Tag: CCO

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Innovation in Compliance

Taxman: Tax and Supply Chain


 
As the Taxman five-part series nears the end, Tom Fox and Tracy Howell tackle an important topic that has become more prominent over the years: tax and supply chain. 
 

 
How Tax Can Help Supply Chain
Supply chain in a traditional sense focuses on the acquisition of goods, in particular the quality, cost, and delivery. There can be a substantial tax component in each of those steps to help companies attain goods at the lowest possible cost. Consequently, if supply chain does not have a relationship with tax, it can result in additional surprise costs being attached to goods. Data beyond the cost of goods, material, and service can be used to model and predict the additional tax burden so that better procurement decisions can be made. 

Mitigating the Risk of Mission Creep 
Establishing a connection between tax and supply chain in an organization is good, but the relationship needs to be kept fresh for a positive impact. In a company, people may be focused on so many different things that they forget to interact. Creative people tend to expand their roles and look for goods and services in different locations, which can be the cause of a mission creep. Hence, having constant close interaction between supply chain and tax allows for changes in functionality to be documented and implemented into the organizational framework.
 
Elements of a Tax-Efficient Supply Chain
Tom and Tracy discuss the elements of a tax-efficient supply chain. This includes:

  • Examination of the entire scope of what’s being manufactured and sold to allow the creation of tax opportunities to bring value based on special purpose entities. 
  • Coordination of transactions in a supply chain with transfer pricing. 
  • Compliance with tax laws and regulations. 
  • Documentation of the process. 

 
Resources
Tracy Howell | Email | LinkedIn 
 

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Blog

Tax and Compliance: Tax and Supply Chain

What is the intersection of tax and compliance? Why does a Chief Compliance Officer (CCO) or compliance professional need to sit down with the corporate head of tax? How does a corporate tax function fit into a best practices compliance program? It turns out there is quite a bit a compliance professional can learn from a tax professional. Moreover, there are many aspects of tax which should be considered by a CCO and compliance professional from an overall risk management perspective. Unfortunately, these questions are rarely explored in the compliance community.
To explore these issues (and remedy this lack of awareness) I recently sat down with noted tax professional Tracy Howell to explore these and other questions. We tackled these issues and others in a five-part podcast series for Innovation in Compliance. Today, we consider the role of tax in the Supply Chain. We also expand that to compliance, because compliance also has a huge role in this area.

Obviously, this topic has become more prominent over the last couple of years during the pandemic. Over the past couple of weeks, with the Russia invasion of Ukraine, it has become even more hyper-critical. One of the things we saw in the pandemic was that many companies with long established Supply Chains, perhaps not single source suppliers, but close to single source suppliers, found themselves scrambling when huge swaths. With the Russian invasion of Ukraine, we have had the largest amount of economic sanctions delivered by any administration in the modern era. Companies are struggling with not only responding to the sanctions but responding to the business dislocation from Russia and Belarus to Ukraine and into eastern Europe.
Clearly Supply Chain is critical for an organization, especially an organization that manufactures and has any substantial delivery of materials and services. There is also the question of where the highest risk in your Supply Chain might be. Is it in the critical component(s) in the acquisition of goods? Is it in the delivery of services? Or is it simply in the manufacturing process itself? Moreover, if you think of Supply Chains as only having a traditional focus on the acquisition of goods, comprising both the quality of the goods and the cost of the goods, and concluding with the delivery of the goods for consumption or later sale; you are missing a key component. That key component is tax and as Howell stated, “there can be a substantial tax component in each one of those steps of acquisition costs. If you are buying goods in foreign jurisdictions that can be transaction taxes, such as GST or VAT.”
Howell provided the following example. “If a company’s buying raw materials in a third country, in the shipping terms, we’d normally say title transfers in international waters, that’s a good thing for the buyer. Because that means if I’m buying something and I take title in international waters, it should not trigger any transaction taxes. However, if you are not paying attention to where you acquire goods from and then you take title within the country of origin’s territory, guess what? That could trigger up to a VAT liability of 15 to 20%. This means that if your Supply Chain is not interacting or does not have a relationship with tax, and the taxes can add a 15% to 20% component to the cost of goods in a transaction, which dramatically impacts the company’s cost of goods sold (COGS).”
However, if there is a good relationship between tax and Supply Chain, there can also be additional benefits tax brought to the fore and such benefits are more critical in 2022 and beyond because they can help a company plan for disruptions in the supply chain. For instance, if Supply Chain looks for alternative suppliers, or a different geo-region for component parts, tax can step in and do an analysis that would at least give them an estimate of what the tax costs are going to be.
Howell said that tax can provide “Supply Chain with the data that is beyond the cost of good, or the cost of material, or the cost of service. A tax professional can do so by modeling out the liability that a multinational could incur, including up to five different possible sources for goods and materials. From there you can extend your model out to see what the additional tax burden would be in each one of those scenarios. From there you can check to see if there are any tax incentives that either exist or that your organization can go negotiate.”
But the risk management that tax can bring to Supply Chain does not end there; particularly once tax and Supply Chain have established a relationship and it is understood how tax can assist Supply Chain in the procurement of goods and services. Through a documented process, it creates and entire framework for the organization to use going forward because at any given time Supply Chain will be looking for goods and services in different locations. Howell said, “you can have a mission creep. It is important for tax to have that relationship with Supply Chain so as their functionality changes and your organization is acquiring new goods in different locations, you can document the changes, and update your framework as needed when new tax issues can come to play.”

