The business world is in the midst of a major paradigm shift.
In addition to the pandemic, other forces – from climate change to declining public confidence to the unprecedented pace of technological disruption – pose new challenges for businesses and society itself.
With these challenges ahead, many companies are placing increased emphasis on corporate strategies that prioritize sustainable work practices and add long-term value not just for shareholders but for a wide range of stakeholders.
However, there is one critical problem that many companies overlook: taxes.
As Benjamin Franklin famously claimed, taxes are one of the certainties of life. Taxes play an important role in the financing of public services through to determining organizational and national competitiveness. During the pandemic, taxes (and tax authorities) have played a crucial role as fiscal pressures mount and the public demands more transparency. As a result, it would be a mistake for companies to consider taxes less important in their overall business strategies.
How should companies approach taxes to effectively increase long-term value and build a better working environment? First, they need to integrate tax strategy into their governance framework. Second, they need to make their tax strategy more flexible. Third, they need to work to ensure greater transparency and accountability.
Develop targeted governance
The first step in embedding tax strategy into a company’s strategy is to focus on governance. Global tax and finance leaders should make tax a part of every business unit – and give business leaders visibility into all tax functions.
This can be achieved by having a tax department report to a company’s board of directors through an audit committee. This helps executive teams ensure that their tax functions add value and mitigate risk.
Refreshing tax policy and strategy
Given the complex and ever-changing legal and political environment – a rate that has accelerated during the pandemic – multinational corporations face new challenges and important decisions every day. The global pandemic has changed everything, including tax law for deferrals and subsidies.
Changes in tax law are unlikely to slow in the wake of the pandemic, especially as countries are likely to focus again on increasing revenue through new taxes and sparking a new wave of legislation. The geopolitical situations are also evolving, prompting companies to examine their tax-sensitive supply chains and adjust their guidelines in order to achieve compliance while minimizing costs and risks.
In addition, sustainability is becoming a major priority for executives, and many governments are considering new carbon taxes and other tax measures to incentivize companies to reduce their carbon footprint and become greener.
All of these trends underscore why it’s time for tax departments to become more agile and responsive. Writing policies that cover key stages in the tax lifecycle is an important component of a well-functioning tax department, and companies that do this correctly can support their tax function as well as their broader long-term value goals.
Increase in transparency and reporting
As public concerns about income disparities increase, so does the drumbeat of stakeholders demanding greater transparency in the private sector. People want to know if companies are paying their “fair share” of taxes.
In response to this pressure, governments and tax authorities have begun to require larger amounts of public disclosures.
There was a time when tax matters were considered confidential. Today it is in the interests of business to advocate transparency. If they don’t, they can get mandates and laws that require them without the chance to shape it.
We saw some activity from NGOs and other stakeholders involved in public tax disclosure. In 2013, a group of business and civil society executives called “The B Team” established good governance principles, including new disclosures, and encouraged companies to adopt them.
More recently, the EY organization, along with a number of global organizations, has worked with the International Business Council of the World Economic Forum (WEF) to develop a framework for reporting on sustainable value creation. The group released a set of common metrics designed to measure the value the private sector offers in governance, people, planet and wealth. Taken together, these key figures are intended to promote transparency and provide interest groups with a comprehensive picture of the contributions made by companies to public revenues – and thus to public services.
The members of the WEF’s International Business Council are currently in the process of implementing these key figures and promoting their adoption by companies in order to make this framework universal. We have already seen some large companies voluntarily disclose more information about their global tax strategy and their tax risk control framework. As European companies accept this information, companies around the world could soon follow suit.
The future of taxes and long-term value
Given the substantial need for taxes to fund government operations, infrastructure and welfare programs, many of which are more critical in times of crisis, it is no surprise that we see growing interest in the tax contributions that companies make to the societies in which they work .
Looking ahead to 2021 and beyond, there is undoubtedly a need for transparency for the private sector, while control of the business world will only increase.
By making tax a central part of their strategy, companies can deliver better value over the long term and satisfy a larger segment of an increasingly diverse group of stakeholders by building a better and more prosperous future for their companies and their communities.