Good tax governance is transcending the tax debate to a matter of corporate social responsibility
17 July 2014
Posted by: Author: PwC
Worldwide companies are increasingly paying more attention to tax compliance, recognising the risk of both hefty fines and the potential of damage to corporate reputation. Governments, policymakers and the public are paying closer attention to corporate tax practices, with more risks around tax than ever before.
"There is a clear need for transparency and disclosure in tax matters and tax needs to be elevated on the corporate risk agenda, becoming an integral part of the enterprise-wide risk management framework,” says Marcus Botha, PwC Associate Director and South African Leader of Tax Reporting and Strategy.
"Organisations are under significant pressure to provide assurance to the board, audit committee and external stakeholders about risk and the tax control,” adds Botha.
Never before has the need for strong internal corporate governance and risk management been more vital for organisations, their boards and their shareholders. There is a general move by tax administrations globally towards more cooperative initiatives that are built on mutual respect, trust and transparency. A number of tax administrations have introduced and are further developing initiatives that encourage organisations to consider good corporate governance and support tax risk management, such as Australia.
As far back as 2009, the OECD’s Forum on Tax Administration issued a report on General Administrative Principles: Corporate Governance and Tax Risk Management. The report shows that many organisations had changed the way in which they approached corporate governance and tax compliance.
Botha says although South Africa’s King III Code of Corporate Governance does not address the issue of tax directly, its requirements are designed to facilitate risk management, including tax risks. "Tax risk management should appear on the board’s agenda. This will be in line with the recommendations contained in the King III Report.”
How a large business manages tax risk can affect its financial performance and reputation. CEOs and boards of large businesses are increasingly considering tax risk management as part of their overall corporate governance.
Companies have become increasingly aware of the wider audience watching them and their business decisions, and these decisions include the company’s strategy, behavior and approach to tax as the audiences’ newest and most influential members include a bigger than even governmental and regulatory presence after base erosion and profit shifting became part of stakeholders’ daily conversations and occupied a spot on the agenda for the OECD, G20 and G8.
In addition, the public’s interest have reached an all-time high with influence from NGOs, CSOs and the media, and now for the first time CEOs are recognising the influence of these stakeholders on company strategy and the link to taxation. With country- by-country reporting and transparency regulations becoming the norm, tax information and disclosures are entering an era of enhanced reporting and a need to assess the total tax impact of an organisation in the tax jurisdictions in which it operates.
With the expanded stakeholder group, the responsibility and expectations of a company by the users of the annual report information has lent itself to change historic views on tax from an obligatory burden for a company’s profits, to defining a responsible tax strategy as part of corporate social responsibility. Many companies are already making efforts in enhancing their reporting on tax in an effort to remedy the decline in trust by public, social and governmental stakeholders and their cries for a "fair amount in tax”.
A cohesive approach is required between tax strategy, tax risk management and corporate social responsibility to demonstrate tax as an instrument to create shared value and not just as a cost, which will enable organisations to not just demonstrate value creation but also meet the demands of enhanced tax information and disclosure needs from stakeholders alike.
"Good tax governance is necessary and fundamental in linking strategic intent to ultimately demonstrating value creation and reporting on it,” says Botha. According to a recent report prepared by the Dutch Association of Investors for Sustainable Development with support from PwC and Oikos, there are six principle-based guidelines on what constitutes good tax governance in order to achieve this:
- Companies should define and communicate a clear strategy on tax governance
- Tax must be aligned with the business and it is not a profit centre by itself
- Respect the spirit of the law. Tax compliance behavior is the norm
- Know and manage tax risks
- Monitor and test tax controls
- Provide tax assurance
In addition, good tax governance requires a Tax Control Framework (TCF) as a foundation, which in its simplest form is a framework that will enable an organisation to file proper returns and effectively communicate on it.
"A good TCF covers all taxes borne and collected on behalf of tax administrations, embeds the guiding principle of good tax governance and enables information gathering to measure and manage an organisation’s tax impact and value creation,” concludes Botha.
This article first appeared on pwc.co.za.