With tax authorities around the world pressing ever harder to get their legislated share of revenues from firms doing business in their jurisdictions, some companies may need to reconsider their overall approach to tax.
Generally, there are two ways companies handle taxes, according to Andy Ruggles, U.S. tax reporting and strategy leader for PricewaterhouseCoopers.
Some view it as a compliance exercise, checking boxes as they follow the rules. More sophisticated companies “weave tax considerations into the fabric of how they make business decisions” around major strategies like acquisitions, dispositions, or entry to new markets, Ruggles says.
“Most organizations are not doing that,” he claims. “They’re missing opportunities to optimize cash flow and to simplify or anticipate future controversies.”
Such companies should “elevate tax to the C-suite,” in Ruggles’ opinion. That doesn’t mean literally appointing a “chief tax officer,” but rather making sure the tax function has a “seat at the table” when decisions are being made about strategic direction.
PwC is recommending to its client tax departments that they proactively convince their companies’ CFOs that filling that seat is necessary. In part that’s a response to the proliferation of new tax regulations globally, most of them efforts to make tax reporting more transparent and to collect more tax.
Most notably, starting next year large U.S. multinational companies will have to start reporting financial results — not only income tax paid but also information on their revenue, operating income, capital, employees, and assets — on a country-by-country basis.
The requirement implements guidance from the Organisation for Economic Co-operation and Development on its Base Erosion and Profit Shifting (BEPS) project, which has been adopted by the U.S. Treasury Department and the IRS. The guidance applies to U.S. multinationals with more than €750 million in annual consolidated revenue for tax years ending on or after Dec. 31, 2017.
More than 100 countries either have already adopted the OECD guidance or are expected to by next near.
But cajoling CFOs to give tax departments a bigger voice would be a good idea even without mounting global tax regulation, according to Ruggles. Not only is tax a major cost, he says, but often overlooked is the potential for reputational damage from headlines about improper tax avoidance or erroneous financial statements.
“If you don’t put tax in the front seat of where you’re going as an organization, on the back end you risk reputational issues, controversy, and inefficiency,” says Ruggles.