How will the tax landscape be post-COVID? Tax accountability starts with tax accounting!

“Responsible investors and well-run companies will acknowledge that tax is not simply a cost to be minimized, but a vital investment in the local infrastructure, employee-base, and communities in which they operate.” – Fiona Reynolds, Managing Director Of PRI

Dear CEO,

I think the above statement makes an excellent point. It would be perfect if corporate tax responsibility were adopted at a much larger scale, especially post-COVID, when the gap between the rich and the poor is widening. There are still too many corporations that are laying-off employees and using COVID as an argument, leaving governments to pay for the social safety nets to keep them alive, or even implementing tax avoidance schemes (for example, see Uber‘s tax avoidance scheme, here).

As the captain of your company, wouldn’t you feel proud if you could safely say to your investors and the public that your company has made a fair investment in its infrastructure, employee-base, and the community in which it operates? Could you also PROVE this if challenged by NGOs, pension funds, and other institutional investors on the spot? Or are you simply jealous that Uber is benefitting from a cash-saving tax avoidance scheme? In the latter case, you should stop reading now.

Here‘s where to start… Team up with your CFO, and together you should find all the answers in your company‘s financial statements! But please do not try only answering the easy part -read to the end of this blog for a full list of challenging questions.

To quote another statement, there are: “… various kinds of risks associated with aggressive corporate tax planning, such as earnings risk and governance problems, macroeconomic and societal distortions, and reputational damage. A good indicator of potential earnings risk is the tax gap, defined as the difference between the effective tax rate on a company‘s income statement and the weighted average of statutory rates based on the firm‘s geographic sales mix. Large and persistent tax gaps are generally the result of profit-shifting and aggressive tax planning. Alarm bells should also go off if a company makes more money through tax systems than through its core business. Such corporate tax practices might be completely legal by the letter of the law, but a purely legal approach will not protect companies from reputational damage. Consumers, NGOs, and investors rather use the intent of the law to assess whether tax practices are responsible – or not.” – (source: Change in context).

Again, the above statement is spot on. However, I am worried that the current approach – which involves challenging a corporation‘s social responsibility – is more focused on naming and shaming than on offering a means to an end. Why is this the case?

For example, I opened one of the RI Transparency Reports and found the following: “This RI Transparency Report is one of the key outputs of this Framework. Its primary objective is to enable signatory transparency on RI activities and facilitate dialogue between investors and their clients, beneficiaries, and other stakeholders. A copy of this report will be publicly disclosed for all reporting signatories on the PRI website, ensuring accountability of the PRI Initiative and its signatories.”

The next thing I did was to read the report and try to find the word “tax”. To my surprise, it was nowhere to be found.

In this report, I was expecting an analysis on how the investors had challenged the CEO and CFO regarding their investments in the processes for monitoring their tax position, based on which they could answer the following:

  • Can you explain the differences between the effective tax rate (“ETR”) on a company‘s income statement and the weighted average of the country‘s tax rates, based on the firm‘s geographic sales and net profit mix?
  • Can you explain the differences between the cash tax rate (“CTR”) and the ETR at the group level AND country by country?
  • Can you explain the income tax payable position on the balance and the movement from the (tax payable) opening balance to the closing balance in a fiscal year? This applies to the entire group and country by country?
  • Can you explain the carry forward losses by country and the valuation of these losses?
  • Can you explain the tax contingencies you should report and the process to assess what you should not report?
  • Can you provide a comparison between the final tax returns in a country and the actual estimate in the financial statements?
  • Can you provide a comparison of the tax payable and the number of FTEs in a country?

The process of monitoring your company‘s tax position is called tax accounting and, in my view, it is by far the best technique to measure tax accountability.

I repeat, as CEO, you are responsible for asking the above questions! And do not just seek easy conclusions!

REMEMBER: numbers tell the tale, not words!

TIP: The best audit trail you can ask for is a consolidated tax position that shows the buildup by country according to the numbers in the group‘s consolidated financial statements. Together with your CFO, you should analyze (in numbers) how the tax position proves/supports a positive response to the above questions. It‘s not great when there are no quick answers… but rest assured that this can be solved through technology.

Based on my experience, I think you will be surprised at what you find out – or perhaps not! In any case, moving from being unconsciously incompetent can be painful, but it‘s better that you discover the truth before a vital stakeholder.

The good news is that you now can move from being unconsciously incompetent to consciously competent. Remaining unconsciously incompetent will be much more painful in the end, as the public and all your other stakeholders will show you no mercy, especially post-COVID.

Need some help? TaxModel is contributing to a more transparent tax world by building TaxProof 2.0, a standardized tax accounting solution that is accessible and affordable for companies of every size!

Therefore, as CEO, it is up to you to ensure your company pays its fair share of taxes and is transparent about it! This is the only way to prove that you are a socially responsible corporation.

Good luck!

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Hank Moonen
CEO/Founder TaxModel International

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