The business world is in the midst of a major paradigm shift.
In addition to the pandemic, other forces – from climate change and declining public trust, to the unprecedented pace of technological disruption – are presenting new challenges to businesses, and society itself.
Faced with these imminent challenges, many businesses are placing an increased emphasis on corporate strategies that prioritise sustainable work practices and drive long-term value, not just for shareholders – but for a wide range of stakeholders.
However, there is one crucial issue that many businesses overlook: tax.
As Benjamin Franklin famously asserted, taxes are one of life’s certainties. Taxes are instrumental in everything from funding public services to determining organisational and national competitiveness. Throughout the pandemic, taxes (and tax authorities) have played a critical role as fiscal pressures grow and as the public demands greater transparency. It would subsequently be a mistake for companies to treat tax as a lesser priority in their overall corporate strategies.
So, how should businesses address tax to effectively drive long-term value and build a better working world? First, they must integrate tax strategy into their governance frameworks. Second, they must make their tax strategy more nimble. And third, they must work to ensure greater transparency and accountability.
Developing purpose-driven governance
The first step to embedding tax strategy into a company’s strategy is to focus on governance. Global heads of tax and chief financial officers 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 out to a company’s board of directors through an audit committee. This helps leadership teams ensure their tax functions add value and mitigate any risks.
Refreshing tax policy and strategy
Given the complex and ever-changing legislative and policy environment – a rate that has accelerated during the pandemic – multinational companies face new challenges and important decisions daily. The global pandemic has prompted changes to everything including tax law for deferrals and subsidies.
Changes in tax law are not likely to slow in the wake of the pandemic, particularly as countries are expected to renew their focus on raising revenue through new taxes, triggering a fresh wave of legislation. Geopolitical situations are also continuing to evolve, causing companies to examine their tax-sensitive supply chains and adjust their policies to achieve compliance while mitigating cost and risk.
Furthermore, sustainability is becoming a significant priority for business leaders, and many governments are looking at new carbon taxes and other tax measures to incentivise businesses to reduce their carbon footprint and become more environmentally friendly.
All these trends underscore why it’s time for tax departments to become more agile and responsive. Writing policies that address key stages of the tax life cycle are a critical component of a well-functioning tax department, and companies that get this right are able to support their tax function, and also their broader long-term value objectives.
Increasing transparency and reporting
As public concern over income inequality grows, so too does the drumbeat of stakeholders demanding more transparency in the private sector. People want to know whether companies are paying their “fair share” in taxes.
In response to these pressures, governments and tax authorities have begun to mandate greater amounts of public disclosures.
There was a time when tax matters were assumed to be confidential. But today, it’s in the business community’s interest to commit to transparency. If they don’t, they may face mandates and legislation that demand it, without any chance to shape it.
We’ve seen some activity from NGOs and other interest groups, which have taken up the cause of public tax disclosure. In 2013, a group of business and civil society leaders called “The B Team” laid out principles for responsible tax, including new disclosures, and invited companies to adopt them.
More recently, the EY organisation, along with a number of global organisations, worked with the World Economic Forum’s (WEF) International Business Council to develop a framework for reporting on sustainable value creation. The group released a set of common metrics designed to measure the value that the private sector provides in the fields of governance, people, planet and prosperity. Taken together, these metrics are intended to promote transparency and give stakeholders a full picture of businesses’ contributions to public revenues – and, therefore, public services.
Right now, members of WEF’s International Business Council are in the process of implementing these metrics and encouraging adoption by companies, with the goal of making this framework universal. Already, we’re seeing some major companies voluntarily disclose more information about their global tax strategy and their tax risk-control framework. As European companies embrace these disclosures, businesses around the world might soon follow.
The future of tax and long-term value
Given the essential need for taxes to fund government operations, infrastructure and social benefit programs – many of which are more critical in times of crisis – it’s no surprise that we’ve seen a growing interest in the tax contributions businesses make to the societies in which they operate.
As we look ahead in 2021 and beyond, there is no doubt demand for private sector transparency, while scrutiny of the business community will only increase.
If companies make tax a central part of their strategy, they will be better able to deliver long-term value and satisfy a larger portion of an increasingly diverse pie of stakeholders by building a better, more prosperous future for their businesses and their communities.