Welcome to the Daily Compliance News. Each day, Tom Fox, the Voice of Compliance, brings you compliance-related stories to start your day. Sit back, enjoy a cup of morning coffee, and listen to the Daily Compliance News. All from the Compliance Podcast Network. Each day, we consider four stories from the business world: compliance, ethics, risk management, leadership, or general interest for the compliance professional.
Stories we are following in today’s edition:
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. In this episode, we explore the unexplored topic of the role of tax in a corporate ESG program.
How Tax and ESG Intersect
Tracy tells Tom, “There are external forces pulling tax into the ‘S’ and ‘G’ of ESG.” In the social sector, different jurisdictions have different tax rates and laws, and as companies begin to operate in a tax-efficient manner, their activities will gravitate towards lower tax regimes. Tracy adds, “You’ve got forces trying to push the concept of ‘fair share’ rather than compliance with tax laws of different jurisdictions.” Governance-wise, it’s becoming more common for companies to be required to talk about their compliance tax audits.
The Role of Tax in a Company
With the growing pressures on ESG transparency, there’s a push to standardize reporting and scorecarding of companies based on their tax transparency. This would include things like the reporting of an organization’s effective tax rate.
Tax and ESG in Multinational Organizations
Institutional investors play a major role in impacting the activities of a multinational company. When making investment decisions, these entities heavily incorporate ESG scorecards with tax transparency, further emphasizing the need for a relationship between the two sectors.
Resources
Tracy Howell | Email | LinkedIn
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. In this episode, we explore the intersection of 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:
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. In this episode, we explore the question of why tax needs 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
Tracy Howell | Email | LinkedIn
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. In this episode, we transfer pricing.
The Concept of Transfer Pricing
Transfer pricing encompasses the methodologies required by tax code to price transactions between affiliated companies. Devising an arm’s length rate for comparable transactions between comparable entities is more art than science. As far as compliance is involved, Tracy believes that, “If you’re a compliance officer that can say anything more than just the words, ‘transfer pricing,’ then you are, indeed, an FOT (friend of tax).”
Parties Involved in Transfer Pricing
Governments (taxing jurisdictions) tend to be involved with different regimes for selling and buying. Third party organizations that are involved currently only consist of the OECD (Organization for Economic Cooperation and Development), who push standard transfer pricing laws and regulations throughout the world.
The objective of the governments is to get their fair share, and they do so by trying to obtain the maximum multi-jurisdictional transaction profit. Consequently, the OECD attempts to provide guidance on what constitutes a fair share. “What’s fair is just somebody’s opinion,” Tracy tells Tom.
Developing a Transfer Pricing Strategy
As a multinational corporation, it is crucial to set transfer pricing policies and business practices at the beginning. This involves identifying the appropriate methodology that will be used to price the transactions between affiliates. Documenting this process of analysis and conclusion helps to adopt a suitable transfer pricing methodology. In summary: perform analysis, document analysis, then adopt the findings in future transactions.
Tracy poses the question, “How often have you seen a company that’s got the policies and procedures, but somebody’s not following them?” Claiming to have global policies for all multinational intercompany transactions, and then failing to follow them leads to an extreme loss of credibility – this is why it is important to comply with local documentary requirements, “You’ve got to follow the laws, even if they’re a little bit different.”
Resources
Tracy Howell | Email | LinkedIn
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. In this inaugural episode, we consider the following topics.
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
Tracy Howell | Email | LinkedIn
Operating in a tax-efficient manner is a wise business move for a multitude of reasons. It’s time to start the conversation about the benefits of a relationship between tax and ESG, especially in multinational organizations. That’s what Tom Fox and Tracy Howell are discussing in this episode of The ESG Report.
How Tax and ESG Intersect
Tracy tells Tom, “There are external forces pulling tax into the ‘S’ and ‘G’ of ESG.” In the social sector, different jurisdictions have different tax rates and laws, and as companies begin to operate in a tax-efficient manner, their activities will gravitate towards lower tax regimes. Tracy adds, “You’ve got forces trying to push the concept of ‘fair share’ rather than compliance with tax laws of different jurisdictions.” Governance-wise, it’s becoming more common for companies to be required to talk about their compliance tax audits.
The Role of Tax in a Company
With the growing pressures on ESG transparency, there’s a push to standardize reporting and scorecarding of companies based on their tax transparency. This would include things like the reporting of an organization’s effective tax rate.
Tax and ESG in Multinational Organizations
Institutional investors play a major role in impacting the activities of a multinational company. When making investment decisions, these entities heavily incorporate ESG scorecards with tax transparency, further emphasizing the need for a relationship between the two sectors.
RESOURCES
Tom Fox’s email
Tracy Howell | Email | LinkedIn
In this episode of Taxman, Tom Fox and Tracy Howell conclude the special series by discussing a topic that has yet to be explored by most: tax and ESG.
