Beyond the current tax environment

(Conclusion)

What is also very important is an engagement beyond the tax administrations  to Finance Ministers and standard setters such as the Accounting Bodies.

Let’s listen in again on their discussions as we listen to a speech by Michael D’Ascenzo on June 15, 2010 and his comments on international developments in tax administration.

“The global economic downturn has led to an overt international focus on good corporate governance and risk management, underpinned by increasing public and government scrutiny of the tax system and the role and responsibilities of large businesses. Tax administrations have responded with a united call for increased disclosure and transparency, promoting robust tax risk management frameworks”.

Equally fascinating is a footnote to his speech. It references the declaration on propriety, integrity and transparency in the conduct of international business and finance - the subject of an OECD discussion at ministerial level in May 2010. In particular he references the following statement.

“Corporate responsibility entails timely and accurate fulfilment of tax obligations wherever a company operates. Companies should comply with both the letter and spirit of the law.”

A clear indicator of a broader coalition of focus on tax and a very broad policy agenda.

So where does all of this leave us?

• A shift from taxes on profits to real time transaction taxes – with consequent pressure on financial accounting systems.

• A greater demand for information.

• A greater demand for engagement.

In reality there are two overreaching themes; more potential for disputes and more pressures on governance and transparency.

In this context I see two types of taxpayers emerging: the fatalist and the optimists.

The fatalists believe that there are two separate bad things going on and no good can come of it. They believe that disputes will become more costly both in terms of financial and reputational risk. Separately they believe there will be more costly documentation and information requirements to prove transparency to satisfy the corporate governance agenda. Most importantly they believe they cannot influence these outcomes and are resigned to the fate.

And then we have the optimists. They believe that they can avoid unnecessary disputes and manage them efficiently, which can lead to performance improvements and benefits for their companies and they can influence outcomes. In practice their focus is on a performance agenda which in turn provides the platform for managing and avoiding disputes.

So is there any hope for the optimists?

YES there is. Working with these companies gives an insight into their approach.

Their goal is to both manage risks efficiently and to free up time to work with the business to enable high value choices to be made. They have a strategy for tax designed to add business value. They know what evidence and controls they need to be confident that the right decisions are made and implemented. They hire, develop and retain the right people.

They motivate by setting the right KPIs. They communicate clearly to the right people in the right way. They make the business case for investments in enabling technologies. They understand the needs of different stakeholders – CFO, Board, Audit Committee and regulations.

So they have turned the Corporate Governance Agenda into a performance agenda.

But how does that help disputes? First disputes and indeed audits can be avoided because tax authorities know their tax decision making is well thought out, decisions will be implemented well, risks will be managed and decisions will be robustly defended.

Also for disputes that do emerge they will be more likely to be able to use less costly alternative dispute resolution procedures that tax authorities are experimenting with – because they are more likely to be made available to those companies that can demonstrate the right attitudes towards compliance, clarity of thought and clarity of information.

So a performance mindset means the optimists can get the best results in disputes.

How do they get there? There are certain behaviors that will help. By showing a global mindset. They realize that a consistent strategy will tackle the multiple challenges globally as tax authorities show different responses to transparency and engagement. From the Senior Accounting Officer regulations in the UK, through tax control framework in the Netherlands, to the recent calls for Board engagement in tax in the US, through to Circular 90 in China and Annual Compliance Agreement in Australia. Consistent strategies and policies globally will equip companies to deal with these developments.

By being forward thinking. This means anticipate challenges, document and implement well. Have relationships before you need them.

And a focus on value adding. In all interactions with tax authorities making sure they understand tax authority needs and dilemmas but also be clear on the value they require from the interaction.

So it is your choice. Are you a fatalist or an optimist? Maybe the optimists will succeed and get the best results and become the optimalists!

(Noel P. Bonoan is the chief operating officer and vice chairman for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected])