This is the first article in a series exploring recent tax developments and the challenges they present to companies in the UK. In this first article, Lydia Challen of Allen & Overy looks at the key tax issues affecting CFOs
You would have to have been living in a cave for the last few years to have missed the fact that corporate tax has become a major concern of the press, public, and therefore politicians, alike. While those of us who deal with tax on a daily basis may question some of the conclusions that are drawn from this debate (would the UK’s public spending constraints really be solved by companies paying their “fair share”, and who is to decide what that is?), it is undeniable that governments and tax authorities have had to respond to this pressure from the electorate, and the tax landscape is changing profoundly as a result.
We recently conducted a survey of nearly 400 tax directors and other senior-level executives (chairmen, CEOs, CFOs and general counsel) of large multinational enterprises in a range of industries and headquartered in countries across western Europe, the US and Australia (Negotiating the Minefield: managing tax risks in challenging times). Some common themes emerged about how these developments have affected the way that tax is approached in their business.
Tax talk on the up
Boards are spending more time discussing tax issues. Overall, a quarter (23%) of our respondents said that their board discusses tax issues more than once a month, up from just 5% five years ago. Interestingly though, this level of board scrutiny was much higher in the rest of Europe and Australia than in the UK, where only 16% said their board discusses tax issues at least once a month (up from 9% five years ago), with 49% (up from 38%) discussing tax once a quarter.
This may be an indication that good tax governance is increasingly institutionalised within UK businesses, for example with the senior accounting officer regime making a nominated individual – often the CFO – personally responsible for ensuring that adequate systems are in place. It may also reflect the fact that the role of the tax director has changed significantly over the past five years, with strengths in strategy and risk management being rated more highly by our respondents than technical knowledge.
Changing strategic priorities
There has been a change in emphasis in businesses’ tax strategies. Last year, the top strategic priority identified in our survey results was minimising tax liabilities. This year, developing strategies that are compliant with the new tax landscape took the top spot. Our survey results suggest that there is a division between those who have already started to grapple with the changes, who have an appreciation that more change may be required, and those who have not. Interestingly, tax directors were more likely to see the need for structural change than our “C-suite” respondents, so it is clearly important that tax directors are brought into these strategic conversations.
Uncertainty is the ‘new normal’
The tax landscape has become more uncertain. Rules are becoming more complicated, the pace of change has accelerated, exposure to reputational risks appears to be arbitrary, and increasingly structures that were put in place yesterday are being judged by the standards of today.
How can businesses try to manage this?
To some extent – as with many other areas of modern political and commercial life – uncertainty is simply the “new normal”. Businesses need to invest in understanding the new rules, be prepared to respond to PR crises, and review their existing structures to ensure that they are robust (and decide how far they are willing to defend them if they are challenged). The traditional route to tax certainty is seeking clearances or rulings from tax authorities. As the recent state aid investigations into Apple, Fiat and others have shown, even these cannot always be relied on. Ensuring that downside risk is explicitly addressed in any proposed structure, and obtaining second opinions where appropriate, are both possible mitigants.
Befriending the tax authority
An open relationship with the tax authority may also help to mitigate uncertainty. The UK tax authorities come out of our survey reasonably well with 49% of respondents ranking them as reasonable (behind only Belgium and the Netherlands at 56% and a stand-out 76% respectively). By contrast, Germany, France and Italy each scored under 20%. In addition, 44% of our UK respondents said that they operated on a full disclosure basis with the tax authority, with only 20% not disclosing anything unless required to do so.
On the flip-side, it is essential to be prepared for when the relationship with the tax authority goes wrong: 24% of our UK headquartered respondents had been subject to a dawn raid in the past three years in the UK or elsewhere, and there is increasing pressure on tax authorities to resort to the criminal law. While it is uncommon for the tax authority to do this in the UK, it is increasingly usual in Germany and Italy, and directors of subsidiaries in those jurisdictions need to manage this risk.
The burden of compliance
One of the biggest challenges facing businesses is the ever-increasing burden of compliance. Whether your business has to comply with the new rules on country-by-country reporting, worry about FATCA or the new “Common Reporting Standard”, or ensure that it is correctly reporting its tax given the ever-increasing complexity of the rules, compliance is a big issue. For example, the UK’s proposed new rules on corporate loss relief (intended to be a helpful measure) come in at over 100 pages of legislation, and require complicated streaming calculations. 23% of our respondents rated compliance related issues as their top priority.
Compliance issues have been extended beyond the tax position of the company itself. Under new proposals, businesses will have to have in place adequate procedures to prevent their employees and associates from facilitating tax evasion in the UK and, in some cases, abroad. Failure to do this could result in the company being liable for a criminal offence if such tax evasion occurs.
Bets on for round two
This series of articles is going to look at these issues in more detail. Next month, we will start by looking at some specific examples of changes to the tax landscape by considering the recent and proposed changes to the UK tax rules on deductibility of interest.
Lydia Challen is a partner at Allen & Overy.
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