First published in The Business Times on 30 July 2013
|Gone are the days when tax was seen solely as an expense to be managed. Rather, tax governance and morality have become subjects of heated discussions.
Corporate reputation management has always been important for large global companies. Now tax and the issue of paying your fair share is emerging as one of the most prominent areas being closely scrutinised by governments, the general public and the media. Multi-national companies, in particular, have come under the spotlight for their tax practices.
Just like corporate and environmental responsibility, public perception of a company’s tax affairs can enhance or damage its branding. As the public looks to businesses to ‘do the right thing’, expectations for more transparency are increasing.
We expect this trend to continue - the public will push for more transparency between taxpayers and the tax authorities, and more disclosure by public companies with regard to the amount of their tax payments and where those taxes are being paid.
With the reputation of their organisations at stake, senior business leaders must understand the underlying factors behind this international debate over tax and prepare to respond.
What are the drivers behind tax transparency?
There are five streams pushing this trend of greater tax transparency. These are:
- Post-global financial crisis revenue and expenditure
- Rise of corporate social responsibility(CSR)
- Growing media focus
- Internationalisation of business
- Widespread use of the internet
The new economic realities faced by governments after the global financial crisis mean that significant tax reforms must take place. As governments try to recoup lost revenues from the economic downturn, a large number of countries are considering, or are in the process of implementing substantial reforms of their tax systems.
There is heightened focus on tax payable by companies and high net worth individuals by politicians and public officials seeking to strengthen a weak fiscal position. That focus is enhanced by a general public impression, particularly in Europe and the United States of America (US), that large companies and banks caused the crisis and should be the first port of call for revenue. Rightly or wrongly, this seems to be perceived as one of the legitimate ways for governments to generate revenue.
In addition, the rise of CSR in the last decade has resulted in the integration of broad social agenda into the purview of business operations. While diversity and sustainability have been the vanguard of CSR, anti-corruption and tax arguably constitute the next wave. Paying the appropriate level of tax seems to have become one of the criteria for an organisation to be regarded as responsible to society.
The third stream is the rise of media focus, including social media power and the entrance of many not-for-profit organisations into the taxation realm. Coverage of the inadequacies of Greek revenue collection, the effective tax rate of US presidential candidate Mitt Romney, and more recently, the former French Budget Minister’s reported evasion activities, among other news reports in the same vein, have kept taxation in the spotlight.
This growing media coverage has two effects. First, the nature and impact of reputational risk associated with tax matters has changed and there is now more at stake. Tax has become an operational business issue, no longer limited to its domain in the finance area of a major corporate. Second, media focus has placed tax into a level of discussion which may not be attuned to its nuances and complexities. This makes discussion far more difficult.
All the above developments are compounded by the increasing internationalisation of business. This is not simply a question of capital mobility, but of longer, more specialised and more international supply chains. Those supply chains increasingly separate intellectual property, marketing capacity and support services into jurisdictions which are neither in the country of residence of the ultimate group holding company nor in the country where the customers or the primary tangible factors of production are located.
Last but not least is the increasing use of the internet for sales and services. Sellers often do not have a physical presence where the transaction is initiated. This has given rise to discussion over whether the standard tax treaty model of more than 60 years standing continues to be appropriate in a digital environment.
How should businesses respond?
Business organisations have a lot to do. They must keep abreast of tax developments occurring both domestically and overseas. A good business leader needs to be able to predict the environment both in the short term and in the long run - such developments are sign-posts to the future.
Senior management must be made aware of the potential risks of a company’s tax affairs becoming a public discussion point and for that discussion to be ill-informed. If and when this happens, time will be of the essence.
Businesses should also develop a tax narrative and be prepared to communicate the story underlying their tax numbers. Make sure the story is balanced and supportable and that it deals with a proper time horizon. Business leaders should also ensure that decisions are made taking into account potential reputational risks and not simply whether the tax law in various jurisdictions has been complied with.
Meanwhile, preparations must be made for discussions with revenue authorities. Efforts must be made to set up processes to support discussions with revenue administrators- the costs of early preparation tend to be significantly smaller than a path of long term conflict and litigation.
More importantly, active dialogue must take place among the various stakeholders - governments, organisations, investors and the general public – so that the issue of tax governance can be discussed in greater depth. Should tax obligations be defined by a morality-driven argument? Does it make more sense for government policies to make companies legally responsible to contribute more?
It is a long journey in navigating the unknown road to tax morality and there are no ready answers to all these questions. Moving forward, businesses must develop a good sense of what constitutes appropriate and acceptable tax planning in a globalised business environment. The general public also needs to recognise that tax is not the only contribution that a corporate makes to the jurisdiction that it is operating in. There are other economic and social benefits - such as employment and the creation of auxiliary businesses - that a corporate brings to a country.
This article is contributed by Mr Tay Hong Beng, Head of Tax, KPMG in Singapore and Mr Paul Kent, Director, Economics and Regulation, KPMG in Singapore. The views expressed are their own.