Africa: Top corporate tax issues for African Boards to consider
18 September 2013
Posted by: Author: EY
Tax affairs are taking up greater focus on boardroom agendas. This is because directors have to balance their traditional concerns with creating vibrant and growing companies with the growing demand of governments and non-governmental organisations that corporations pay their fair share of taxes.
"This balancing act is particularly acute in developing economies such as one finds in Africa,” comments James Deiotte, EY Africa Tax leader. "On the one hand, directors must ensure that they manage the company’s tax burden effectively in order to improve earnings and maximise growth, with positive impacts on the communities in which they grow and invest in.
On the other hand, when companies gear their planning exclusively around tax minimisation, thus risking a confrontational relationship with local tax authorities, there can be a long-term negative impact on their earnings and cash flows—with adverse knock-on effects for the local economy.”
Getting this balance right is challenging, says Deiotte, who is chairing a session on boardroom concerns relating to tax reporting and other reputational threats at EY’s 2013 Africa Tax Conference.
"We have seen this debate around balance shift from the finance and tax department to the C-suite and boardrooms, it is now brought into focus by the media,” Deiotte says.
"Our experience at EY indicates that it’s best practice for boards to be engaged on the topic and to focus on the following important corporate tax issues.” Companies should:
- Maintain constant focus and assess the change landscape. "Seeing around the corner” and anticipating changes in tax law is extremely difficult, a challenge compounded by a lack of tax-accounting and legal skills on many boards. The challenge is even more acute in Africa, where governments are under extreme financial strain to meet developmental targets. Compounding the challenge further, tax laws and the application thereof are constantly shifting, and courts frequently lack the resources and skills to arbitrate complex tax matters quickly and fairly.
"The tax landscape in Africa and other developing markets is changing rapidly, and can create devastating traps for companies,” says Deiotte. "Monitoring the tax, legislative and regulatory agenda is critical.”
- Manage risks relating to transfer pricing closely. EY’s annual surveys on risk consistently show that transfer pricing is at or near the top of all enterprise risks today. Financial reporting concerns along with reputational considerations will keep this front and centre as boards increasingly demand that their companies manage this topic proactively.
- Align tax planning with operational and supply chain planning. The benefits of streamlining global supply chains can be quickly lost if the tax implications are not taken into account. Proper planning can reduce direct and indirect taxes. For maximum benefits, tax planning must be aligned with operational models.
- Support the tax function. Boards are starting to insist that corporate tax functions are better resourced—particularly as tax authorities make increasing use of software and data analytics to identify non-compliance. At the same time, attention is being given to the quality of corporate tax staff and their reporting lines within the organisation to assure overall effectiveness of the group.
- Enhance corporate value through good tax planning. Corporations potentially lose millions through the overpayment of taxes, and investors have well-established sources of information to help them assess whether a company is managing its tax affairs well. Sources of leakage typically include value-added tax or withholding taxes. Other causes for overpayment of tax include inefficient structuring of corporate deals, especially around business acquisitions, and the consistently poor use of government investment and job-creation incentives to reduce tax liabilities.
"Corporate tax departments are already under strain, and many of them are missing these issues and opportunities because they have become too burdened on compliance, tax reporting and managing controversy,” concludes Deiotte. "Better resourcing both within these departments and at board level can help companies to strike the tax balance better—to their own benefit as well as the benefit of the countries in which they operate.”