Building on my previous article, which looked at the tax implications of the 2018 KPMG CEO Outlook findings, at a high level, I now want to delve deeper into tax risk areas. Here are five tax considerations I think should be top-of-mind for multinational CEOs and their leadership teams in today’s environment.
Understand the environment of each country in which you are operating – One of the biggest risks businesses face is a failure to understand the tax environment across each of the jurisdictions in which they do business. In the same way that topics like politics, preferred cuisines and cultural norms differ across borders, so does the tax culture; if you make the assumption that attitudes towards tax and business are the same in every country, you are bound to get it wrong. One of my contacts at the Organisation for Economic Cooperation & Development (OECD) shared a story with me in which they were discussing a theoretical piece of tax planning with tax professionals from the US, the UK, and Germany. The US analysis was that all was in order. The UK analysis was that it was contrary to the anti-avoidance rules and would result in penalties. The German analysis was that it would be criminal. Every country is indeed different, and with the shift to increased territorialism, as mentioned above, I think we should expect even more of that.
Stay current with fast-moving tax laws – Another area where I see companies get themselves into trouble is in failing to keep pace with the rapid changes happening in the tax environment. Perhaps they get sound advice on their structures at a certain point, but they fail to review these on an annual basis or even more frequently. For example, a company may have an employee travelling to a country regularly for business, without causing a tax liability. If, however, that person moves there, and others visit with this individual regularly for meetings in the country, suddenly you may find yourself with an unexpected tax liability. Your tax position needs to be reviewed regularly to ensure you are keeping up with the developments in the business and in the tax environment. You need to review to ensure the decisions you made before, which were right for your organization and tax structures at the time, are still fit for purpose today.
Have good data – There are some obvious risks of poor data. For example, making errors in your tax returns. In the modern environment, you need strong data governance practices in place in relation to your financial and tax reporting systems, as you can bet that many of the tax authorities you are reporting to are indeed using the most advanced technologies to perform their analysis of your data. In Brazil, for example, 96% of tax audits are now done electronically, and 92% of those result in a penalty. Beyond the risk of penalties though, there is an opportunity cost to poor data because as a data-centered function within an organization, tax departments have a real opportunity to add value back into the businesses that they serve by transforming that tax data into insights that can inform decisions.
Get involved in the broader discussions around tax – The world needs more businesses to engage in the discussion about the formulation of policy. This requires a diverse range of voices and stakeholders to reach better tax policy for all. (You can get started by getting involved in KPMG’s Responsible Tax project.) Without the voice of business at the table, we can run the risk that political pressures can result in tax policy with the greatest of intentions, but without the desired outcomes, because the voice of business is not being heard in that discussion. As an example of this, look at the proposal launched by the European Union recently about how to tax digital businesses in the EU based on a percentage of turnover. On the surface, it might seem sensible, but in practice, it risks taking an organization directly into double taxation—with no means of relief. For example, if I were a person living in France, wanting to download a show from Netflix under this proposal, if I download the program, Netflix would have to pay an extra amount of tax that would not be otherwise payable if I had just had them post me a DVD. The proposal would pose major barriers for digital businesses, and they need to be involved in the discussion to help ensure the policies make sense from a tax collection and a business sustainability perspective.
Be nimble enough to adapt – We have had a huge wave of tax reform, both in terms of the international tax landscape, including the BEPS project, but also in terms of domestic reform like those in the US. Virtually every country in the world has done some kind of tax reform in recent memory, and it is not over, because the tax policy makers are still wrestling with big issues. It is difficult to predict how changes in taxation will affect business models, especially because many of these changes are still happening. I think the real issue is that your approach to the management of tax these days has to be one that is more in touch with what's going on, and organizations will need to be nimble in this environment.