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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.

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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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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.

Categories
Innovation in Compliance

Taxman Series: What is Transfer Pricing?


 
Tom Fox and Tracy Howell continue their exploration of the intersection between compliance and tax in episode 2, where they touch on the practice of 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
Tom Fox’s Email
Tracy Howell | Email | 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
 

Categories
Blog

Tax and Compliance: Why Compliance Should Talk to Tax

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. We begin with why compliance should talk to tax and why tax needs to have a seat at the table when it comes to a best practices compliance program.
All publicly traded companies and all organizations have an Enterprise Risk Management (ERM) system. Companies, especially compliance professionals, work diligently to assess and then monitored the identified risks. Moreover, significant efforts are put in place to mitigate and manage these risks. A key risk that every multinational company’s faces is corporate tax. Unfortunately, as Howell noted, “many times corporate tax risk remains under the radar from what is characterized as your normal risk. An entity normally will identify the risk, a legal risk, environmental risk, transactional risk, supply chain risk, and others. But one of the risks that frequently doesn’t get much attention in a formalized ERM program is tax risk.”
These tax risks can be substantial, especially for multinational companies operating in many jurisdictions. Across the globe, jurisdictions are in different stages of development economically and Rule of Law sophistication, which includes tax jurisprudence. This means there are different levels of risk associated with where a company is performing its work, what type of work it is it doing, how it is delivering goods and services and the overall development of the jurisdiction.
Howell asserted that experienced international tax professionals and multinational entities are usually very good at identifying and mitigating tax risk. Unfortunately, such specialized risk management talent does not usually get outside the visibility of a tax department. Howell provided an example of a transactional risk where a company manufactured in one country and then sold the goods through a foreign affiliate in another country to a customer in a third country. “An Indian affiliate contracted with a customer in outside India. The Indian entity needed for the sale of a manufactured good in the US, but it was a drop shipment. The sale was between the Indian entity and a third-party for the delivery in a third country. Legally, the contract went from US to India to the third party in the third country. However, the flow of goods went in a different way; going directly from the US directly to the third country. Internally, the India subsidiary reported the third-party sale as income and then India was trying to deny the deduction for those goods because the goods never entered the territory of India. In other words, India is saying, okay, we’re going to tax the revenue, but we’re not going to let you deduct the cost of goods. And that’s because the goods never entered and left, were exported for the country. It was a tax risk, and it was huge.”
Typically, such a series of events would have no visibility to the corporate compliance function. Now imagine that same series of events where a tax dispute arises and goes on for literally years. Would compliance ever have visibility into it? What would happen if a bribe was paid, or other type of illegal conduct was involved to resolve it? Now you can perhaps begin to see the issue, more particularly if you consider the Lisa Monaco October 2021 speech about the Department of Justice (DOJ) reviewing all disputes and corporate culture.
This type of problem is amplified globally because of the differences in maturity of governmental tax functions across the globe. I asked Howell about this key difference. He said, “it’s the difference between night and day. I lived and worked in Canada, a very mature, sophisticated and developed tax regime, great environment for jurisprudence. And one of the things you learn once you go outside of the US to get rid of the idea of asking the question, well, this is different, why does it work that way? You focus on the rules, laws, and regulations.”
Howell then compared the maturity and sophistication of the tax regime in Canada with that in Russia. He said, “You compare it to some of the other jurisdictions that I’ve lived and worked in, most jurisdictions will all have a tax code, but the street rules or the rules of the jungle play, those are in play. You go into the remote parts of a country that’s five time zones away where it’s very cold and you’re summoned by a tax official in a very remote place, they want to audit you, you’re a multinational. You’re thinking in a traditional sense, this is very organized, there’s a tax law which is your taxable on profits, but the conversation goes something like the following, “Okay, how much tax are you going to pay me?” That’s the question that was asked by a tax official. And I said, “Well, it’s all calculated based on profits, you have the tax returns.” He said, “No, I want to know, how much are you going to pay me now to resolve this?” And he says, “I have a budget and I have to have some contributions.””
This means the tax function must establish the fact that you do not pay bribes, you do not make facilitating payments regarding tax issues, or any other types of payments and, as Howell noted, “you make it real clear. The reality is if you are doing business outside the US more than likely your organization will have complicated tax issues and while it may seem more expensive to deal with them above board, the bottom is you have to follow the Foreign Corrupt Practices Act (FCPA) so you do not put the company at risk, but you have to be strong and you have to be firm.”
Join us tomorrow when we discuss transfer pricing. 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.