The boardroom tax gap

UNTIL RECENTLY many tax directors did not register highly on the radar of their boards. In fact, the tax function was somewhat far removed from the business, often reporting into a financial controller rather than directly to a finance director.

This could have been due to the fact that the FD was primarily focused on pre-tax measures, therefore crediting little importance to the tax function. Or it may have been because the Tax Director felt somewhat removed from the business, resulting in a reluctance to put his or her head above the parapet.

But let’s not dwell on the past. Now is the time to look forward and appreciate what is a new era in the relationship between tax and the boardroom. There has undoubtedly been a radical change in the way the board views tax as a strategic partner with key events resulting in tax gaining prominence within organisations.

Initially this step up was a result of the rather unfortunate corporate scandals in the “noughties” that raised public scrutiny and as a consequence, compliance and regulation. The demand by the public and markets for good corporate citizenship was in full swing and FDs viewed tax as a critical element in achieving this.

Recognising their growing status within the organisation and building on their new found relationship with the FDs, the savvy tax director then began to focus on developing strategy consistent with the group’s commercial objectives, most notably the corporate push for globalisation. As the corporate world embraced globalisation, it was clear that tax would play an even larger part in business strategy.

Globalisation meant a change in operating models and supply chains both of which created significant tax issues and challenges. From the FD’s perspective, tax was transitioning from the back office to playing a significant role in the alignment of the commercial and fiscal strategy. The new role of tax – supporting above the line savings, returning a sustainable reduction in the group’s effective tax rate and maintaining its compliance and regulatory role – resonated loudly with FDs.

The strategic importance of tax was at last acknowledged – the wheel was well and truly in motion. But there was still some way to go. At this point in time, many within the operations of a multinational had key performance indicators (KPIs) based on pre-tax measures tied to EBITDA, thus ignoring the relevance of tax. This was counterintuitive given taxes such as VAT and Customs Duties hit above the line and new investment opportunities were evaluated on a post tax basis.

As a result, tax planning ideas would not get the support of the business – this in turn resulted in projects not being implemented. Importantly this impacted both shareholders’ returns and the tax directors’ performance measurements – neither ideal situations.

However, there was more to come in the evolution of tax and the FD. On 15 September 2008, Lehman Brothers collapsed, resulting in shockwaves throughout the global economy which continue today. During the recession which followed we have seen changes in the way boards manage their business which have further highlighted the strategic importance of tax.

Cash is now well and truly king. Tax, in all its forms, is a cash cost that must be managed efficiently to meet the demands of today’s working capital management crusade. Post tax measures are now increasingly used to assess performance, thereby further enabling the “stepping up” of the tax function. In addition, multinationals are under increasing pressure to maximise shareholders’ returns, while governments are being scrutinised to maintain their revenue base, resulting in inevitable tension among stakeholders.

Now there is no hiding the strategic importance of tax to the FD. The role of tax and its relationship with the FD has clearly undergone radical change over the last ten years. There is no doubt that today’s tax director faces greater challenges than ever before now that their heads are well and truly above the parapet. While we should be enthusiastic about recent developments, it would be foolhardy to suggest that the metamorphosis of the tax and FD relationship is complete. There is still work to be done but the fact that tax has moved from the shadows to the forefront of business strategy, driving shareholder return, is a development that should warm the hearts of every FD.

Tom McFarlane is a managing director with Alvarez & Marsal Taxand and leads the Tax Efficient Supply Chain Management practice in London