Join us tomorrow for our concluding post when we consider the role of tax in a corporate ESG program. Check out the full podcast series Taxman: On the Intersection of Tax and Compliance on the Compliance Podcast Network. Check out Tracy Howell on LinkedIn.

Categories
Innovation in Compliance

Taxman: Why Tax Needs a Seat at the Table


 
In episode 3 of the Taxman series, Tom Fox and Tracy Howell strive to answer the question: ‘Why should tax have a seat at the table?’
 

 
Tax and the Table
The table refers to the front end of when an organization is trying to define what it wants to do, where it wants to do it, and how it’s going to perform. A corporation’s ultimate objective is to generate net income or distributable profit, something tax professionals are well-suited to assist with because they are experts in damage control and risk mitigation. Tracy points out, “Tax can provide an umbrella to achieve corporate objectives if they’re involved in the front end.”
 
Tax’s Relationship with Other Stakeholders 
In a company, a functional lead will often pose the question: ‘Why do we need tax here?’ According to Tracy, “A good tax guy has to be proactive and provide examples to get the tax men at the table.”
 
Educating Corporate Functions Outside of Tax 
Tracy’s advice is to build a relationship with the functional experts, and “create the situation where you’re a trusted business advisor”. He recommends one-on-one interactions above all. However, it is important to remember that in a global organization, the outcome may not always be successful. For this approach to yield positive results, he comments, “there has to be some buy-in, compliance, and a willingness to talk tax.”
 