How Tax and ESG Intersect
Tracy tells Tom, “There are external forces pulling tax into the ‘S’ and ‘G’ of ESG.” In the social sector, different jurisdictions have different tax rates and laws, and as companies begin to operate in a tax-efficient manner, their activities will gravitate towards lower tax regimes. Tracy adds, “You’ve got forces trying to push the concept of ‘fair share’ rather than compliance with tax laws of different jurisdictions.” Governance-wise, it’s becoming more common for companies to be required to talk about their compliance tax audits.
The Role of Tax in a Company
With the growing pressures on ESG transparency, there’s a push to standardize reporting and scorecarding of companies based on their tax transparency. This would include things like the reporting of an organization’s effective tax rate.
Tax and ESG in Multinational Organizations
Institutional investors play a major role in impacting the activities of a multinational company. When making investment decisions, these entities heavily incorporate ESG scorecards with tax transparency, further emphasizing the need for a relationship between the two sectors.
Resources
Tom Fox’s Email
Tracy Howell | Email | LinkedIn
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, in this concluding blog post, we consider the role of tax and Environmental, Social and Corporate Governance (ESG).
We began from where Howell sees ESG from a tax perspective. ESG is the acronym for and covers environmental, social, and governance sections of an entity. For the ‘E’, environmental, an organization is supposed to be monitoring and contributing to its social requirements of its environmental footprint. It can include such areas as wastewater management, energy efficiency, carbon footprint of an organization. In the ‘S’ or social component, it includes the human rights, where an organization is operating, its Human Resource (HR) function, the wellbeing of its workforce, fair wages and much more. In the ‘G’ or governance, it includes the executive compensation, which Howell noted is “a high-profile item”, political contributions of an entity, board independence and composition, the demographics of its executives, whistleblower schemes, among many others.
Importantly, Howell believes there are “external forces pulling tax into the S and the G of the ESG component.” From the social component, how does tax fit in? The phrase “being thrown around these days is for companies to pay a fair share.” Yet in addition to that being an arbitrary term for multinationals, Howell believes it is “really misunderstood because there are different countries or jurisdictions which have different tax rates. Some are higher, some are lower.” This means that as companies employ a tax strategy “to operate in a most tax-efficient manner, their activities are going to gravitate to lower tax regimes. Social taxes becoming more common in social piece of ESG, and you’ve got forces trying to push the concept of fair share rather than just compliance with the tax laws of those different jurisdictions.”
There is also a tax component in the governance prong. It is becoming more common for companies to have to talk about their compliance tax audits. Howell emphasized this “does not mean a company has a perception of not being compliant in governance simply because a company’s following the laws of the different jurisdictions.” Additionally, Howell has seen litigation in the European Union (EU) between the “countries where there is some intellectual property licensing and one jurisdiction that’s at a lower rate, and governments are giving maybe some tax concessions to draw business incentives.” Subsequently those are being challenged, so that too falls under the ‘G’ for governance.
Howell believes the continued pressures on ESG transparency are growing. This could well lead to standardized reporting and score carding of entities on their tax transparency. US publicly traded companies currently have substantial reporting requirements in material areas of their operations and income taxes, which is “one of the large footnotes as required in SEC reporting.” Indeed, some international organizations such as the Organization for Economic Cooperation and Development (OECD), the International Financial Reporting Standards Foundation (IFSR), the World Economic Forum, and the Sustainability Accounting Standards Board (SASB), “are all drafting up their own and pushing out their own transparency scorecard that would include some things like effective tax rates.”
Another key issue Howell sees in the conjunction of tax and ESG is in the arena of effective tax rates (ETR) reporting by jurisdiction. In ETR “if you are in a high-tax country such as the US and then your organization has operations in Ireland, which has a lower income tax rate; if you just put those on paper and compare the two effective tax rates without an explanation or thorough understanding, you’re going to get an inaccurate conclusion. But these organizations are pushing for globalization and transparency, and it’s going to be a component for ESG score carding.” All of this will mean more importance for tax in an overall corporate ESG program.
We concluded with what Howell sees as the most important reason for tax to be a part of a company’s ESG discussion. That reason is the market. Howell stated the “biggest pressure that’s coming on top of multinational organizations around ESG is coming from the institutional investors. Large institutional investors play a heavy role in impacting a multinational’s activities. Every CFO really has to listen to the institutional investors that he has or his entity have relationships with. Moreover, institutional investors are probably the biggest 500-pound gorilla in the room that are making investment decisions with their millions of dollars, and they are incorporating an ESG scorecard with tax transparency. It is a big part of where they are making their investment decisions. So, the biggest players in the room that are asking for tax transparency are institutional investors, the pension funds and investor class. Those investment dollars are driving the CFOs and organizations to get ahead of SEC reporting and requirements and include an ESG scorecard component, of which tax is going to be a large component.”
What started off as a discussion of regulatory and legal requirements around tax has become market driven. This echoes my observation that it was not government regulation which drove ESG but the market. As antithetical as the former administration was to ESG, the market spoke about what it wanted for its investment dollars. This speaks to the overall and what will be the long-lasting power of ESG.
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.
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:
