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

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with other legal issues. Uncertainties with regard to interpretations of legal regulations are also not uncommon. To ensure full compliance with all legal requirements has become a challenge for almost every corporate governance system. As the OECD Principles state: “Corporate governance requirements and practices are typically influenced by an array of legal domains, such as company law, securities regulations, accounting and auditing standards, insolvency law, contract law, labour law and tax law. Under these circumstances, there is a risk that the variety of legal influences might cause unintentional overlaps and even conflicts, which may frustrate the ability to pursue key corporate governance objectives.” 14 Global markets and the free flow of capital made it possible to control the jurisdiction in which profits arise which is a challenge for tax authorities. As a result the enforcement processes through civil and criminal actions have been strengthened in many countries and on an international level. Reporting and documentation requirements have been enhanced to address the problems of information asymmetries resulting from the principal-agent conflict - between shareholders and the management - and in the light of corporate scandals like Enron and WorldCom. Most notably the Sarbanes-Oxley Act (SOX) was introduced in the United States which required a significant effort from companies in documenting their internal control systems. The Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48) also intensifies the focus on accounting and disclosures for uncertainties in tax positions in the financial statements 15 . In the light of these developments tax cannot stay in the splendid isolation in which its technical nature has historically placed it. The management of tax risk has become even more important in the light of recent changes. The public, shareholders and legislators expect board members to address these effects through the corporate governance system of a business. 14 OECD Principles (2004), I.C Annotations, page 31. 15 FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an interpretation of FASB statement No. 109 Page 8 / 25
III. Tax is in the boardroom – What is the perspective of the board? 1 Awareness The OECD states: “What is clear is that the recent spate of corporate scandals, the success of a number of tax administrations in challenging aggressive tax schemes and the general change in attitudes towards tax planning, will all combine to produce a greater awareness in the Boardroom of the importance of tax issues” 16 KPMG has undertaken surveys and asked board members for their views on the relevance of tax issues for the board over recent years. The directors of many companies acknowledge the need to change their attitudes towards tax. There is a general understanding that tax cannot be managed independently from the main business and can have a significant influence on decisions as regards the transactions undertaken 17 . Survey results from 2006 show that 72 % of the respondents consider tax and its risks to be boardroom issues (an increase of 11% over a two year period). There is awareness that a reduction in taxes can increase the value of a company. They also consider that the most significant areas where tax has an impact are changes in capital structures, intra-group funding arrangements, transfer pricing and similar transactions. 18 The issue has therefore become more important in recent years. But this does not mean that changes follow at the same speed. Various major critical issues remain. Many tax departments are isolated so that their presence is not felt throughout the business. There is a lack of general understanding and awareness of tax issues. Tax considerations are not integrated into the main business processes. Tax may be considered on central projects, but is often ignored in routine day-to-day transactions. The performance measures for management are mainly based on pre-tax figures such as earnings before interest and tax (EBIT). 16 Good Corporate Governance: the Tax Dimension – OECD Forum on Tax Administration – September 2006 17 KPMG’s Wired Tax survey 2004 18 KPMG’s Wired Tax survey 2004 and 2006 Page 9 / 25
Page 1 and 2: Tax Risk Management and Board Respo
Page 3 and 4: I. Introduction Is the board respon
Page 5 and 6: II. The changing Landscape - Why ha
Page 7: usiness transactions such as merger
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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