Resources
Tom Fox’s Email
Tracy Howell | Email | LinkedIn
 

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Blog

Tax and Compliance: Why Tax Needs a Seat at the Table

What is the intersection of tax and compliance? Why does a Chief Compliance Officer (CCO) or compliance professional need to sit down with the corporate head of tax? How does a corporate tax function fit into a best practices compliance program? It turns out there is quite a bit a compliance professional can learn from a tax professional. Moreover, there are many aspects of tax which should be considered by a CCO and compliance professional from an overall risk management perspective. Unfortunately, these questions are rarely explored in the compliance community.
To explore these issues (and remedy this lack of awareness) I recently sat down with noted tax professional Tracy Howell to explore these and other questions. We tackled these issues and others in a five-part podcast series for Innovation in Compliance. In Part 3, we consider the issue of why tax needs a ‘seat at the table’.
I first met Tracy Howell when I had a tax issue come up in a contract interpretation and someone told me to go see him about the issue. I literally went to the basement of our building and there was the corporate tax team. I introduced myself and told him about the issue. We worked on it and he gave me some ideas. As I was leaving, he also made clear that the issue could have been handled in the contract negotiation and language put directly into the contract. From that visit, I understood why tax needed a ‘seat at the table’.
Corporate income tax is a significant component of an entity’s operating expenditures with statutory tax rates within any jurisdiction between 20% to 30% of profits. Howell said, “The business cycle includes sales, cost to deliver those sales which generate a profit, and many people think “Okay, that’s the end of it.” But then you take on the additional work of corporate income tax and it’s a significant component.” This is the reason Howell believes that “tax needs to be at the table, at the front end when a business organization is trying to define what it wants to do, where it wants to do it and how it’s going to perform what it wants to do.” A corporate tax function “needs to be at the table to help with each one of those components.”
An organization needs to ask (and answer) such questions as “Where will you manufacture the products?Where do you want to sell those goods? Where is your customer base?” Howell said that with the location of the manufacturing activity and the subsequent resale to third parties to generate a profit “you can get different answers based on where you’re manufacturing and where you’re selling.” If tax is not at the table, the “thought process is pretty much focused on the manufacturing activity, the procurement of raw materials, the application of direct labor equals finished goods, and then where you sell them.” However from the tax perspective, at the point in time each of those activities occurs “you can get substantially different results if you are manufacturing and then you are trying to sell across 25 different borders, but you are importing goods from five different countries. Tax can provide an umbrella, to achieve those corporate objectives.” But a key is that tax needs to be involved at the front end as opposed to at the back end.
Howell added that tax works with a wide variety of corporate disciplines. He pointed to tax and the corporate HR function. If your organization is a multinational company, it is literally sending  people around the world, for both short and long periods of time. Each country has certain rules about having to pay income taxes for foreign employees. If you send an employee from the US to the UK to work offshore, you have a certain amount of days before you are required pay income tax on that employee. Howell said that if tax is “interacting with a HR professional on the provision of people, they can put in a management system to prevent an employee from being in country too long and triggering the change in employment status. This can be a substantial impact for 20 or 30 employees whose tax cost are not factored into the price of their products they are servicing.”
We then turned to how tax can get a seat at the compliance table. Howell said it all starts with relationships. But relationships are two-way affairs. I have long advocated that a CCO gets out of the office and goes down the hall to meet other executives. The same holds true with your tax folks. Howell said the reason this is so critical is a CCO needs to have solid relationships with functional experts inside an organization. He stated, “it sounds a little bit of a cliche … You need to create the situation where you’re a trusted business advisor.”
I asked about tax putting on training for groups such as a corporate compliance function, with such strategies as Lunch ‘N’ Learns or other types of trainings. Howell responded, “I have found that one-on-one interaction has to happen before you can just send updates, emails, training seminars. It needs to have an in-person component. In a global organization, you are not going to be able to get in front of everybody, but the relationship must start at the top down, with those functional leads. There has to be some buy-in top down in an organization around compliance and then a willingness to talk tax. The belief that tax is here to help, there has to be some buy in on that angle.”
Join us tomorrow when we consider the role of tax in Supply Chain. Check out the full podcast series Taxman: On the Intersection of Tax and Compliance on the Compliance Podcast Network. Check out Tracy Howell on LinkedIn.

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Blog

Tax and Compliance: What is Transfer Pricing?

