Tax strategy? What tax strategy? Such cries are increasingly unlikely to be
heard in the UK’s top boardrooms as directors recognise the benefits that come
from discussing and agreeing their corporate approach to tax management.
According to a poll of 110 tax directors from European headquartered
multinationals attending PricewaterhouseCoopers’ Global Tax Symposium in Athens
last autumn, 41% of respondents already had a clear tax strategy communicated
and agreed with all key stakeholders, namely the CEO, finance director and the
board. Another 35% were currently working on it, while 21% were not but accepted
that they should be.
“Tax, if it’s not a strategic issue, it ought to be and on the boardroom
agenda,” says Richard Collier-Keywood, UK head of tax at PwC. “The amount a
company pays in tax is pretty significant.
It’s often a very big number on the face of the P&L account.” Sue Bonney,
UK head of tax at KPMG, refers to Sir David Varney’s November 2006 report on how
HM Revenue & Customs seeks to improve its links with business. “They are
looking to risk assess a range of taxpayers and spend more time on high risk
taxpayers,” she says.
“One thing that would lead one to be lower risk is if they have a very clear,
articulated tax strategy that they then follow. So this [having a written
strategy] could impact on how you are viewed by the tax authorities and how they
expect to interact with you.” Alan MacPherson, partner in tax management
consulting at Deloitte, believes a number of developments have created a
“perfect storm” for tax.
He identifies three separate forces coming together to push tax high up the
FD’s agenda: HMRC and its increasingly risk-based approach to tax assessment;
the US Securities and Exchange Commission and Sarbanes- Oxley, with its strong
tax focus; and investment funds such as Henderson, which have begun producing
research looking at companies’ tax management.
“These are the three stakeholders that, if they act, the FD has to follow,”
Appetite for risk
Boards therefore need to give their approach to tax management some thought, and
devise an appropriate strategy to reflect their conclusions.
“There are things companies can do to minimise tax inefficiencies, so they
have a choice as to how much effort they put into reducing their tax bill,”
MacPherson says. “That has implications for the company’s appetite for risk.”
For example, is it willing to try things that could ultimately lead to
litigation with tax authorities? “Often, real genuine tax management involves
having the business structured in the most tax efficient way, such as locating
value and risk in lower tax jurisdictions,” MacPherson says. “That would mean
relocating people and infrastructure. There’s a choice [for boards] about how
far they want to change the business for tax purposes.
Some businesses are interested in that.” In his experience, boardrooms
generally incorporate a range of opinion.
“Typically there will be one director thinking tax should be minimised as far
as possible,” MacPherson says. “There is one thinking it’s a good thing; it pays
for schools and it’s part of the contribution the company makes. The CFO and CEO
have to find an appropriate middle ground that satisfies everybody.” The
decision can only be made by linking the tax strategy to shareholder value,
MacPherson stresses. “There are plenty of examples where shareholder value has
been damaged by companies getting tax wrong,” he says. “Tax-risk decisions have
to be made in the context of shareholder value as a whole.”
One of the complications in determining a tax strategy is that, as MacPherson
notes, there are ethical or moral opinions involved. Groups such as the Tax
Justice Network (see box, next page) are trying to promote tax as an ethical
Collier-Keywood believes that tax authorities in the UK and elsewhere, such
as the US, Australia and Canada, have also been keen to encourage debate about
this morality aspect. “It’s on the presupposition that people should pay the
amount of tax that’s morally due as opposed to legally due,” he says. This
complicates the situation for companies because people’s moral views fall along
a spectrum, whereas legal issues can be clearly established through the courts.
“That debate has sparked a bit of a dialogue around the reputation of these
companies,” Collier-Keywood says.
“It’s made companies think twice about doing aggressive tax planning, because
they might be presented as immoral in some way. This has put tax on the
boardroom agenda more, as the board have been forced to think about what their
attitude is to tax planning.” In PwC’s Global Tax Symposium poll, 34% of
respondents said they would forgo significant tax planning opportunities to
protect their relationship with tax authorities.
Variety of approaches
This is not to say that all aggressive tax planning will stop. Some boards may
still decide that paying the least tax is in their shareholders’ interests, and
therefore relocating to lower tax areas, for example, is the right thing to do.
“Companies have taken different approaches,” says Collier- Keywood. “Some say
they will now think about going abroad.” Coming to the decision requires
consideration of all the various stakeholders, from tax authorities through to
customers (see box, page 2).
However, PwC tax partner Angus Johnston notes that it is just as easy to
overstate the importance of some stakeholders when determining tax policy, as it
is to overlook them.
