World: The call for more tax transparency
17 June 2014
Posted by: Author: Catherine McLean
Author: Catherine McLean (EY Tax Insights)
The profile of corporate tax has changed considerably in recent years. Stories about the tax affairs of multinational companies can often be found on the front pages of newspapers around the world. At the same time, given their own financial challenges, many governments are seeking to increase tax revenues through legislative reforms and greater audit scrutiny by their tax authorities.
This increased visibility has stirred the interest of an ever wider variety of stakeholders who want to know how companies manage their tax affairs – in particular, how much tax they pay, and in which jurisdictions these taxes are paid. While corporations, investors and tax authorities have always paid close attention to tax, non-governmental organizations and the wider public have increasingly joined these groups.
The growing interest of companies’ tax affairs
Companies must now consider a greater number of interests when managing their tax affairs. While still important, it is no longer sufficient for companies to merely focus on increasing shareholder value and complying with tax laws. Demands from tax activists and the general public that companies pay a "fair” amount of tax are difficult to ignore — especially since social media provides them with a prominent platform from which to advocate for their cause.
Governmental and non-governmental stakeholders alike are also calling for increased transparency of tax affairs. In light of these conflicting interests and demands, a carefully considered and thoroughly implemented tax policy can be a vital tool for companies. Corporate boards should be heavily involved in formulating these policies, and also need to ensure that appropriate governance of the policies is in place once they are implemented.
Creating and implementing an effective tax policy
An effective policy is one that outlines the company’s responsibilities, articulated by the board of directors, to all executives, as well as those employees directly involved in the tax function. Companies must also ensure that the tax policy is understood and implemented uniformly around the globe.
The tax policy, as well as decisions and planning made under the policy, should be reviewed regularly as a result of the dynamic tax and business environments that multinational companies operate in today.
The OECD warned in its 2013 report Addressing Base Erosion and Profit Shifting that common and legal tax strategies of the past may need to be reassessed. The OECD report noted that "aggressive tax strategies can be detrimental to shareholders’ interests, particularly in the medium to long term, because they are high risk and the costs of failure can be significant, and also from the point of view of reputation.”
- Firms should consider how to address the changing tax environment and diverging interests of stakeholders.
- The development of a comprehensive tax policy, guided by the board of directors, can be a key tool.
- One way to communicate with outside stakeholders is to outline the tax strategy in the annual report. One-fifth of FTSE 100 companies currently do so.
This article first appeared on taxinsights.ey.com.