What is the intersection of tax and compliance? Why does a Chief Compliance Officer (CCO) or compliance professional need to sit down with the corporate head of tax? How does a corporate tax function fit into a best practices compliance program? It turns out there is quite a bit a compliance professional can learn from a tax professional. Moreover, there are many aspects of tax which should be considered by a CCO and compliance professional from an overall risk management perspective. Unfortunately, these questions are rarely explored in the compliance community.
To explore these issues (and remedy this lack of awareness) I recently sat down with noted tax professional Tracy Howell to explore these and other questions. We tackled these issues and others in a five-part podcast series for Innovation in Compliance. In Part 2, we turn to the question of what is transfer pricing and what does this have to do with compliance?
We began at the beginning – what is transfer pricing and what methodologies are used to determine or estimate price transactions? Howell began with the rather astute obligation that if you are “a compliance officer and you can say anything more than just the words “transfer pricing”, you are indeed an FOT (Friend of Tax).” He went onto explain, “Transfer pricing encompasses the methodologies required by tax code and regulations around the world to price transactions between affiliated companies. It is the provision of and sale of goods between affiliates, sale of services, provision of services, including the licensing of intangibles. Finally,  transfer pricing requires you to press the transactions at an arm’s length rate.”
Transfer pricing is a critical issue when you have transactions between related parties, which in a large multi-national organization is almost always. To help illustrate the issues involved, Howell compared two transactions. First if you are selling goods, “such as Ford Motor Company selling an automobile, it is easily comparable if manufactured in Canada and sold to the US, because you could compare that transaction to something that was manufactured by Chevrolet.” However, Howell noted, “when it gets really complicated is if you’re manufacturing proprietary products. In oilfield services for instance, your organization might manufacture a very unique valve. What would the arms-length rate be if it’s manufactured in the US and sold to Mexico?” Here the tax professional must have a process to prove the arms-length rate of value for sale between related parties. The methodology to do so would be to get some comparables for those kinds of transactions. But this may be hard to do if you are selling proprietary top specialized manufactured equipment.
As Howell related, “it becomes an art, and that art is developing and applying an arms-length rate for comparable transactions between comparable entities. Even trickier is if a one-off piece of equipment does not have a comparable, so then you have to broaden the scope of finding manufactured goods, for instance, or something comparable. It is an art and its normally tax issues of an exact nature and transfer pricing is not but the key is to have a defined methodology.”
We then turned to the several entities involved in the government side of transfer pricing and how they may at times be at odds, complicating the job of the tax professional as well as the compliance practitioner. Initially Howell noted that governments are involved with their different regimes for the selling and buying side of tax jurisdictions. This means in every case you have a seller of goods or services and a buyer. The objective of governments and their taxing jurisdictions is to get their fair share. In reality, this means that every government is trying to expand its tax base. They do that by trying to grab as much of multi-jurisdictional transactions profit as possible.
Then there are third party organizations that are involved, such as the Organization of Economic Cooperation and Development (OECD). The OECD is pushing standard transfer pricing laws and regulations throughout the world. They provide model laws, treaties and transfer pricing strategies. As Howell noted, their objective is to “try to standardize the government’s laws and regulations, so that you do not have a mismatch between very aggressive and very liberal transfer pricing laws. The OECD is trying to provide some guidance on what is a fair share.” But as Howell further related, “at the end of the day, what is fair? And that’s just somebody’s opinion; what is fair.”
We concluded with a look at the transfer pricing negotiation process. Most interestingly, the process Howell described mirrored the process when negotiating with the Department of Justice (DOJ) in a Foreign Corrupt Practices Act (FCPA) investigation or enforcement action. It all starts with your credibility. You must demonstrate credibility to the taxing authority and then back up that credibility with documentation (Document, Document, and Document). From there it is demonstrating your consistent process and methodology to demonstrate how you came up with a rate for transfer pricing of a good or service, similar to how a CCO would demonstrate compliance program effectiveness to the DOJ. But here the tax professional will face an added wrinkle from a that of a CCO. Howell explained that if you are in a country like Kazakhstan, your submission must in the format required by Kazakh law. If you are required to use local language in your submission, you are partway there. Howell ended with “you have not gone all the way. You must follow the laws, even if they are a little bit different. That includes language and formatting in all your jurisdictions.”
Join us tomorrow when we explain why tax needs a seat at the table. Check out the full podcast series Taxman: On the Intersection of Tax and Compliance on the Compliance Podcast Network. Check out Tracy Howell on LinkedIn.

Categories
Innovation in Compliance

Taxman: Why Compliance Should Talk to Tax


 
Tom Fox is back again for a special new five-part series, Taxman: On the Intersection of Tax and Compliance. Tracy Howell, Tom’s colleague and tax expert extraordinaire, joins in to discuss the intersection between compliance and tax. 
 

 
Why Should Compliance and Tax Interact? 
All organizations have an enterprise risk management (ERM) system. One risk common to multinational companies especially is corporate tax risk; and yet, it tends to remain under the radar. While tax professionals are usually very good at identifying and mitigating tax risk, if there is no close interaction between compliance and tax professionals, the risks are elevated. 
 
Sophistication in Taxing Jurisdictions 
Most jurisdictions have a tax code, but street rules tend to also be in play. “You have to establish very early on that you don’t pay bribes,” Tracy advises. The results of following the law are more expensive, but it pales in comparison to the cost of putting your company at risk. 
 
