Those that can quickly and clearly explain their tax transactions and strategies — to executives, to their employees and to external stakeholders such as legislators, regulators, shareholders, customers and the media — are better positioned to manage reputation risks.
For companies that choose to be proactive, we think there are six distinct actions to consider when forming a reputation risk strategy that centers on developing a more holistic and transparent way of thinking and communicating about your company’s tax strategies and the broader role your enterprise plays in global, national and local economies.
1. Actively monitor the changing landscape
Tax function leaders should regularly monitor the level of public interest in their company’s tax profile. This includes closely monitoring media coverage of their company and tracking social media channels that previously may not have been of interest to the tax function. This often requires closer collaboration with communications and PR functions within the enterprise.
Companies should also closely monitor legislative and regulatory developments in the transparency and disclosure area to understand the likelihood of new and increased tax disclosure requirements. While many new requirements are already being demanded of companies, more are likely to follow.
2. Assess readiness (and desire) to respond
The assessment of a company’s readiness to respond to a reputation risk threat can be measured by the ability to answer the following questions:
- Does the company have complete visibility of its tax structures and taxes paid in each jurisdiction in which it operates?
- Are the taxes paid in all jurisdictions in line with business results?
- Does the company have complete visibility of all disputes or litigation in each jurisdiction?
3. Enhance communication with internal and external stakeholders
Communicating effectively about the company’s total tax picture, tax policies and overall tax profile is the next critical step.
Internally, the tax function should validate the desired approach to the C-suite and other oversight functions, including the audit committee, risk officers, general counsel, public affairs and boards of directors. This is part of the tax director’s growing responsibility to take a more proactive role in general business strategy. The goal should be to secure agreement on the potential impact of reputation risk at the management level and to develop a common, strategic view of issues related to tax transparency.
Informing company leadership about tax reputation risk concerns will help them appropriately rank tax among other risk factors and help embed sensitivity around tax-related reputation risk in other business activities such as mergers or acquisitions. Because critics and the news media now look for a tax angle in nearly everything a company does, companies need to anticipate those inquiries and be prepared to respond.
Companies should also establish and sustain a dialogue between their tax and corporate communications functions. This is important both to familiarize public relations representatives with the details of material tax items before they are disclosed in public filings, and also to engage effectively with investors and the company’s own personnel.
This broad-based dialogue should answer four questions:
- On an ongoing basis, are there sensitive tax items that are being disclosed in public filings?
- Does the company want to proactively publish or reactively respond to any criticism?
- Does the company want to publish information on tax policies but not any deeper tax data? Will doing so create or mitigate reputation risk?
- Who will be the key spokesperson should a tax issue arise?
4. If appropriate, go through the steps that are necessary to prepare the total tax picture
The total tax picture of a company incorporates much more than a mere listing of taxes paid around the world. Rather, it incorporates deeper insights on why a company operates where it does, why it is structured in the way it is and how it manages its tax department.
It addresses not only what the company’s total tax contribution is across different classes of tax, but how its very existence benefits an economy as a whole. Finally, a total tax picture analysis carefully views all of the above through the lens of public perception.
Establishing a closer relationship between tax and accounting functions — especially related to finance transformation initiatives and ERP-related projects — will help ensure changes to systems and processes take current and potential future tax reporting needs into account. In fact, many of the elements causing reputation risk today are the same elements that will be required to be reported under the OECD’s transparency initiatives prescribed in Action 13 of the BEPS project.
Developing the company’s total tax picture may in turn lead to discussions about whether to restructure transactions, relocate certain operations or intangible assets, or change a business model altogether.
5. Decide with whom the company wishes to communicate
Increasingly, corporate executives say questions about tax are taking up more and more time on investor calls. Institutional investors in particular want to know whether the company will be affected by tax reforms underway around the world now or future changes that may come about as a result of the BEPS project.
When a company faces specific accusations of tax avoidance, they want to know whether the questioned tax positions are sustainable. The tax director must work with the C-suite and communications function to anticipate and answer these types of questions.
It is difficult to overstate the importance of communicating with employees when a company is under scrutiny for its tax practices, especially when the company is involved in direct engagement with consumers. Most executives understand how difficult it is to recruit and retain the best people; unanswered allegations of tax avoidance may damage morale and catalyze employee attrition over time.
Finally, the decision of whether to proactively engage with the media (as opposed to reacting to a published story) is perhaps the most difficult of all. Some may argue that doing so mitigates the risk; others may believe that it is akin to waving a red flag at a bull. Each company must decide its own strategy, based upon facts and circumstances.
6. Embed reputation risk thinking into core business strategy
Assessing and preparing a response about how the company manages ongoing tax operations is one thing. Creating a whole new risk-focused mindset and culture within the function is another. Ensuring that non-tax professionals — particularly those in upper-level management — proactively consider tax risks when considering a merger or acquisition takes that philosophy one step further. That kind of dialogue must be initiated, revisited and sustained if the tax function is to properly and actively assess the tax reputation risks of ongoing business decisions.
The full version of this article is included in EY´s A new mountain to climb report.
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