Tax duties

Globalisation has led to an increased focus on the tax obligations of the world’s multinationals. Alexandra Cain explains why it is essential that boards manage and oversee their organisation’s tax risk frameworks.

Technology business Apple is the latest multinational corporation in an increasingly long list of businesses to face the intense scrutiny of regulators over non-payment of tax. In August, the European Union (EU) ordered Ireland to force Apple to pay $19.5bn in unpaid taxes, plus interest, after the EU claimed that the Irish government struck a deal with the iPhone maker to slash its tax bill. Apple denies this.

Apple is far from the only business to hit the headlines for allegedly not paying enough tax. In 2012, Starbucks became one of the first big, global businesses to attract the attention of tax authorities. It subsequently agreed to pay an additional £20m in tax in the UK over two years to compensate for shifting profits to lower tax jurisdictions. The case was splashed all over the global media.

Subsequently, the Organisation for Economic Cooperation and Development (OECD) launched an aggressive campaign to force global businesses to pay more tax. The upshot of this is a requirement for businesses to report tax obligations in each jurisdiction in which they operate.

Many global businesses are in the process of implementing systems to record and report tax on a national rather than global basis. There’s a way to go before this issue is put to bed, however, as recording tax obligations is complex. For instance, Apple owns its intellectual property in the US, manufactures phones in China and sells them in Australia. Which means there’s no easy answer when it comes to the right jurisdiction in which the business should pay income tax and how much it should pay.

What is clear from the high-profile tax cases involving big businesses that have hit the headlines is that tax is a huge risk on a number of fronts for all businesses.

Stuart Dall, a partner with accounting and advisory firm Pitcher Partners, explains that businesses now operate in a world where they are expected to be much more transparent about their tax affairs. “The risk for boards is an inability to articulate the corporate tax strategy or tax position. There are unprecedented levels of scrutiny from tax authorities, shareholders, politicians, media and the community around why a company has or has not paid the amount of tax that might be expected to have been paid,” says Dall.

“There is huge focus on public disclosure of tax information, especially for public and foreign-owned groups with turnover of $100m or more, and for private corporate groups with turnover of $200m or more,” he adds.

Daniel Levin, commercial manager at Wolters Kluwer’s CCH Australia, agrees the tax landscape has changed significantly over the last four years in Australia and globally. “Navigating your way through the complex maze that is the rapidly changing global tax landscape is tricky. The overarching theme is that there are more compliance reporting obligations than ever before,” says Levin.

He says the OECD’s Base Erosion Profit Shifting (BEPS) initiative, in particular Action 13 on country-by-country reporting, and the Board of Taxation’s (BoT’s) voluntary tax transparency code (TTC), are just two examples of new tax transparency initiatives that mean large corporations are now faced with much higher compliance requirements than ever before.“By not being proactive in addressing these new initiatives, companies run the risk of increased public scrutiny over their tax affairs, not to mention potential penalties for non-compliance. The morality argument seems to be trumping the legal argument,” says Levin.

Adele Townsend, partner of professional services firm BDO, agrees. “There has been a big change in the average Australian taxpayer’s attitude to large companies not paying tax. So reputation is now higher on the risk matrix than it may previously have been.”

Globalisation risks

On a practical level, globalisation is one of the reasons businesses are now more exposed to tax risk. “In the past, many companies would operate only in Australia. It’s now becoming commonplace to have operations in at least New Zealand or South East Asia and, increasingly, America and Europe,” says Townsend.

She says this leads to two issues. The first is the tax complexity that goes with having businesses in multiple jurisdictions. The second is having adequately trained and qualified staff.

“Each tax jurisdiction is complex and tax rules vary widely from country to country. So you can have jurisdictions like New Zealand or Australia that will apply fringe benefits tax to certain expenses, whereas in other regions like Europe they will apply a different tax framework to the same expense.”

Ensuring staff understand the different rules, and know how to apply them appropriately to the company’s income and expenses, requires careful planning and foresight. Townsend says that in order to be comfortable that the business is meeting its tax obligations, directors need to ensure tax is part of the company’s risk framework, especially when expanding internationally.

“Companies that have been doing this for a while make sure they help staff with compliance obligations. They often have briefings to ensure staff are across all the required tax rules,” she adds.

Levin says there are a number of different ways boards and the tax function can execute tax risk management frameworks. “Technology is an enabling solution that should help the process. It’s not there to solve the issue and it’s not there to fully govern the tax risk. But it is a key part of establishing a tax risk management framework.”

He explains technology enables businesses to automate and streamline processes to produce efficiency gains and ultimately lower costs. “It also means when the Australian Taxation Office (ATO) inevitably comes knocking at your door you have a framework and audit trail in place, which reduces the risk of a further review or audit.”

In terms of the board’s role in determining the tax risk framework, Levin suggests management be the architect of the framework, with the involvement of the board. “Now that there is such scrutiny over what organisations are doing from a tax perspective, boards can play a more influential role, rather than just a review role.”

Beyond having a formal tax risk process, Dall says boards must be responsible for having oversight of the tax risk appetite of the company. It’s also up to the board to encourage management to have an approach that looks at the business’s strategic objectives and how these intersect with tax.

