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.
Tag: compliance
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
Tom Fox is talking about purpose in this solo episode of the ESG Report. He shares insights from an HBR article, What Is The Purpose of Your Purpose written by Jonathan Knowles, Tom Hunsaker, Hannah Grove and Allison James, that talks about aligning your ESG program to your corporate purpose.
The Three Senses of Purpose
The authors identify the three senses of purpose: competence, culture and cause. There are gaps in these senses that compliance officers must overcome:
- The cause competence gap – the lack of alignment with your business and why it exists.
- The competence culture gap – where the company is valued by its customers but treats its employees poorly through low wages or an intolerant environment.
- The culture cause gap – where the company has a clearly defined cause but employee engagement on that cause is very low.
Finding Your Corporate Purpose
The authors map out a five-step approach to finding your corporate purpose, and also remedying the sense gaps. Itemizing the types of interests for your ESG program, and getting those departments to work together, will be crucial in order to get them to buy into the ESG approach. Understanding the three senses of purpose and their advantages will help compliance officers develop a clear sense of business objectives. Asking questions about your organization’s credibility to do good and bring value to society, will keep you focused on the bigger picture and help to ensure ethical behavior. By embedding purpose in corporate behavior, and from a bottom-up perspective, purpose can increase authenticity and engagement from the day-to-day experiences of customers and employees.
The Importance of Purpose
Purpose can increase customers’ preference for your products and services. Purpose can boost employee engagement. “The employees have to believe in your compliance program and do business in your compliance program by believing in it,” Tom quotes. The purpose of your organization and your ESG program can help with this. Purpose and ESG can help reinforce a company’s reputation as a good corporate citizen. Finally, purpose and ESG will allow you to respond to crises and risks in a timely manner, in ways that are impactful.
Resources
Tom Fox email
What Is The Purpose of Your Purpose
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.
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
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.
- 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.
- 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.
- 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.”
- 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.
- 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.
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.
Tom Fox welcomes Brad Hibbert on this episode of the Innovation in Compliance Podcast. Brad is the Chief Strategy Officer of Prevalent, Inc. He joins Tom to talk about how Prevalent helps companies manage third-party risk, the importance of risk management, and what the future for risk management in the compliance world may look like.
Managing Third-Party Risk
Tom asks Brad to explain how Prevalent helps companies manage third-party risks. “We have a SaaS platform that helps organizations identify those risks, report against those risks, and then provide remediation capabilities to reduce those risks at every stage of the vendor lifecycle,” Brad tells Tom. Risk management is no longer about just doing reactive reporting on an annual basis. Risk has to be proactively monitored, identified, and reduced on a day-to-day basis, and especially when companies are having day-to-day conversations with their third parties during contract execution. Prevalent enables its risk management platform by having different team members interact with the third parties to collaborate and reduce the risks at every stage of the vendor life cycle.
A Must Have
Third-party risk management is a must-have right now, and will continue to be in the future. “What organizations are realizing is they have to move beyond the compliance check box and actually reduce the risk associated with these third parties,” Brad remarks. Compliance is one of the drivers of this, but another main factor is the pandemic. COVID has changed the way companies and businesses operate, and has also exposed their weaknesses. With the shift to the hybrid work environment, and the increase of work from home, companies have had rapidly onboard third-party risks due to the use of online platforms. The risk of cyber-attacks and information being leaked is high, so being able to manage and protect companies from that is paramount.
The Contract Essentials SaaS Solution
Tom asks Brad to explain the contract essentials SaaS solution. The SaaS solution allows the company to onboard or add existing contracts. Prevalent’s platform has very strong workflow and collaboration capabilities that focus on vendor risk, which is also good for profiling current contracts to see where the risk lies. Companies can use the SaaS solution to upload their contracts, or any related documentation surrounding it to a secured file, and it allows them to collaborate with third parties outside of the corporate network.
The Future of Third-Party Risk Management
Brad predicts a convergence of third-party risk management and the broader third party. “We’re going to continue to focus on building solutions that are easy to use that enable data sharing between the different groups that promote efficiency, collaboration, and then risk reduction,” he says. Organizations can no longer simply rely on assessments, instead must have continuous insights play major roles at all levels of the vendor life cycle. Monitoring the financial risk, the business risk, and the cyber risk proactively to create appropriate measures is something that will continue as well.
Resources
Brad Hibbert | LinkedIn | Twitter
Prevalent, Inc.
As Ukraine hangs on from the Russian invasion, Jay is on assignment so fan fav Kristy Grant-Hart joins this week as a co-host with Tom to look at some of the week’s top compliance and ethics stories from the impact of the Ukrainian crisis in the Ukraine Hangs On edition.
Stories
- What Russia invasion means for companies and compliance. Tom with a series in the FCPA Compliance and Ethics Blog. Matt Kelly in Radical Compliance.
- Dick Cassin says sanctions may lead to more corruption in the FCPA Blog.
- Jaclyn Jaeger looks at supply chain disruption and issues in Compliance Week (sub req’d)
- Matthew Murray asks if Putin invaded Ukraine to advance corruption, in GAB.
- Chasing oligarchs’ money, from the Washington Post.
- The Swiss approach to Ukraine crisis. Mark Pieth in Risk and Compliance Europe.
- Mike Volkov focuses on new and evolving sanctions, in Corruption Crime and Compliance.
- Economic nationalism and corporate governance. Martin Geller, in Harvard Law School Forum on Corporate Governance.
- Illicit finance and High-value art. Sullivan & Cromwell lawyers in Compliance and Enforcement.
- The invasion and cybersecurity. Jonathan Armstrong in Cordery Compliance.
Podcasts and More
- In March on The Compliance Life, I visit with Audrey Harris, Managing Director at AMI, formerly CCO at BHP. In Part 1, she discusses her academic background and early professional career.
- On the FCPA Compliance Report, Tom has a 2-part series with Trade Compliance guru Matt Silverman on the full extent of possible Russia sanctions (Part 1) and the corporate response you need to make (Part 2).
- Tom and Loren Steffy look energy issues and fallout from the Russian invasion in Greetings and Felicitations.
- Tom and Matt Kelly take a deep dive into the compliance weeds about the Russian invasion on Compliance into the Weeds.
- Silvia Surman devotes the entire week to Russian trade sanctions and economic issues in The Compliance Kitchen.
- Tom celebrates Texas Independence Day and the anniversary of the Alamo in a podcast with Don Frazier, Executive Director of the Texas Institute at Schreiner University on The Hill Country Podcast.
Tom Fox is the Voice of Compliance and can be reached at tfox@tfoxlaw.com. Kristy Grant-Hart is Compliance Kristy and can be reached at kgranthart@sparkcompliance.com.
Welcome to the Greetings and Felicitations, a podcast where I explore topics which might not seem to be directly related to compliance but clearly influence our profession. In this episode, I visit with business journalist and long-time energy issue reporter Loren Steffy about what the Russia invasion of Ukraine means for the world energy scene. Highlights include:
· Russia is the second largest oil exporter after Saudi Arabia.
· Russia provides 40% of the energy for the EU.
· 60% of Russian GDP comes from energy production and sale.
· What will be the response of US producers?
· What will this mean for shale production?
· Where does LNG fit into all this?
· Can the US upgrade its energy infrastructure?
· What about a US energy policy?
Resources
Loren Steffy in Forbes.com
30Point.com
