Tax risk and the audit committee

Tax has become a highly sensitive political issue recently, with multinational companies (MNCs) accused of not paying appropriate amounts in some of the countries in which they operate. Governments, tax authorities and campaign groups are seeking greater transparency – and this has significant consequences for company boards and their audit committees.

News stories from around the world frequently highlight what is described as “aggressive tax planning.” These stories are fueled by the disclosure of private legal and financial information – for instance, the so-called “Panama Papers” – and have led to public criticism of large MNCs. In response, governments and institutions such as the European Union (EU) have started to act with a level of coordination rarely seen.

The best example is the Base Erosion and Profit Shifting (BEPS) project from the Organisation for Economic Co-operation and Development (OECD) and Group of 20 countries. Under BEPS, a 15-point action plan, described as the “most significant re-write of the international tax rules in a century”, was approved in November 2015.

Three focus areas for audit committees.

It seems inevitable that collective action on corporate taxation will grow, creating a dilemma for global companies as they weigh up the risks and the possible impact of any controversy and bad publicity. Audit committee members need to be aware of the risks associated with tax policies. Changes to tax policy require companies to gather more information, provide it in different forms and report it in different ways.

Greater transparency on corporate taxation is being encouraged on at least three fronts, each having an impact on the audit committee:

Audit committees need to consider the impact of all three issues as part of their risk assessment. Members have to understand the reputational dangers and be aware of the sometimes contradictory forces affecting the company. They should be checking that the company is prepared for this, and can answer the detailed questions.

Committees should also consider whether the company has a robust and transparent relationship with relevant tax authorities. This can create more certainty about tax treatment and, when problems do arise, allow for a faster dispute resolution given greater understanding of the background. It is particularly important in the home country as, in the new environment, that tax authority may be required to argue its position in disputes with other jurisdictions.

Resources are certainly a factor. With companies expected to gather increasing amounts of data and to implement more nuanced tax policies, there could be a requirement for additional skilled staff in the tax department, more sophisticated systems and the creation of cross-functional teams (including representatives from the public relations department). These issues have to be discussed when determining budgets – and it is critical that the audit committee is aware of these decisions.

Corporate taxes are, of course, only one element of the discussion. For most companies, payroll taxes and VAT payments will be more significant, and the penalties for getting these wrong can be severe. So audit committees should make certain they focus on all aspects of taxation.

Demands for greater transparency aren’t going away. Audit committees should assume that tax will continue to be a reputational, as well as a financial, issue. Additional public disclosure is inevitable, with greater demands placed on the tax department. It will require significant oversight from the audit committee and should remain at the top of their agenda.