Tax responsibility: Tax advisors’ crucial role

Corporations that use aggressive tax-planning practices can put their earnings and brands at risk, and investors are taking notice. As a tax advisor, what’s your role when it comes to tax responsibility?

Has your company or the company you advise considered publishing a tax policy or set of principles to indicate its approach to taxation? Is tax formally a part of the risk management oversight mandate of the company's board? How does the company define and manage tax-related risk?

An international network of investors says investors should ask companies questions like these about their tax practices to better understand if and how companies and their boards identify and respond to tax-related risks, and the expectations of government and other stakeholders. Tax advisors have a role to play in ensuring their corporate clients are prepared to answer these questions.

Principles for Responsible Investment (PRI) works in partnership with the United Nations Environment Programme Finance Initiative and the United Nations Global Compact. In its new guide for investors, the PRI discusses why and how to engage with investee companies on their tax practices.

As the PRI points out, companies minimizing tax payments through aggressive tax-planning strategies have become a key focus area for governments, international regulators and civil society. Stronger enforcement and increased public society scrutiny have made multinational companies more vulnerable to unexpected tax assessments and increases in tax liability and reputational damage.

Why should an aggressive corporate approach to tax planning raise concerns? Because it can put earnings at risk, cause governance problems, damage reputation and brand value, and lead to broader macroeconomic and societal distortions, the PRI says.

In this environment, it’s important for tax advisors to think beyond just the technical rules. Tax positions that meet the letter of the law but that might run against its spirit can lead to severe reputational consequences, even if the company’s tax position is ultimately supported by the courts. As professional tax advisors, we have a duty to ensure our advice covers all the potential ramifications of clients’ tax arrangements, not just the technical interpretation of the tax law.

TAX TRANSPARENCY AND DISCLOSURE IN FOCUS

At the international level, the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) project is aiming to ensure that companies are taxed according to where their economic activities take place and value is created. The new rules will give tax authorities stronger powers to assess corporate tax activity. Among other disclosures, new country-by-country tax reporting rules will require companies to detail the breakdown by country of group data related to revenue, profits, taxes paid and accrued, employees and assets.

The need for transparency and better disclosure is also in focus for other global bodies. The International Federation of Accountants has called for jurisdictions to share information to promote accountability and long-term global sustainability, for example, and the International Accounting Standards Board has worked on changes to tax disclosure rules. Further, the World Federation of Exchanges included tax transparency as a “material environmental, sustainability and governance metric” for reporting by listed companies.

I support the PRI’s statement that “tax is not simply a cost to be minimized, but a vital investment in the local infrastructure, employee-base and communities in which (companies) operate.” I encourage all tax advisors to review the PRI’s list of red flags and questions to ask, and consider how they might impact the advice they give their corporate tax clients.

KEEP THE CONVERSATION GOING

I want to hear from you. What role do you think tax advisors have to play in ensuring the tax responsibility of the companies they advise? You can keep the conversation going by posting a comment below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practise tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada

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