested and maintained.
Does the tax function have the resources, skills, competency and experience to execute on the tax strategy?
Tax functions are continuously transforming to meet KPIs, such as agility and cost-effectiveness, value add and transparency. Whether it is technical expertise, local understanding, strategic thinking, technology enabled or good governance practice, the tax function needs to make choices and prioritise what they can do in-house and what can be outsourced. It may also mean upskilling staff or transferring tasks to enable valuable resources to focus more on strategic activities.
Are accountability and responsible citizenship demonstrated?
Transparency is vital as we manage our way through our increasingly dynamic tax world. However, it is still regarded by many as irrelevant or unnecessary. Being socially responsible includes being a transparent taxpayer on a variety of matters, such as tax strategy, governance and risk management initiatives, stakeholder engagement, contribution to tax policy and total economic contribution. Being transparent about taxes is much more than a narrative confined to corporate reports. Think of it as part of the organisation?s story of value creation and accountability. This story of tax requires an organisation to look not just at financial data, but also at the bigger sustainability picture. Becoming transparent about taxes is an incremental journey that evolves over time and requires collaboration and communication with both internal and external stakeholders.
There are visible trends globally and locally that indicate the important role of tax governance not only to create shareholder value, but also to move towards providing enduring value by building justified trust with stakeholders and ensuring sustainable participation in societies.
Please click here to complete the quiz.
This article first appeared on Jan/Feb 2021 edition of Taxtalk