By Stephan Kuhn
The breadth and pace of change when it comes to tax matters has taken everybody by surprise. In just a few years, tax has quickly climbed to the top of everyone’s agenda, be it governments, media or corporate leaders.
Companies that rely on tax-planning policies that are entirely legal and, until recently, were widely understood and used in business, can now find themselves strongly criticized in the media for having adopted “aggressive” tax strategies.
The era of accountability and transparency
Governmental bodies, for example, increasingly challenge multinationals on their tax strategies, often in open hearings. Indeed, companies are discovering that their tax bills are now publically scrutinized in this new era of accountability and transparency. Those not viewed as contributing their “fair share” now face the anger of the broader public.
Boards and CEOs are still coming to terms with this new reality. But it is not an option to delay action and hope the debate over transparency and what represents a fair share of tax will stop. It is also no longer realistic to think that a company can merely stick to the letter of the tax laws and ignore other considerations. Doing so puts companies and their shareholders at risk.
As international tax advisors to multinational companies, we are sensitive to this change. We, too, are undergoing a transformation as we consider the broader business implications and reputational risks of the technical tax advice we give to our clients. This is not business as usual anywhere in the world.
How can you optimize your company's tax affairs?
So how can companies adapt to this new landscape and best address the different concerns of these very engaged stakeholders? It starts with formally and carefully defining a company’s tax policy, which gives effective guidance from the board to the group tax function on what the company’s responsibilities and required behaviors are worldwide.
This policy needs to take account of the often conflicting interests of various constituencies, such as tax authorities, investors, employees, the media and the general public. In the future, a business model must adjust to recognize that, while commercial decisions must continue to take account of tax analysis, such analysis itself needs to include wider business risks.
A company’s tax policy will also help in determining how transparent a company wishes to be with stakeholders about its tax affairs. Companies are concerned that stakeholders could misinterpret the complex nature of their tax affairs.
Creating effective tax policies
More companies recognize that it is important to communicate about how the company contributes to the economies and communities in which it operates – in other words, how much public value it creates. Any effective tax policy needs to strike a balance between clearly communicating the risk appetite and approach of the company, while also managing all costs, including opportunity costs caused by its tax approach and its consequences regarding reputation and the risk of controversy.
Companies should be prepared to engage with governments, worldwide organizations such as the OECD and tax activists to discuss how the continual flow of new policies and laws will impact their business. While cash-strapped governments in these austere times are keen to see more tax revenue, they are also very concerned about encouraging economic growth to create jobs.
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This article is included in Tax Insights issue 11 (pdf, 1.37 MB)
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