Tax strategy report When tax is breaking news
When tax becomes breaking news Companies tax contribution to society is attracting increased attention from consumers, the media, politicians, NGOs and tax administrations worldwide. Companies are being met by requirements and expectations of greater transparency on their tax payments, tax policy and tax strategies - not only in their home countries but also in other countries in which they operate. The media is more than willing to expose companies which either do not pay any tax or do not pay their fair share of taxes, and the implications for companies which make the headlines either rightly or wrongly - is that they are often branded as tax evaders and are left to suffer the consequences to their reputation and earnings. It s no longer enough to merely calculate and pay your taxes you must also be willing to openly talk about your company s tax matters. Nevertheless, many companies even some which have already been subjected to media scrutiny - have not yet decided on how they want to communicate about their tax matters. 2 When tax is breaking news In some cases the media coverage could undoubtedly have been harnessed or laid to rest if the company involved had been more proactive or - at least - prepared. It is probably naive to think that tax matters could ever be a media winner, but in many cases they could have been handled with more discretion, delicacy and clout. The BEPS (Base Erosion and Profit Shifting) initiative follows in the wake of increased focus on companies tax payments. In 2014, the draft BEPS project became a proposal ready for implementation. The project will result in enhanced tax transparency and puts a heavy burden on companies regarding the information and data which they must maintain. There is no shortcut - from 2017 multinationals must prepare and submit documentation including country-by-country reporting. Many countries have jumped the gun and started to pre-implement and interpret the actions, thus increasing the risk of complexity at least for the first few years.
Attention of senior management Companies will have to accept that their tax matters will remain in the media spotlight and that the BEPS initiative will result in greater transparency. The BEPS initiative should however not be seen as a barrier but rather as a springboard for adopting a more strategic approach to taxes and as a means of lifting the area to a higher management level in the organization - where it rightfully belongs. Consequently, a company s tax matters should be carefully monitored and managed by the board of directors and the executive board, in particular the overall tax policy and strategy. It could also be argued that communication about tax matters should also be handled by senior management. Tax transparency is not just about publishing figures; it is also about building trust. This trust is built up over time through the company s behaviour and communication. The BEPS initiative provide companies with a basis to communicate more about tax and to tell the good story. So instead of lamenting the burden of implementing the BEPS initiative, companies should see it as a means of restoring trust by consumers, the media, politicians, etc. A strategic approach to the company s tax payments begins with the commitment and decisions of senior management. Anders Bjørn, Head of Tax, EY Denmark 5
Greater strategic focus Half of the companies in EY s Tax Strategy survey replied that they work strategically with their tax matters and have either a tax policy or a tax strategy in place. This is twice as many as in 2014, and may be due to fear of the implications of negative media coverage to reputation and earnings. It could also be that the OECD s BEPS initiative has pushed companies to think more strategically. The number of companies that have not yet started to think strategically regarding their taxes is somewhat worrying, seeing that the BEPS challenges are just around the corner. Do you have a tax policy or strategy (for internal/external use) in place? Without a tax policy or tax strategy and a clear view of the company s current tax position, the company is operating in the dark with a risk of damaging its reputation and earnings. To work strategically with your tax matters means making decisions which are aligned with the company s business activities, current tax position and risks with the involvement of the company s management. The pyramid below shows the important building blocks for a strategic tax approach. Tax pyramid The foundation is the company s tax policy, which defines the company s overall attitude to tax matters and how they should be handled. Based on this and a reality check of whether the company s current position is in line with the adopted tax policy, a detailed plan/strategy of action is drawn up. The strategy defines how and to what extent taxes should be optimised, how tax risks are identified and mitigated, and how the company wishes to communicate about its tax affairs. In carrying out the reality check, the company should establish an overview of its total tax contribution to society. Here, it is important to stress that it is not enough to merely look at the company s corporate income taxes. 2014 50 % 50 % 24 % Tax policy & strategy 76 % Tax communication & transparency Tax risk & control Tax optimisation 6 When tax is breaking news 7
