New corporate tax reporting requirements and the rising exchange of tax information between countries are leading to the disclosure of more details about multinational companies’ tax affairs and increasing reputational risk.
CEOs, CFOs, and boards of directors have taken note, according to an EY report. More than half (55%) of the 191 tax executives EY polled at large multinational companies said that oversight of tax risk and controversy by CFOs and boards has increased in the past two years.
Eighty-three per cent of the polled tax executives said they regularly brief the CEO or CFO on tax risks, and 43% regularly brief the audit committee. About two-thirds (65%) said they developed a more structured approach to managing their public tax profile, and 42% said they changed the way they communicate tax risks and controversy to external stakeholders.
But transparency readiness is an “often underestimated need of companies, whether the end goal is compliance with enacted disclosure and reporting requirements or proactivity in the development of a snapshot of data that publicly explains a company’s total social and economic contribution,” according to the EY report.
To be better prepared and to better manage reputational tax risk, EY suggests companies consider the following six strategies and actions:
Actively monitor the changing landscape. Understand the likelihood of new and increased tax disclosure requirements, such as a possible expansion of existing financial services disclosure and reporting requirements in the EU. Also, collaborate with corporate communications and public relations to track the level of public interest in the company’s tax profile in the media and in social media channels.
Assess readiness to respond to a reputation risk threat. Determine whether the company has a board-agreed strategy or plan of action of what to do and whether the tax function has a regular and clear input into business strategy and is consistently aware of major transactions. Get a grasp of how visible the company’s tax structures and disputes are in each jurisdiction.
Enhance communication with internal and external stakeholders. Establish a communications strategy and protocols for reaching stakeholders. Internally, the tax function should validate the approach to the executive suite and other oversight functions, including the audit committee, risk officers, general counsel, public affairs, and the board of directors. Informing company leadership about concerns allows executives to rank tax among other risk factors, including in business activities such as mergers and acquisitions.
Prepare a total tax picture. Tax and accounting functions should co-operate to assess the business reasons for existing tax structures in each jurisdiction where the company operates, how the company contributes to the economy, and how much it pays in total taxes. Taking a look at how the company’s tax function operates is designed to trigger a discussion of global risk management, tax resolution processes, audit function, and tax performance processes.
Decide with whom the company communicates. The company’s tax director, in co-operation with the C-suite and corporate communications, should anticipate and answer questions from investors who want to know whether the company will be affected by tax reforms. Decide how to engage with the media in case the company’s tax practices come under scrutiny. If it happens, make sure to communicate with employees.
Embed reputation risk thinking into core business strategy. Initiate a dialogue that allows the tax function to properly assess the tax reputation risks of ongoing business decisions, such as mergers and acquisitions.
Related CGMA Magazine content:
“International Tax Transparency Improves, but Still Needs Work, OECD Global Forum Finds”: While many countries have made progress in increasing tax transparency over the past few years, some countries continue to have “serious deficiencies.”
“How to Make International Tax Less Challenging”: CFOs and finance directors of multinational companies are facing increased international tax challenges, including heightened scrutiny from authorities focused on preventing tax avoidance. Here’s how to deal with the challenges.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.