By Ted Howard
Companies are trying to figure out how to structure new tax plans. But they should pay heed to the attitudes about complex tax schemes, legal as they may be.
Companies have been under the microscope globally for several years now when it comes to paying taxes. This is evident in recent initiatives like the OECD’s BEPS (Base Erosion and Profit Shifting) action plan, which attempts to coordinate tax policies within Europe (and ostensibly around the world—parts of Asia are creating similar rules). It’s also looking to snuff out special arrangements companies might have made with countries like Ireland (Apple) and Luxembourg (some 350 companies, according to LuxLeaks).
While the effort to wrangle together hundreds of countries’ tax policies is ongoing, corporations would probably be wise to start thinking of new strategies or at least prepare for a new paradigm. Since the beginning of corporations as they’re known today there’s never been a reason to reveal much beyond the level of tax disclosure required in company financial statements. But this has now changed as countries struggle for revenue and attitudes about corporate citizenship have evolved. So whatever the outcome of BEPS, there is a big push for companies to do more self-examination when it comes to planning their tax strategies.
“Companies should assess whether aggressive tax planning is legal and whether it is legitimate or perceived as legitimate by their stakeholders,” Jermyn Brooks writes in a post on the FCPA Blog. Mr. Brooks, chair of Transparency International’s Business Advisory Board and a founding member of the World Economic Forum’s Partnering Against Corruption Initiative, says a good start in attaining these goals is the UN’s Principles for Responsible Investment (PRI), which he says provides “helpful guidance” on corporate tax responsibility.
The guidance includes several questions for investors to ask companies, including, “To what extent does your profit after tax rely on your presence in tax havens or incentives and structures that enable very low taxation (e.g. <15%) of profits?” and “Have you reconsidered your tax planning strategies, or do you intend to reconsider them, in light of changes following the BEPS project?”
Whether companies go for this is debatable. There’s transparency and then there is revealing complicated, sometimes proprietary tax strategy; as in Kipling’s “The Ballad of East and West,” it’s likely “never the twain shall meet.” Two notable companies that have disclosed their tax strategies are Unilever and Grupo Nutresa, both of which have received the good corporate citizen award from PRI.
“I think if they are not aware of this trend yet, they’re going to be aware of it very soon,” said Barbara de Marigny, a partner at the law firm Orrick. It is one of those issues, she said, like ISO 20000 or sustainability initiatives, that companies are going to have to deal with “whether they like it or not.”
As an example, Ms. de Marigny notes that similar to the UN effort, the UK now has a tax strategy transparency mandate as a part of its Finance Bill of 2016. This requires certain UK firms to publish their tax strategy as it relates to or affects UK taxation. This new tax transparency rule will require qualifying businesses to publish their tax strategy online for the public to see. The UK feels companies will comply in order to avoid significant reputational impact. And companies won’t be inclined to pay lip service to such a requirement. “If you’re going to publish it for all to see,” Ms. de Marigny said, “you better be telling the truth.” She added that one aspect of the UK law that is notable is that the UK government scored it in their revenue calculations as a revenue raiser. She said the idea is that by compelling companies to publish this statement, they will be inspired to comply. “Legislators in Washington are always looking for revenue, and if you told them that they didn’t have to change the tax code, didn’t have to do anything about rates, didn’t have to do any complicated set of regulations, and they just had a requirement for companies of a certain size to make a public statement [about tax strategy] and they could add that to the revenue raisers in their legislation, they’d be ecstatic,” she added.
According to NeuGroup research, companies are already planning and modeling for the prospect of tax reform and its implications for capital structure, capital and cash forecasting (see related story). Now might be a good time to consider acknowledging the global climate on taxes.
But old habits or fiduciary duties sometimes prevail. Tax advisors presenting to members at one NeuGroup meeting encouraged a “no-regrets” planning approach; that is, taking actions to review or revise tax structures that will bring benefits no matter what form tax reform takes, or even if it does not come to pass at all. Such action include shifting out of offshore cash positions and making efforts to minimize earnings and profits subject to a repatriation tax, or harvesting tax losses from subs in high-tax pools and/or planning to accelerate interest deductions while you can. Whatever the strategy, treasurers and tax planners should keep checking the pulse of the anti-corporate tax planning movements afoot.
Tax as Part of a Sustainability Effort
As part of the push to turn companies into better corporate citizens via more transparent and less aggressive tax strategies, various global governmental agencies are trying to get them to think about how tax relates to the environment. Indeed, PRI operates under the auspices of the UN’s Environmental Program.
But companies have yet to buy in to the concept in a big way. According to an Ernst & Young survey, “only 16% of companies that either have or are developing an environmental sustainability strategy said their tax or finance departments are actively involved.