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BEPS Awareness Becomes Embedded In Boardrooms

17 April 2018

 

Corporate heads of tax and Philip Green, the former CFO of Deliveroo and Groupon, share their perspectives on why tax and transfer pricing are taking up an increasing amount of C-suite time. With the rollout of BEPS, transfer pricing and controversy management have become crucial for boardrooms.

12 April 2018

Corporate sources say senior-level executives including CEOs and CFOs (C-Suite) have become more involved in tax and transfer pricing over the past year. The driving force behind this is the rollout of OECD BEPS measures in domestic laws, foremost among them country-by-country reporting, which kicked off for many countries in 2017.

As a result, there has since been an increase in the interaction between the tax department and the C-suite. TP Week’s sources say that while tax used to be somewhat overlooked, the C-suite is now spending more time with the tax department to ensure business decisions including supply chain optimisation are taken with transfer pricing risks and opportunities in mind.

BEPS stood out as the area where tax professionals received the most questions from their management. “I prepare information on the transfer pricing status and during the last year there were several specific requests from the board to present the situation in light of BEPS. They are interested in what BEPS is, what the impact could be specifically on our group, and what the risks are,” a transfer pricing manager in Ukraine told TP Week.

The transfer pricing manager said he made sure to convey the company’s transfer pricing compliance status to the CFO. “I usually share the status of our reporting, if all our reports are submitted on time without any impairment, with the CFO and the management,” he said. “Additionally, we share the current levels of profitability, which are important, and information about litigation processes and disputes with the tax authority if there are any.”

Philip Green, ex-CFO at Deliveroo and Groupon, ex-finance director at Amazon and currently CFO and board director at 3D visualisation software VividQ, theatre and live entertainment producer Jamie Hendry Productions, corporate security and intelligence company Mitmark and provider of game-based assessments Arctic Shores, told TP Week there has been a lot more focus on tax in the last three to four years, and that he is now spending more time with the tax department than before.

“Your tax needs to be very involved in the commercial decisions you’re making with your business. I think the worst thing is if you make a commercial decision and you ignore tax and you say ‘we’ll make it work’. You want to get expert opinions on tax - that’s the right approach,” Green said.

Green argued that there were more important things for a CFO to take note of than the effective tax rate. “What is much more important is [to know] your tax and your transfer pricing policy because as long as you’re getting that right and then taking the right businesses decisions, in the end what it’s about is making sure you’re paying the right tax,” Green said.

Media spotlight

With the Panama Papers, and most recently the Paradise Papers in 2017, corporate tax affairs have come under public scrutiny to an unprecedented level and are continually discussed in the media. The C-suite and company boards have recognised that a tax reputation can impact the bottom line, in particular for consumer-centred businesses.

A 2017 EY survey of global 901 tax and finance executives showed that over the past two years for 55% of respondents, tax controversy management had become more important for their company. The number was even higher for respondents from large businesses, at 64%.

“Historically, tax was often in the background – never getting a front seat at the boardroom table unless there was a fire to extinguish,” Tom McFarlane, head of transfer pricing and supply chain EMEA at Hogan Lovells in London, said. “With BEPS, transparency, increased compliance burdens and disputes on the rise, more must be done by the C-suite to invest in the tax function.”

A head of transfer pricing at an MNE in the UK told TP Week she had definitely seen an increase in interest from the board, and said board members look to the tax team to provide them with more information than in the past.

The corporates TP Week spoke to were generally happy with the recognition they were getting from their C-suite and board.

“There is continual interaction between the two, especially because the tax risk committee is a sub-committee of the board of directors,” a head of tax at a multinational in South Africa told TP Week.

“The relationship between the C-suite and the tax department is good and we are [being] acknowledged for the immense contribution we make to the business in managing the group’s tax charge. The international operating model is very cognisant of the group’s transfer pricing requirements but we continue to update them regularly in this regard.”

Several of TP Week’s sources mentioned the difference between statutory and effective tax rates as an important thing for CFOs to understand in light of media scrutiny.

What should CFOs know?

TP Week’s sources mentioned the split of taxes paid in VAT, withholding tax, corporation tax as ‘must-knows’ for the C-suite, especially for businesses with digital operating models.

Richard Asquith, VP global indirect tax at Avalara, said the C-suite should be familiar with international tax structures, related intellectual property and other transfer pricing issues, as well as the swing to taxation at destination.

“The 20th Century tax consensus on taxing in the country of corporate residency is bust. Globalisation and digitisation are perpetrators here. Whether through VAT and GST, or turnover taxes like the EU’s latest proposal, there are huge tax gains or losses at stake for multinationals,” he told TP Week.

The South African head of tax said the C-suite should be informed of the tax compliance status of all entities in the group and the measures taken to address all non-compliance.

“They should be aware of the transfer pricing requirements of the group and the need for all intra-group relationships to be reviewed and signed off from a tax perspective, and they should be aware of the impact of all tax legislative changes on their business in order to assist in minimising any negative impact,” he said.

With focus shifting to substance for permanent establishment under the BEPS project, and on to new debates about a digital nexus and user-generated value, the C-suite has a lot to keep up with.

McFarlane of Hogan Lovells said that the message to the C-suite was clear: they should understand what drives value in the business, as well as where, how and by whom it is driven, and ensure profit is allocated accordingly.

“There is scope for the C-suite to invest more strategically in tax to maximise shareholder returns. Tax is a key driver in most, if not all, of the key strategic decisions that a group makes. This includes M&A activity, expansion into new markets, product development and business model restructuring for example,” McFarlane told TP Week.

The above article was published on www.tpweek.com on April 12 2018 and has been republished with the approval of the Publisher.


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