For years, a business’s tax affairs were considered private and the limited disclosures in published financial statements were sufficient “publication” of tax information.
Not anymore. In a comparatively short period of time, the public opinion has shifted from accepting very limited disclosures to having a desire for full tax transparency. And the Government is responding.
In late 2015, for the first time ever, key tax details were published for Australia’s largest companies. The ABN, total income, taxable income and income tax payable of companies with over $100m in turnover ($200m for Australian private companies) were released by the Australian Tax Office (ATO) and subjected to some intense media scrutiny. Recent proposals by New Zealand’s Inland Revenue and Treasury are pushing for similar disclosures in NZ.
In this new environment, companies now face a wider sphere of stakeholders. It’s not only shareholders and investors that are interested in their tax affairs but so too are the media, politicians and wider community. The level of tax paid by an organisation, and their approach to tax planning, now has a direct bearing on the public’s perception of their brand and often their trustworthiness.
This year new “country by country” (CBC) reporting rules take effect. These rules are part of the implementation of OECD recommendations from the Base Erosion and Profit Shifting (BEPS) Action Plan.
Under the CBC rules, entities with global income of more than $1 billion will be required to lodge documents with the ATO or Inland Revenue detailing their operations and tax outcomes in every country around the world that they have entities in.
Other OECD BEPS related recommendations are also being implemented in Australia, including treaty shopping and anti-hybrid rules. New Zealand already has anti-treaty shopping provisions in its model tax treaty and is expected to follow the OECD recommendations on anti-hybrid rules in the near future.
Combined, these measures fundamentally change the way that businesses need to deal with their tax affairs. Much of the responsibility for managing this change will fall to the CFO.
Tax transparency is new the reality and cannot be ignored. Here the key things proactive CFOs should be looking at.
Re-evaluate tax strategies
Existing tax strategies should be re-evaluated to see if they:
- Are still effective under the current (and proposed) tax laws?
- Increase the business’s “tax risk” above the levels that the business is prepared to accept?
Evaluating tax risk involves balancing the likelihood of a tax position being challenged by the ATO or Inland Revenue (i.e. is the position legally correct) and the likelihood of a tax position triggering a review or inquiry by the ATO or Inland Revenue (i.e. their perception of the position, regardless of whether it is legally correct). An ATO or Inland Revenue review will of itself cause disruption and cost for the business.
Review tax outcomes
Under today’s increased scrutiny, interested stakeholders (rightly or wrongly) have an expectation of the amount of tax an entity should pay.
Businesses need to be aware of how their tax outcomes compare to their peers. Benchmarking results to the industry, or to similar size businesses, will help you balance tax strategies with stakeholder expectations.
Inquiry from the ATO or Inland Revenue is now increasingly likely. Make sure you and your board members are prepared for questioning about your tax affairs by properly documenting key tax matters.
Understand your overall risk
CFOs, senior management, boards and business owners all need to increase their understanding and awareness of the tax risks of their business. The regulators are expecting this, and so is the public.
Manage public perception
The public response to perceptions of tax avoidance by businesses should not be underestimated. One need only look at Starbucks in the UK, who voluntarily paid £20M in tax due to public pressure.
All businesses need to be mindful of this and manage public perceptions. Timely and transparent communication of your approach to tax planning and compliance will build trust in stakeholders that an appropriate amount of tax is being paid. Where the public tax data is misleading, businesses should consider issuing a more detailed report on their tax affairs to give a more complete explanation.
When assessing the merits of a course of action, it’s worth asking yourself; “Would I be happy if this was on the front page of the paper?” If the answer is no, you should reassess your plans.
Applying this test to your tax affairs has never been more apt.