CEOs see need for urgent tax reform

Almost two-thirds of CEOs globally say the international tax system is in urgent need of reform and 70% say the impact of tax on their company’s growth is among their top concerns.

 

In a new study, ‘Tax strategy and corporate reputation: Balancing trust and growth,’ PwC analyses CEO attitudes towards policy issues and offers companies an approach for creating coherent tax strategy. The findings form part of PwC’s 17th Annual Global CEO Survey. The global survey results were based on interviews with 1,344 CEOs from 68 countries. In addition, 105 interviews were held with CEOs from South Africa.

 

The study finds that tax strategy and policies are best dealt with by the board of directors and should include consideration of such issues as impact on stakeholders, transparency, governance and controls and communications. It also examines the data on the impact of rising taxes on business, CEO opinions on tax transparency and the prospects for international tax reform.

Paul de Chalain, PwC Head of Tax Services for Africa, says: "CEOs have a difficult balancing act ahead. The increasing tax burden is a serious concern for many, and changing public attitudes to corporate taxation cannot be ignored. Tax policies, even if perfectly legal, can present a serious risk to corporate reputation.

"PwC’s 2014 17th Global Annual CEO Survey clearly shows that CEOs recognise the risks associated with tax policy and are actively looking for ways to help stakeholders understand their total tax contribution to society.”

For CEOs, tax reform is the single biggest issue that needs to be addressed; 65% said that the international tax system doesn’t meet the needs of multinationals. However, just 27% feel a consensus on tax reform can be reached among the G20 countries in the near future.

As CEOs expand their operations at home and abroad, the tax burden is seen as a major barrier to growth; 70% of global CEOs (Africa:67%) cite the impact of tax and its potential to affect growth as a concern, compared with 62% in the 2013 report and 55% in 2012.

 

The survey shows that concerns on tax will inevitably take on different forms in different countries. For example, in the US the need for domestic tax reform is high on the domestic agenda while for other CEOs the main concern is that individual governments may take unilateral action to address what is commonly termed base erosion and profit shifting (BEPS).

 

There were also marked differences in the response from sector to sector. A significant percentage of CEOs (83%) in the energy and mining sectors, which are often subject to windfall and environmental taxes, felt that the increasing tax burden was a barrier to growth, compared with 59% of CEOs in the technology sector.

 

Tax is also a factor when CEOs make decisions about where to operate. Overall, 63% of global CEOs (Africa: 65%) say that tax policy and the competitiveness of local tax regimes are key factors in decisions about where to operate their business. "The tax regime means much more than solely direct tax on corporate profits – a typical multinational will pay a range of taxes including employment and benefits taxes, property taxes, indirect taxes, such as VAT and sales taxes, and a host of other direct and indirect taxes and tax costs,” adds de Chalain. Mining companies for example, must follow available resources and 57% of CEOs in that sector took the tax regime into account.

 

CEOs are also extremely aware of the need to rebuild the trust between business and stakeholders. Globally, 49% of CEOs said that a lack of trust in business hampers their prospects for growth, an increase from 37% last year. There were some regional and sector variations – CEOs in Africa (74% agreed) and the Middle East (69% agreed) were most likely to name trust as a problem, as were CEOs in financial services (59% agreed).

 

De Chalain says: "A number of companies are recognising the reputational impact of the decisions they make on tax, elevating tax strategy to its rightful place as a board issue and starting to think through whether and how they can improve public perception by being ready to provide meaningful information on tax in a way that people can understand.”

Globally, 65% of CEOs agree (South Africa: 53%) that the need for tax reform is pressing. According to the report, CEOs contend that the international tax system is outdated and doesn’t meet the needs of multinationals. Furthermore, CEOs have little confidence that their own government or the international community will succeed in making the tax reforms they need. Just 21% of CEOs globally (Africa: 22%) felt that their government had been effective in creating a more internationally competitive and efficient tax system.

 

"The reality is that tax is a cost as well as an obligation. A well thought out tax strategy balances business cost pressures, national fiscal needs and international tax norms in a sustainable way. It cannot be solely about a race to the minimum level of taxes,” concludes de Chalain.