More publicity and communication Of the responding companies 28% have already had their tax affairs examined by the media. This is a significant increase on the 9% in 2014 and confirms that the media are scrutinising companies tax payments. In the light of this development, companies should consider how to communicate about their tax matters in order to avoid negative publicity. Have your tax issues received any public attention? 72 % 28 % It is surprising that only 34% of the respondents have decided on how to communicate about tax matters. Just under half (48%) who replied that they have a strategic approach have addressed the issue on how to communicate about tax matters. Has a decision been made on how your company communicates regarding tax? 66 % 2014 91 % 9 % 34 % A third of the companies that have been in the media have still not decided how to communicate on tax matters. How prepared are you to respond to any negative media coverage of tax issues related to your company? 30 % 25 % 20 % 15 % 10 % 5 % 0 % The survey also included an additional question on how well prepared companies are to handle and react to negative publicity. Only 8% replied that they are well prepared, while 40% said that they are either not prepared or somewhat prepared. Ready for a media siege? 1 = t prepared 2= Somewhat prepared 3= Prepared 4= Quite prepared 5 = Well prepared Is somewhat prepared good enough when it comes to handling the media, or is it at all possible to prepare for a potential media storm? Even though many companies know that media coverage of tax matters is often blatantly biased, the answer is yes. A well-prepared communication strategy may be instrumental in mitigating the risk of negative publicity. Instead of waiting to be exposed by the media a more proactive communication strategy would be to make your company s tax policy and tax contributions public and to talk openly about your tax payments. In other words, you are not just waiting for a phone call but you proactively contact the press to tell them about your tax matters. The aim and advantage of a proactive strategy is to be one step ahead, to take control of the discussion and flow of information and to ensure that the debate is on your own terms. Needless to say, a proactive approach necessitates that the company is able to defend its transactions. This could strengthen the company s reputation, improve its relations with the media and the tax administration and, ultimately, contribute to reinforcing confidence in the company. For many companies, being named and shamed as a tax evader by the media has been a costly experience. A recent example is the telecom company 3-case which broke in January when the Danish daily newspaper Politiken reported that the company was using Luxembourg as a tax shelter to avoid tax in Denmark. But the truth is that the company did not pay Danish taxes because of heavy investments and because previous losses were offset against later profits, as is standard accounting and tax practice. According to the Danish business daily Børsen, the false accusations in Politiken, which were also brought by the main national TV station, have already cost the telecom company more than DKK 3 million as well as serious damage to its image. The question is whether the company could have handled its communication better if it had a clear tax policy and was better prepared? The press was obviously ignorant of the company s investments and these did not come to light during research by the journalists. Pandora is another example of a company that recently hit the front pages because of its tax matters. The company received an extra tax bill of DKK 1 billion after a settlement with the Danish tax administration over the distribution of profits between its Thai production company and the parent company in Denmark. Despite the magnitude of the case and its immense media coverage, Pandora was able to communicate its innocence. The company proactively talked about the tax dispute through press releases, comments in its financial statements and interviews with the press. In doing so, they succeeded in telling their side of the story: that the company did not agree with the tax administration, but that they chose to pay the tax bill to avoid a major tax case with an unpredictable outcome. By doing so, the company averted the negative impact of the media coverage to its image. Is it good enough to be somewhat prepared for a public discussion of the company s tax payments?, there is simply too much at stake!. Jeffrey Owens, EY Senior Policy Advisor and former Director at the OECD Center for Tax Policy & Administration 8 When tax is breaking news 9
Tax optimisation is not tax evasion Working with optimisation Tax optimisation and tax planning are part of running a business. Companies with cross-border operations where tax regulations vary from country to country must take tax issues into account in order to ensure compliance with the law or to actively make choices which are financially sound. We see Tax optimisation (which is legal) as opposed to Tax evasion (which is not legal). Companies that work strategically with tax generally have a tax policy which has addressed how to optimize their taxes. It is possible to distinguish between three different optimisation strategies: Tax-driven optimisation Business-driven optimisation Conservative optimisation When a company follows a so-called tax-driven optimisation strategy its restructurings are carried out with the aim of reducing taxes and would probably not be implemented if there was no tax saving potential. These could be simple, low-risk financial schemes aiming to transfer interest income to countries with relatively low tax rates (such as Denmark) and interest expenses to countries with relatively high tax rates (such as the US) in order to reduce the company s total global tax payments, or they could be more complex risky initiatives. A company with a business-driven optimisation strategy concentrates its optimisation efforts around its business decisions, for example, the decision to build a new factory in South America or to acquire a competitor. In either case, the company will factor the implicated tax implications into the overall business decision, and the tax implications may also be decisive for the way the competitor is taken over or the country in which the factory is built. Companies with a conservative optimisation strategy aim to avoid tax risks. For instance, if the parent company has extensive intercompany transactions with a