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Tax Strategy Needs to be Linked to Corporate Reputation, states PwC Tax Report

03 July 2013   (0 Comments)
Posted by: Author: PwC
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Author: PWC (Tax Risk)

Worldwide CEOs are grappling with a host of tax issues in the wake of rapid legislative change and corporate governance principles, as well as increased scrutiny from governments and tax authorities. Tax avoidance will be at the heart of next month’s G8 summit in Northern Ireland, the first time that it has been given such prominence on the agenda. The corporate tax debate is gaining momentum in the face of the uncertain global business and economic climate that we face in 2013 and as government’s come under increasing pressure to reduce deficits or increase economic stimulus.

Paul de Chalain, Head of Tax Services for Africa, says: "Worldwide, organisations are feeling the heat, particularly those that have been caught in the spotlight of the media as a result of their tax strategies, and are increasingly concerned about their corporate tax and reputational risks. Governments, regulators and the public are focusing on corporate tax practices in a way we haven’t seen before.

"However, the report shows that there appears to be some sort of disconnect,” says De Chalain. PwC’s new report, ‘Tax Strategy and Corporate Reputation’, shows that almost half of CEOs do not consider corporate reputation a priority area for investment in the year ahead.

According to the report, there are signs that CEOs are failing to invest properly in the management of their corporate reputation. Most CEOs said they planned to concentrate on customer growth and retention, and on talent management. Investment in managing the corporate reputation was a low priority, with 46% saying that they planned to make no changes in this area at all.

It is interesting to note that there are regional variations, with two-thirds of CEOs in Africa planning to make some or a significant change to the management of corporate reputation. CEOs of companies in North America were the least likely to make any change to their plans for managing corporate reputation.

The research forms part of PwC’s 16th ‘Annual Global CEO Survey’, in which 1 33o interviews with CEOs in 68 countries were carried out. The survey provides a summary of findings on tax issues affecting CEOs.

"Given that the recent high-profile debate about corporate taxation has centered largely around US companies, most notably Amazon, Google, Apple and Starbucks, we would expect the issue of trust and corporate reputation to move up the agenda of North American CEOs over the coming months,” says De Chalain.

So far, though, as well as being the least likely to make any changes to their management of corporate reputation, CEOs in the US are also the least influenced by their media stakeholders when it comes to setting business strategy, according to the survey. On the other hand, CEOs in Africa (70%) and Asia Pacific (62%) are the most influenced by their media when it comes to setting their business strategy.

The focus on tax avoidance is understandable. However, it’s obscuring the real issue, which is that the international tax system is out of date and was never designed to deal with the way in which business operates today, states the report. The report points out that the principles governing the taxation of cross-border trade are also between 40 and 100 years old. Until the world’s governments tackle the issue of an outdated international tax system, there are many more risks around tax.

"There are more risks around tax – reputational and strategic – than ever before. It’s a risk that no business leader can afford to ignore. Tax is on the agenda of an increasing number of stakeholders – and more tied than ever to corporate reputation. Tax strategy and managing this link to corporate reputation should become a higher strategic focus for business in 2013.”

Tax is the top business threat to growth in today’s economy

CEOs are anxious about the recent economic uncertainty, and their confidence about growth, in the short term at least, remains fragile. Many are casting a wary eye over how governments are addressing their deficits. A significant percentage of CEOs globally (63%) see a potentially increasing tax burden as the key threat to their business’s growth, compared to 48% of South African CEOs.

Kyle Mandy, PwC Head of National Tax Technical, says: "This worry is not unfounded. After an eight-year trend of decline, the total tax rate appears to be stabilising.” PwC’s ‘Paying Taxes’ study also shows that corporate income tax – the headline tax – in fact makes up just over a third of a company’s total tax rate contribution.

Corporation’s tax contributions are being closely scrutinised by more stakeholders

CEOs today are feeling increasing pressure from a growing number of stakeholders, as traditional groups have been joined by new influencers, with social media and the 24-hour news cycle giving voice to an ever more diverse set of observers.

There have been recent cases where corporate tax practices have become a matter of public interest. CEOs are also fully aware of how closely they are being watched and are adapting their business strategies in response.

The survey report shows that ethical behavior is a focus for many business leaders in 2013. More than half of CEOs say that a priority for the year is to create a framework to support a culture of ethical conduct in their business. There are, however, strong regional differences. For instance, CEOs in Africa (76%) are far more preoccupied with a framework to support ethical behavior than their counterparts in the developed markets of Western Europe (52%) and North America (51%), possibly because developing markets are less likely to have a strong framework already in place, states the report.

The report contends that companies need to develop resilience if they are going to succeed in the current environment. Trust is an essential component of the relationship between a company and its stakeholders and, as such, is a vital element of this resilience. CEOs know that they have to rebuild bridges between business and society -37% of CEOs said that they worry that a lack of trust could damage their company’s prospects for growth – and tax forms an important part of that process.

Tax is a strategic issue

The survey shows that CEO’s confidence about growth in the short-term remains fragile. Over the medium to long term, more CEOs will look beyond the BRIC markets to emerging economies. That means more organisations will be operating in countries with regulations and tax regimes, and invariably an attitude to tax, that are very different to their own, warns Mandy. And yet, the survey shows that CEO’s attitude to tax planning varies widely from region to region. Just fewer than 50% of companies in Latin America said they planned to focus their approach to tax planning and contributions as a priority, while only 34% in Africa said the same. And just 31% of CEOs in the largest companies said that tax planning was a priority for them.

"This is a serious risk in the current climate. Governments, regulators and the public in general are more focused on tax than ever before and as we’ve seen there are considerable risks involved. Determining the company’s approach to tax planning globally should be a key strategic priority,” concludes Mandy.

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