Resources
Tom Fox’s Email
Tracy Howell | Email | LinkedIn
 

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Great Women in Compliance

Alison Hinds-Pearl on Why the Only Constant is Change

Welcome to the Great Women in Compliance Podcast, co-hosted by Lisa Fine and Mary Shirley.

Today is the day after International Women’s Day, and we are so pleased to welcome Alison Hinds-Pearl.  Alison is the Chief Compliance Officer and Assistant General Counsel at Revlon and previously had senior roles at MasterCard and Bayer.   Her career is remarkable in many ways, particularly as she has been in three very different industries, finance, pharma and now beauty and self-care products.

Alison talks about the differences and similarities in these different industries, particularly as finance and pharma are so heavily regulated.  Alison also started at Revlon during the pandemic and discusses her experience.

Lisa and Alison discuss the importance of diversity in our organizations, and Alison shares some insight from her experience, as a woman and as a woman of color, including an early experience at the Bronx District Attorney’s Office.  This is a great discussion not only for Women’s History Month, but to conclude the winter session of #GWIC.

Great Women in Compliance will be back on March 30 with a special bonus episode hosted by Tom Fox.  Lisa and Mary want to say thank you to the #GWIC community, especially during Women’s History Month.

You can subscribe to the Great Women in Compliance podcast on any podcast player by searching for it and we welcome new subscribers to our podcast.

Join the Great Women in Compliance community on LinkedIn here.

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Compliance Into the Weeds

First We Kill All the Lawyers

Compliance into the Weeds is the only weekly podcast which takes a deep dive into a compliance related topic, literally going into the weeds to more fully explore a subject. This week, Matt and Tom take look at a recent speech by SEC Commissioner Alison Herron Lee where she considered the role of lawyers as gatekeepers under SOX 307. Some of the issues we consider

·      Who do lawyers represent?

·      What is the difference between lawyers and gatekeepers?

·      How can or should lawyers represent multiple interests on SOX issues?

·       How does this comport with state bar requirements?

·      How, if at all, does SOX 307 impact compliance professionals?

·      Was the speech a policy change announcement, trial balloon or something else.

Resources
Matt in Radical Compliance
SOX 307

Categories
Blog

Using Purpose to Create a ESG Program

I have advocated that compliance is uniquely situation to lead a corporate ESG effort. In a recent Harvard Business Review article entitled, What is the Purpose of your Purpose? authors Jonathan Knowles, Tom Hunsaker, Hannah Grove and Alison James looked into creating Purpose in an organization. Their article laid out a great road map for companies to identify “an authentic and motivating basis for alignment among key stakeholder groups” for the elusive concept of Purpose. I found their piece to be a great way to think about bringing ESG into your corporate purpose.
For the Chief Compliance Officer (CCO), determining an ESG strategy is fundamentally a business decision and must be anchored in your business strategy. This means “identifying the most authentic and motivating basis for alignment among the key stakeholder groups on which the success of the business depends.” Moreover, determining and then implementing such a strategy “sits at the intersection of four business agendas: (1) For marketing and sales, it can help win customers and enhance their loyalty. (2) For HR, it can attract, engage, and retain employees. (3) For governance and sustainability, it can enhance environmental, social, and governance performance. (4) For strategy and finance, it can guide how resources are allocated and risks are managed.” Maneuvering through these four agendas is critical.
The authors begin with the idea that there are three senses of purpose. They are competence, which they define as the function which your product or services serves in the marketplace; culture, which they define as the intent in which you run your business; and cause, which they define as the social good for which your organization aims. These three ‘senses’ operate in different manners which can be confusing. For the CCO, separating these three senses into different components can be an important exercise. Here the authors identify three key gaps in these three senses which every CCO must overcome.
The competence-cause gap. This is the lack of alignment between the nature of your business and your espoused cause, such as when the business your pushing is at odds with your stated goals. Next is the competence-culture gap which is when a company is valued by customers but treats its employee poorly, usually through overwork, low salaries and wages or tolerating a culture which is less than respectful. The final gap is the culture-cause gap where your organization has a clearly stated purpose but employee engagement on that purpose is low. Like having a great paper compliance program but then engaging in bribery and corruption. To remedy these weaknesses, the authors have developed a five-step approach to finding your corporate purpose. Once again these are an excellent way to help create and foster a ESG program.

