A new report from Ernst & Young demonstrates how many multinational corporations are being pushed in the direction of greater transparency about their tax strategies as their reputations come under attack in the U.S. and abroad for shifting their profits to tax havens.
The report, “Managing Tax Transparency and Reputation Risk: A New Mountain to Climb,” is the third installment of EY’s 2014-15 Tax Risk and Controversy Survey Series, for which the firm surveyed 962 tax and finance executives in 27 jurisdictions.
The report found that tax transparency is becoming a new norm placing new demands on business, with 71 percent of businesses saying they need more resources to meet such demands. Tax reputation risk is high on the agenda of C-suite executives, as 83 percent of the tax directors surveyed said they regularly brief the CEO or CFO about the subject. Companies increasingly are looking to have the data available to explain where and how they pay taxes globally.
The Organization for Economic Cooperation and Development, the European Commission and national governments are demanding more tax data from businesses. However, many multinational companies do not have systems or resources in place to meet new requirements, according to EY’s report.
“All of this attention to tax increases the need for careful documentation and analysis,” said EY Americas vice chair of tax services Kate Barton in a statement. “Companies must develop and implement long-term solutions to these complex requirements for transparency and reporting, while also anticipating tomorrow’s policy changes. In the Americas, we see clients using the data needed for deeper levels of transparency to manage more than documentation risk. The evolution of finance transformation has led to a risk reset—not just cost savings. In this post-crisis economy, like the CFO position itself, finance transformation focuses on capital growth and a competitive advantage. In line with that, transparency readiness doesn’t just help to mitigate regulatory risk, but becomes a catalyst to uncovering new opportunity. A strategic finance transformation effort needs to enable enhanced financial reporting internally and externally. The data that new IT systems provide can help to improve operations, while mitigating tax risk with full tax transparency, thus helping to build a better working world.”
Greater transparency has the potential to provide benefits to companies, including reducing the number of disputes with tax authorities and helping foster cooperative compliance relationships. But to meet the new demands, tax professionals may need to change the way they report and track information related to the taxes they pay, and re-align their IT systems to make sure the data can be collated quickly and easily, according to the report.
The survey describes several steps that companies can take to get ready and prepare the data that can help them manage reputational risk. The report recommends companies closely monitor public interest and regulatory developments to better understand the likelihood of new disclosure requirements, develop and sustain the ability to source accurate data, in the right format and in a timely manner, and develop deeper insights that allow them to present a “total tax picture” to integrate what they learn into their tax risk management strategy.
“We are at a critical stage as the global tax environment evolves,” said EY global vice chair of tax Jay Nibbe. “Increasing transparency readiness presents an opportunity not only to comply with new disclosure demands but also to proactively work to mitigate reputation risk. Getting prepared will require some additional investment in technology, data extraction capabilities, and new skills in people resources. It also involves increased awareness on how you think about your tax position, and how it could be perceived by a wide range of stakeholders.”