“The other aspect is around the board understanding roles and responsibilities within the tax function, and being kept appropriately informed of them. That includes escalation procedures and monitoring the gap between the statutory rate of tax and the tax paid, and testing controls to ensure they remain appropriate,” he explains.

Aside from having the right risk infrastructure in place, it’s imperative that boards know the right questions to ask management when it comes to elucidating tax risk. Says Townsend: “Management should regularly communicate tax issues to the board; the best companies have tax as a standing agenda item, advising the board of tax risks, including a risk register. There must be definitive guidance as to when a tax matter needs to receive board sign-off and when the business should seek external advice.”

ATO focus

The ATO has been very clear that it has multinational corporations in its sights. Indeed, the 2016 federal budget gave the ATO real firepower to address tax avoidance. It included provision for 1000 tax specialists to form the Tax Avoidance Task Force, which is charged with pursuing, testing and prosecuting companies suspected of avoiding their tax obligations.

“Boards need to be aware the ATO has changed its policy. It’s looking for early engagement and that’s how it judges a good company. The ATO is now looking to engage with any business involved in a complex transaction. If you want to be seen as a company that has a low-risk framework in place, one of the things the ATO will be looking for is the take-up of the early engagement process,” Townsend advises.

Dall stresses the ATO is fully focused on multinationals and transfer pricing. “They’re looking at complex tax structuring arrangements. We’re also seeing an increased focus on the research and development claims companies are making.”

All this must happen in an environment in which the government continues to try to reform the tax system. But Townsend says the government’s tax reform agenda shouldn’t affect the way boards manage tax risk. “It’s up to management to negotiate the response to day-to-day changes in legislation. It’s management’s job to notify the board if there’s something about which they need to be concerned.”

When it comes to the tax reform process, Dall says the danger for directors is the risk of fatigue with the process. “Notwithstanding their fatigue, boards need to remain vigilant in articulating what it is they really want in terms of tax policy, and to use their wider influence to bring issues to the table.”

The role of auditors and advisers

Every large business has a litany of advisers and auditors to help manage its tax compliance. The question for boards is whether they need to reconsider how they engage with experts.

Townsend says many advisory practices offer tax risk management reviews as part of the audit. “Businesses can ask their advisers to undertake a full risk review or, if the board is particularly worried about an issue, it can engage a firm to provide a specific report. But the key is to be pro-active. Don’t wait for the auditors or advisers to come to you with an issue. Work with them to identify risk up front.”

Levin agrees the role of advisers and auditors has changed. “Auditors and advisers are trying to bring strategic guidance to organisations. Their role should be to collaborate with the board to ensure tax risk is mitigated.”

Of course, the appropriate way to engage with advisers will differ for every business. Says Dall: “In businesses that have a relatively large tax function, the role of the tax advisers is largely to review and to ensure appropriate sign-offs are obtained from a risk perspective. In smaller corporates that don’t have the critical mass to have a larger finance or tax function, the role of the adviser is much more important. In this situation, there might also be more engagement between the advisers and the board.”

He points directors to the ATO’s recent External Compliance Assurance Process pilot. “This encourages boards to engage external advisers to perform an agreed-on review of tax risk management. This gives both the ATO and companies greater assurance that tax risk management policies are being appropriately followed.”

Dall says technology has a huge role to play in ensuring businesses meet their compliance obligations. “I can see a future where the ATO has full access to a company’s financial records on a real-time basis. So companies need to be ready for this, which means ensuring tax reporting is in good shape so that they are ready to present in that format in the future.”

Levin also stresses how important it is for businesses to have an IT strategy in place that deals with tax risk. “Gone are the days when you could rely on manual systems and processes to govern risk policies and manage compliance and reporting. Twenty years ago the norm was to rely on tools like Excel for tax reporting and compliance. But there has been a huge shift within organisations to start using automated tax technology solutions for corporate reporting. This started with the income tax return, but now helps organisations manage, automate and streamline their global tax and transfer pricing compliance and reporting obligations,” he says.

“Most large organisations today have these solutions in place to reduce their risks, because relying on a manual tool to manage these processes is high risk. Establishing technology solutions also provides a more granular view of tax arrangements. But technology is not the solution to all tax problems; it’s an enabler. Nevertheless, any board not thinking about using technology is not thinking strategically,” he adds.

Tax will no doubt continue to be a major focus of regulators and the community. The onus is on boards to stay abreast of international developments to ensure their businesses meet their tax obligations in every jurisdiction in which they operate.

Tax oversight: what directors need to know

• The Organisation for Economic Cooperation and Development (OECD) has launched an aggressive campaign to force global businesses to pay more tax.
• There is intense focus on public disclosure of tax information, especially for public and foreign-owned groups with turnover of $100m or more and for private corporate groups with turnover of $200m or more.
• Each tax jurisdiction is complex and tax rules vary widely from country to country.
  
• Ensuring that staff understand the different rules, and know how to apply them to the company’s income and expenses, requires careful planning and foresight.
• Technology has an increasingly important role to play in ensuring businesses meet their compliance obligations.