The issue of tax avoidance and tax morality are receiving particular attention, and on the morality front, the streets are becoming the judge and jury of what is and what is not acceptable practice by corporates, or even individuals in tax planning. Tax can no longer be seen solely as an expense to be managed.

Of course taxes need to be managed, and there are many taxes that a corporation needs to consider apart from income tax. But tax management now needs to be contextualised. The point is that there are bodies of stakeholders that influence tax management and inevitably tax governance, to a far greater extent than might have been the case before. The consequence of getting it wrong in today’s new tax environment is far more serious - more far reaching - than might have been the case previously when the stakeholder influences were different.  

Today, relatively passive stakeholders of the past like customers, public opinion, and tax authorities have become mobile and publicly engaging. Whether it is corporate social responsibility, tax governance, enhanced transparency with tax authorities and investors, or society holding individuals and businesses accountable for not paying a fair amount of tax, these issues are subject to increasingly heated debates. So while corporate reputation management has always been an issue for large global companies, taxation is a new player in this area.

The wrong image has reputational consequences. A company cannot be sued if, beyond the technical front, it is not getting its tax right. In the new world of tax, a company’s actions are judged based on what is regarded as socially acceptable and not necessarily what the law suggests is legally correct. The trend is that, in business, people are shying away from dealing with companies that they perceive as not paying their fair share. Tax morality requires organisations to think about what strategically is acceptable tax planning and what is not, and inevitably this leads to a spiral in tax litigation.  

In December 2012, UK Uncut, an anti-austerity direct action group, launched a campaign against a Starbucks on the basis of the small amount of tax it had paid in the UK relative to its very large sales. The retailer responded by indicating that it had listened to its customers and that it would pay approximately EUR10 million of tax in each of the income years of 2013 and 2014, whether it was profitable or not. It is noteworthy that Starbucks recently reported its first drop in turnover in 16 years* - despite supportive trading conditions. The significance is that its turnover dropped in the financial year immediately following the picketing of the Starbucks shops in London. It would appear that British coffee-drinkers could be voting with their feet (and wallets) when it comes to negative perceptions about the tax policies of multi-national companies.

At around the same time, the European Central Bank and the IMF provided approximately EUR150 billion in bailout loans to Greece and focused attention on comparative tax ethics of various systems throughout Europe and elsewhere. This only serves to further empower action groups who drive the morality debate and seek ammunition to support their views.

It is our opinion that these influences or trends will be the role players in driving tax up the boardroom agenda. The companies which do not manage their taxes or are less vigilant about good tax management policy will face potentially severe consequences. If tax isn’t properly managed, the items executives typically believe to be under control may not be so in the external environment, and moreover poor tax management may result in unexpected and expensive disputes with the Revenue Authorities.  

An international KPMG survey of 1 500 audit committee members revealed only 5% of audit committee members saw tax as a risk for businesses today. But the fact is that it has the potential to cripple a business. The less emphasis that is placed on tax and the lower tax is placed on the agenda in the boardroom, the higher the risk for tax issues to arise.

Many executives take the approach that they will simply do what is necessary – ie, avoid risky tax planning. However, tax is too dynamic for that. It’s too much part of everyday business, to believe that it can be managed in hibernation mode. Most of a company’s tax management has to take place on its everyday operations, and requires systems and controls that are capable of ensuring that taxes are properly accounted for. In future, this is where the Authorities will be concentrating their efforts further.  

* http://www.reuters.com/article/2014/04/24/starbuckstaxbritain-idUSL6N0NG31R20140424