  1. Identify the types of interests and constituencies for your corporate ESG program. The authors identify four interests: (1) sales and marketing, (2) employees, (3) governance and sustainability, and (4) strategy and business valuation. As CCO, you need to work with all four interests to navigate a unified approach for all the internal and external constituencies who will need to buy into this approach. Your internal constituencies include employees, senior management, Board and shareholders. Your external constituencies could include potential shareholder, third parties such as suppliers, localities where you do business and customers.
  1. The three senses of purpose. All three senses have their advantages. The authors note, “A competence-focused purpose presents a clear value proposition for both customers and employees. A culture-focused purpose creates internal alignment and collaboration with key partners. A cause-focused purpose aligns customers, employees, and communities around the societal benefits that the company generates.” Moreover, each will have overlap in your ESG agenda.
  1. Link ESG strategy to purpose. What will be the biggest drivers for your organization into 2025 and beyond? Obviously, sales and growth are critical but what about talent acquisition and retention? Is it expansion through organic growth or through M&A? How about access to capital through PE financing, floating new shares or even bank financing? Whatever the purpose(s) is or are, the authors note that you should “develop a clear sense of the business objective that the purpose will support. How can it enhance the relevance and sustainability of your value proposition to customers and other stakeholders and strengthen the company’s relative advantage? This step typically produces a short list of three to five key ideas for defining your purpose in a way that aligns strongly with the strategy of the business.”
  1. Get out of siloes. Here you need to be seen as moving past simple corporate self-interest. The authors list several questions you can ask to your working group. They include Is the usefulness of what we provide so self-evident that we need say nothing more?Does the nature of your business make it credible for us to assert that we are out to do good?Does our leaders’ behavior support the idea that we are in the business to make the world a better place, even if that is not our core focus? Do we deliver value to customers while also being an attractive employer, partner, and corporate citizen? Does how we do business create value for society in ways unusual for our industry? By asking and answering these questions it will help you to move past the self-interests of the groups you have identified as internal constituencies. 
  1. Embed purpose in corporate behavior. Execution is where the rubber meets the road. As with all things corporate it starts with senior management who must set the tone, commitment and walk the walk. But the interesting insight from the authors note is that while senior management tends to view such efforts as a top down experience, “Most other stakeholders experience it from the bottom up—through their interactions with products and services, employees, physical locations, and communications…From a bottom-up perspective, it is more important that purpose increase the sense of authenticity, coherence, and engagement derived from the day-to-day experiences of customers, employees, partners, and the communities in which the company operates. The ultimate test of your purpose is whether it improves the way the business actually operates.”

The authors conclude that there are two additional elements which must be considered: pragmatism and authenticity. Both of these elements are directly in the wheelhouse of the CCO and compliance function. ESG can be powerful tool to speak to a variety of stakeholders in any organization. Using the approach to Purpose the authors have outlined, designed for a ESG program, can be a direct way for a CCO to move forward in the design, creation and implementation of what can well become a successful ESG program.

Categories
The Compliance Life

Audrey Harris-Into the CCO Chair

The Compliance Life details the journey to and in the role of a Chief Compliance Officer. How does one come to sit in the CCO chair? What are some of the skills a CCO needs to success navigate the compliance waters in any company? What are some of the top challenges CCOs have faced and how did they meet them? These questions and many others will be explored in this new podcast series. Over four episodes each month on The Compliance Life, I visit with one current or former CCO to explore their journey to the CCO chair. This month, my guest is Audrey Harris, who handled FCPA cases prior the explosion of FCPA enforcement actions in the early 2000’s, sat in the CCO Chair, led compliance program work back in private practice and now is Managing Director for Global Anti-corruption, Compliance, Ethics & Non-Financial Risk at Affiliated Monitors Inc.

Even though Audrey had seen numerous CCOs ‘die painful professional deaths’ in 2015,  Audrey moved into the CCO Chairs at BHP. She gave the Top 10 CCO lessons she learned in that role. When asked what her top accomplishment was, she answered that it was seeing the professional growth in her team and how this compliance team grew and led a compliance reset for the company. She also learned to make the commercial case for compliance.

Resources

 Audrey Harris on LinkedIn

Audrey Harris on Affiliated Monitors, Inc.