Economic downturn highlights pressure on tax departments to manage risk and standardise approach - KPMG survey

Leading companies point the way to responsible, standardised tax management Tax controversy expected to remain high, but SA bucks the global trend

While governments globally are seeking increased tax revenues, improved global cooperation, the reduction of tax avoidance and evasion and improvements to the efficiency and effectiveness of their approaches to tax audit controversies, a new survey from KPMG International shows that those companies who get the basics right are better able to manage tax risk and create value.

The survey elicited responses from 40 South African corporate tax departments with other responses drawn from 850 companies across 19 countries in Europe, the Asia-Pacific region and the Americas, with South Africa as the only African representative. Half the South African respondents reported a turnover of between US$200million-US$499million, while ten declared turnover of US$1billion –US$5billion. Four respondents reported a turnover of over US$5billion.

Given the much expanded public deficit and tax authorities trying to maximise revenue, increased tax controversy seems likely and it is expected that there will be more litigation and controversy in most countries. South Africa, however, showed stabilisation in controversy with tax authorities with controversy activity declining to 0 in 43 percent of the sample surveyed in the period under review.

Most global survey respondents reported some level of controversy activity with tax authorities – the greatest areas of dispute involving country-based (federal) corporate income taxes (33 percent) and indirect taxes (31 percent). The pattern of controversy with authorities varies across the world. Controversy levels are relatively high in the United States, Brazil, the United Kingdom, Canada and Singapore, with very large companies - those with revenues of US $5 billion or more - most likely to be the subject of investigations. In South Africa, however, country-based income tax controversies accounted for 25 percent, while indirect tax disputes accounted for 33 percent of disputes with authorities.

While most respondents believe that tax controversy has not escalated over the past year, there are some country differences. Indirect taxes in Canada, local taxes in the United States, and corporate income tax in Hong Kong serve as the primary reason for increased controversy within those countries. The South African sample reported a 0 percent increase in the number of controversy activities in 43 percent of the companies surveyed, however, across all the surveyed issues. Trends in controversy activities for South Africa also point to an average of a 65 percent decrease.

“An encouraging finding of the survey has been the levels of compliance being targeted by South African companies,” said Alan Field, Managing Director of Tax & Legal at KPMG in South Africa. “Over 88 percent of companies are focusing on tax return compliance and the same percentage is interested in accurate and timely reporting. This shows that the South African corporate sector is serious about risk and is taking on board the recommendation of King Three [Recommendations on Corporate Governance] and the issues raised by the new Companies Act.”

The global findings also revealed that tax risk management and governance remained an integral component of the tax agenda. The majority of respondents (76 percent) rated managing tax risk a top priority over the next 12 months, and nearly a quarter (23 percent) reported it has having increased in importance in the past 12 months. South African results differ markedly from the global findings, where 93 percent of respondents reported that their tax strategies are consistent with their overall business strategy and a further 93 percent indicated that their companies have risk management committees.

In South Africa, however, it also emerged that standardisation of the tax practice has been a priority for over 83 percent of the companies surveyed, with levels of consistency reached at over 65 percent in the area of reporting compliance.

“Yet the challenge is about how to do more with less,” says Field. “Companies are being asked to respond to the demand for better tax risk management, provide more proactive and timeous support to the business, and prepare for greater scrutiny by tax authorities while dealing with the resource constraints affecting their companies in difficult economic times.”

While there may be different drivers for change, the survey data suggests that tax functions that perform well on standardisation and risk also perform well on supporting the business and value added activities. High performers recognise that sustained performance improvement is about synergies, not trade-offs. Indeed, tax functions in the top tier of good practices are more likely to be highly standardised in tax processes, structure, and reporting lines. Of the high performing tax functions, 89 percent indicate they have global standards for their tax policies and procedures, compared with 25 percent of the lowest tier.

“Standardised processes help deliver efficiency and free up valuable time necessary for business support and effective tax planning. It also helps facilitate a more complete and accurate understanding and communication of tax matters across global organisations, which in turn can add value by improving timeliness and transparency and reducing the risk of tax controversy activity, said Field.”

In the quest to balance the risk versus value equation, those who are successful reveal what may be key hallmarks for others to learn. For example, in addition to focusing on governance and risk, high-performing tax departments were also able to focus on providing value in a turbulent economy. For leading tax functions, participation and integration with wider business initiatives appears to be an important goal—with high-performing tax functions placing a high value on integration with the business (95 percent) compared with the lowest quartile (77 percent).

To help achieve and maintain such a balance, KPMG highlights some of the building blocks that can be put in place:

· The strategic goals and objectives of the tax function need to be clearly aligned with those of the wider organisation so there is a common purpose.

· Tax functions need to understand the aspirations and constraints of relevant stakeholders and communicate with them effectively in order to help achieve their goals—this includes the capability to influence stakeholders.

· The right formula is needed. Tax is complex and requires the careful judgment of trained professionals. Effective tax management needs the right people doing the right things. Those people need the right skills, the right resources, and the right reward.