Tax Risk Management and Board Responsibility - International Tax ...

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Nations and the Organisation for Economic Co-operation and Development (OECD). “Business practices rooted in universal values can bring social and economical gain” 7 . Stakeholders are enquiring more into the values that underlie a business’s actions. Companies that move to tax shelters without obvious business reasons risk reputational damage in addition to the possibility of legal actions. In 2004 Swatch, the Swiss watchmaker, featured in the newspapers over its transfer pricing arrangements, while US clothing group Tommy Hilfiger could find itself in court over the commissions paid to a non-US subsidiary. 8 Stakeholders’ demand for ethical behaviour is increasing significantly and tax is one area where businesses have to show value-based behaviour. Socially responsible investors have been active in the US at companies such as Pepsi and Raytheon, and have demanded curbs on tax havens used by Tyco and others 9 . In the UK Henderson Global Investors encourages all companies to consider whether tax matters are among the principal risks and uncertainties facing the company, or are included in the main trends and factors which are likely to affect the company’s future development, performance and position 10 . Tax has become an ethical and reputational issue and the board is responsible to ensure awareness of tax issues throughout the organisation. 2 Relevance of tax for business performance and financial statements Certainly the board is primarily accountable for the financial performance of a business. And it should not be forgotten that, as Josef Ackermann stated, financial success is important because the more a company earns the more taxes it is able to pay 11 . Taxes are important figures on the face of the balance sheet and the income statement of a company. They have strong implications for the year end results as well as the profitability and the ability to pay dividends. Tax considerations can influence the decisions on major 7 Ban Ki-Moon, Secretary General of the United Nations. 8 Ethical Company, December 2004, page 25 9 Ethical Company, December 2004, page 25 10 Henderson Global Investors, “Responsible Tax”, October 2005 11 “Wir wollen Deutschland nicht verlassen”Süddeutsche Zeitung, 10 march 2007, page 25; Page 6 / 25
usiness transactions such as mergers, acquisitions and disposals of companies. Thus if something goes wrong this does not only affect the balance sheet but may also affect the share price significantly. In February 2006 Google announced reduced earnings due to a higher than expected tax charge. Market value fell by 20 billion dollars. An analysis of companies listed on the Dax-30 Index in Germany shows that the deferred tax assets can easily amount to forty percent of the equity of a business. This means that if the tax asset is impaired almost half of the equity may be wiped out. Due to the importance of tax effects on business performance and financial statements the board will be accountable for implementing processes that ensure the quality of tax figures reported. This implies specifically that tax provisions and liabilities must be calculated accurately and the correct valuation of deferred tax assets in the balance sheet must be ensured. The board must therefore bridge the gap between being profitable and not taking tax risks that could have negative impacts on the business performance and the financial statements. But tax in many cases has a long term perspective. So the implication go far beyond the financial statement of one year. 3 Compliance and reporting an ongoing challenge The trend of globalisation has developed further as emerging markets offer new business opportunities. An international survey among 250 chief financial officers of successful global companies shows that the majority sees foreign expansion as one of their top priorities 12 . However, globalisation has become a ‘two-way street’ where emerging economies show increasing amounts of foreign direct investment. At the same time, there are significant flows of investment into emerging markets to take advantage of low costs and access to new markets 13 . Multinational companies now have to take into account different local regulations, customs and stakeholder expectations as well as market demands. In addition the complexity of tax laws at national and international level has increased significantly and is subject to ongoing changes. Furthermore, tax law often inter-relates 12 ,Emerging Markets, KPMG 2007 January 2007, pg. 1 13 World Investment report 2006 United Nations Conference on Trade and Development Oct. 2006 www.unctad.org Page 7 / 25
Page 1 and 2: Tax Risk Management and Board Respo
Page 3 and 4: I. Introduction Is the board respon
Page 5: II. The changing Landscape - Why ha
Page 9 and 10: III. Tax is in the boardroom - What
Page 11 and 12: extraordinary pressure from investo
Page 13 and 14: made on how aggressive tax manageme
Page 15 and 16: department needs to be in line with
Page 17 and 18: Processes to raise awareness of tax
Page 19 and 20: Direction The tax philosophy has to
Page 21 and 22: Control It is the responsibility of
Page 23 and 24: VI. Future developments Stakeholder
Page 25: VII. Conclusion The board is respon

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