“There’s a tendency sometimes to equate the amount of tax the company pays
with issues like environmental responsibility or using child labour in other
countries,” he says.
“Companies have picked up on these sorts of issues. They realise that if they
get on the wrong side of these issues they will be punished by customers.
There has been an attempt by various governmental and non-governmental
organisations with an axe to grind to try and position tax in that space.
“Have they succeeded? Are customers particularly attuned to whether or not a
company is seen to be paying its fair share of tax? I just don’t know. It would
be wrong to ignore it, but also to over-rate that. There’s a strategic decision
that companies need to make about it,” Johnston says.
Once boards have accepted the need for a tax strategy, they need to write it
down. KPMG’s Bonney suggests a one page document should do it. “It’s about
high-level guiding principles,” she says.
“We are not talking about a tax manual.” The contents of the strategy should
start with clear corporate principles – the corporate attitude to and appetite
for risk. “It’s got to be the group’s appetite to risk, not the tax director’s
view,” Bonney stresses. “It should be debated and understood. Then having
accepted where you are on the risk spectrum, you need something around how you
manage risk, a statement around processes and controls.”
Rules of engagement
A third element could address how the tax strategy interacts with the main
business decisions of the organisation.
“It’s important that tax is embedded in the business, and not something
bolted on the side,” Bonney says.
There could also be a reference to how the organisation expects to engage
with key regulatory authorities, Bonney suggests. For example, does it expect to
lobby for change in an area of tax if it thinks there is a need? Although there
has been a growing recognition of the need to agree a formal tax strategy,
boards may need to be reminded of the issue’s ongoing importance. A recent
survey by KPMG (see box, page 3) finds that the proportion of tax directors and
FDs who “strongly agree” that tax is a board level issue has decreased in the
last two years.
Bonney suggests this may because some boards were “fire-fighting” two years
ago, when tax suddenly became higher profile. Having put strategies in place,
some boards may now feel they have addressed the problem.
However, the tax strategy should not be laid aside once agreed, Bonney
argues, but reviewed regularly. “There is a need to debate it and perhaps change
it or flex it,” she says.
The board needs to consider whether the strategy is being applied properly,
and whether it remains appropriate in the current environment, depending on
HMRC’s and other tax authorities’ prevailing states of mind.
Avoidance, evasion and activism
The Tax Justice Network, a coalition of researchers and activists concerned
about tax avoidance, is developing a code of conduct on business Taxation. “Our
objective is to look at how good practice could be codified,” says Richard
Murphy, senior policy adviser to the Tax Justice Network. “It’s a vision
The code is aimed at taxpayers, agents and governments. “From companies we
are asking for a change of approach to tax management,” Murphy says. “We are
quite unhappy with the existing language – tax avoidance, evasion… If you are
avoiding the law, and that is the implicit assumption of avoidance, you are not
acting as a good corporate citizen. If you will avoid as much as possible, you
cannot reconcile that with a CRS [corporate social responsibility] statement.
We believe in tax compliance – you pay the right amount of tax but no more,
in the right place, at the right time. We are saying tax avoidance is trying to
work around the rules of the game and tax evasion is trying to break the rules
of the game.
Murphy adds: “Some people think we are ‘anti’ business. They are wrong.
It [the code] is a manifesto for the way tax could be managed better, from an
entirely different perspective, which believes tax is the core element of
corporate responsibility for a company. It’s the payment you make for the
license to operate. It’s the quid pro quo.”
Is tax treated strategically?
A KPMG survey of 200 FDs, tax directors and managers in large companies
across a range of sectors found there is some way to go before tax receives the
full strategic attention it deserves:
Only half the corporates questioned had a documented tax strategy.
– The proportion of respondents stating that the ultimate responsibility for
tax risk lies with the board increased to 23%, up from 9% in 2004…
– …but fewer respondents said they “strongly agree” that tax is a board level
issue 32% compared to 42% in 2004.
– Just 11% of respondents described their organisation’s attitude to tax
panning as “aggressive”, compared to 23% in 2004.
– Not a single respondent claimed to be “very aggressive” compared to 3% in
Shared Services Centres will come under the gaze of regulators under country-by-country tax reporting rules. Michelle Perry discusses where the line might be drawn on your corporate's tax bills
HMRC has launched a series of consultations on proposals to clamp down on the black economy, which include new sanctions for companies
HMRC has defeated a tax avoidance scheme used by Greene King and marketed by EY, protecting around £30m in tax.
Fraser Simpson examines the welter of tax rules post-Panama and tries to understand what they mean for business