subsidiary in a given country, the optimisation efforts might include efforts to have the authorities sign an agreement concerning the distribution of profits between the countries in question (Advanced Pricing Agreement). Companies with a tax-driven optimisation strategy generally also pursue optimisation potential in connection with new business measures and probably also include elements of a conservative, risk-mitigating optimisation strategy. Similarly, companies with a business-driven strategy will typically also include elements of a conservative optimisation strategy. Tax-driven optimisation Business-driven optimisation Conservative optimisation 80% of the surveyed companies replied that they are proactively engaged in tax optimisation. Only 8% of these have a tax-driven optimisation strategy, while 60% pursue a business-driven optimisation strategy. We should also keep in mind that there are different perceptions and definitions of what a tax-driven optimisation strategy is. Do you work actively to optimise your tax payments? If yes to above, how? 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Tax driven 20 % Business driven Conservative 80 % Regardless of which optimisation strategy a company follows, it is important that it is based on the best possible decision-making platform where the best initiatives are prioritised and suboptimisation or unnecessary risks are avoided. The survey shows that many companies pursue optimisation initiatives without fully knowing their tax risks or having an overview of their full tax contributions. Do you optimise your tax payments and have you implemented a procedure to identify your tax risks? 37 % 63 % Do you optimise your tax payments and do you collect data on your total tax contribution? 54 % 46 % The first of the above figures shows that 63% of the companies optimising their tax payments have an overview of their significant risks. The second figure shows that only 46% of the optimising companies have a full overview of their full tax footprint. Even though there s a considerable improvement from the 2014 survey, there s still a large number of companies optimising on an insuficient basis, which could involve risk of suboptimisation and could affect the company s overall risk profile. 10 When tax is breaking news 11
Ready for BEPS The OECD BEPS project is probably the biggest change to the international tax systems in many years. It contains 15 action points including mandatory countryby-country reporting, increased tax transparency as well as increased focus on prevention of treaty abuse, interest deductions etc. One of the aims of the BEPS initiative is to ensure that profit is taxed where it is generated and to prevent multinationals from moving the profit to locations with low or zero taxation. The action points are expected to be implemented differently across the globe as the BEPS project is merely a frame work suggesting changes in legislations. There is no doubt that this approach will significantly increase the complexity of the international tax world. Going forward, tax administrations worldwide will have access to the same data and information regarding a company s business Do you know about OECD s BEPS initiative (Base Erosion, Profit Shifting)? Have you considered how the BEPS initiative will impact your company? activities and intercompany transactions. There is no getting round it and it starts from 2017. Companies should therefore start to prepare for change. The implications of increased transparency may be far-reaching, and companies should be wellprepared and ensure appropriate management focus. The increased transparency and complexity is expected to result in an increased number of tax disputes, which will also need to be addressed by multinationals. In short, the tax world is changing and we need to start preparing. Companies should ask themselves questions like: Do we have the proper reporting systems in place to be able to deliver the required data? What risks can be identified before the reporting becomes mandatory in 2017 and are there any urgent changes that can be implemented, e.g. are holding companies in low-tax countries still necessary or could they be eliminated? Have you taken any measures to meet the requirements in the BEPS initiative? The survey shows that 49% of the participating companies are not familiar with the OECD s BEPS project, which is quite alarming considering that 65% of these companies are multinationals and therefore very likely to be subject to the BEPS Initiative. Among the 51% that are familiar with the BEPS project, 37% have not considered its implications for their business, and a mere 43% have initiated measures to meet the BEPS requirements. Of the companies responding that they work strategically with their tax affairs, 36% are not familiar with the BEPS project. This could be interpretated as if many companies do not see BEPS as an important part of their overall tax strategy or believe that it will only have negligible impact on their tax matters. Adjusting to the new requirements will take time for most global companies so start preparing now. BEPS will happen! Anders Bjørn, Head of Tax, EY Denmark 49 % 51 % If yes 37 % 63 % 57 % 43 % 12 When tax is breaking news 13
About the survey This report presents the key conclusions from EY s survey of Danish companies strategy for and communication in the tax area. The survey was carried out in March and April by electronic questionnaire and represents a broad range of Danish companies, most of which are large and medium-sized businesses with cross-border activities. Contacts: Anders Bjørn Phone: +45 25 29 30 15 anders.bjoern@dk.ey.com Lars Hauerslev Phone: +45 25 29 37 91 lars.hauerslev@dk.ey.com 14 When tax is breaking news 15
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and/or one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young P/S All Rights Reserved. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/dk B15016