The next step towards tax transparency

The next step towards tax transparency

A 2016 Pure Search Survey of FTSE 100 Tax Directors revealed that strategy formulation and stakeholder management are increasingly important needs and priorities for Heads of Tax and that, as a consequence, their skills and abilities need to respond and develop.

In 2017, this will be tested.

Under government legislation, over the course of 2017 (depending on account year-end) large businesses must publish their “Tax Strategy” on the internet free of charge. This issue should be a major priority for CFOs, as any criticism over what is or is not published is likely to be laid at their door.  

Many will already have strategy document(s) of some description, but they are unlikely to have been drafted with public consumption in mind. Whilst it is difficult to predict the reaction to the publication of a high-profile FTSE company’s tax strategy, it would be unwise to expect this will go unnoticed.

Those who are required to comply with this new law must be on notice, not least because of the recent frenzy over Apple, State Aid and the Panama Papers; and the historic, periodic attacks by media, charities and parts of Government on apparent under payers of their ‘fair share of tax’. It will not necessarily be an easy ride.

The real difficulty with the initiative is that the audience of a public tax strategy document is, largely, uninformed over the nuances of an incredibly complicated world. Tax for large business requires a specialist and trained eye; most of the readers of these documents will not have this, and are likely to be governed by emotion and by their own political and ethical considerations.

It will be a real challenge for the Tax Director to conclude on an appropriate strategy and then bring the many stakeholders on side. The CFO, the Audit Committee, Media and Relations, and many others will all have a point of view.

The current draft guidelines on what should be included in a Strategy Document are brief, perhaps understandably so.

So, what should be published?

The particulars that should be set out in the document (so far as they relate to UK taxation) are:

  1. The group’s approach to risk management and governance.

  2. The ‘attitude’ of the group towards tax planning.

  3. The level of risk in relation to UK taxation it is prepared to accept.

  4. It’s approach to dealing with HMRC.

There are some modest proposed penalties for failure to comply with the proposed regime.

Inevitably, some big judgements are going to be required around philosophy, tactics, goals and risks as a group assesses its response to this requirement.

Does the group see transparency to be ultimately good whatever the short-term pain, or does it want to do the minimum, hide in the shadows and wait for and deflect the criticism when it arrives?

Does it want to be first mover or follow the pack?

Threat or opportunity?

B to B businesses may take a different view to B to C. Extractives, for example, will be more familiar with this environment as they have had to manage greater transparency for some time.   

For Tax Directors there is a challenge - but also a great opportunity - to create wider engagement with stakeholders around this issue.

How effective will Heads of Tax be in this? Will this answer or raise questions about their personal skill sets?

So, what approach might a Tax Director take in navigating this issue?

Here is a possible course of action:

  1. Initially, brief important internal stakeholders on the issue and approaches that could be taken, as well as the options available.
  2. In this briefing, highlight potential ‘banana skins’ and areas where material judgements could be required.
  3. Is the disclosure going to be limited to UK Taxation or extend to global? (the proposed legislation envisages this option).
  4. Think about what....