New tax landscape place major burdens on companies, says PwC report

Marcus Botha, PwC Associate Director and South Africa Leader of Tax Reporting & Strategy.

An expanding compliance burden, more audits and the potential for increased and double taxation are some of the challenges facing companies due to the rapidly evolving global tax landscape, says a PwC report.

The demand for greater tax transparency is reflected in the agendas and action plans of the Organisation for Economic Co-operation and Development (OECD), the G20, the European Union, and the United Nations and is placing more pressure on tax functions to better manage tax and related risks by strengthening the control environment that governs reporting processes.

Overall, the tax function will need to expand its core capabilities relating to risk management governance, data, processes and technology. In addition, due to the potential and business and reputational risks associated with many transparency initiatives, the tax function will need to be more engaged with the C-suite stakeholders.

The second report in PwC’s thought leadership series, Tax Function of the Future, explores predictions relating to global tax legislation and regulation, as well as risk management and how legislative and regulatory change will mandate transformation.

Marcus Botha, PwC Associate Director and South Africa Leader of Tax Reporting & Strategy, says: “Companies are voicing concern over how disclosures of wider tax and financial information on a country-by-country basis to tax authorities will be interpreted and potentially misused, including the broader implications of such information ending up in the public domain.”

PwC identifies the most immediate and sweeping initiative faced by tax functions to be the OECD’s Country-by-Country Reporting (CbCR) recommendation and template. CbCR will have a significant impact on the tax function and how it must engage with the wider organisation to be ready for initial compliance as well as meeting recurring annual obligations.

Botha points out that some African countries have already shown an interest in adopting CbCR. In South Africa the Davis Committee is of the view that country-by-country reporting should be mandatory for large multinational companies.

Changes to the tax function will also be shaped by other pending initiatives under the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan as well as unilateral government actions that could upend existing international tax norms, including the requirements by certain territories for the disclosure of a company’s tax strategy.

Company boards are engaging more regularly on tax matters reflecting the increased business risk associated with a company’s tax strategy. Along with gathering information for reporting purposes, additional processes will be required to analyse the potential business and reputational impacts in advance of making tax decisions. Businesses will need to be prepared to communicate tax-related information to governments, regulators, investors and the public.

According to the report, jurisdictions are already able to share detailed information and data with each other as transparency initiatives increase under automatic exchange of information agreements. This will also lead to an increase in tax disputes and taxpayer audit activity. To avoid this, taxpayers should be in a position to reconcile information and demonstrate that their documentation is accurate and consistent.

Botha adds: “The emphasis on tax control frameworks in assisting companies manage tax risk is gaining momentum globally. For example, the Australian Tax Office recently stated that the presence of a robust tax control framework will be taken into account when determining a company’s risk-assessment score.” Other recent developments include the Senior Accounting Officer regime in the UK. These changes enable tax authorities to give more attention to those taxpayers that are deemed higher risk. The OECD Forum on Tax Administration is also working on a guide for multinational enterprises and tax administrations. The guide will outline the essential features of a functional tax control framework and recommendation for the tax authorities as to how to approach its assessments.

Botha says that transparency and increased regulatory burdens should be catalysts for change. These trends, amongst others, are pushing companies to re-examine how they are managing their tax matters and ultimately how this is communicated to the market and stakeholders in annual and integrated reports. Global tax information reporting requirements, such as CbCR and similar transparency initiatives will grow significantly and will have a material effect on the operations of the organisation. Enhanced stakeholder scrutiny and reputational risk will compel companies to continuously re-evaluate their tax decisions.

“Companies need to think differently and strategically to address these risks while proactively engaging with their broader organisation and potentially the public,” says Botha. “Now is the time for companies to create a multi-year plan to expand their tax function capabilities, integrate new reporting requirements, and provide the business case for operational investments. This is further motivated by the recent OECD and G20 Code of Corporate Governance and potential tax governance requirements and guidance in the new King IV Code of Governance applicable to Africa.

“While risk and compliance obligations may be the main drivers for change, there may be several positive benefits to reap along the way – such as management having greater real-time business insight due to enhanced access to information. In addition, African Tax Administration interest in cooperative compliance model initiatives will essentially provide taxpayers with more certainty on tax matters for an exchange in increased transparency and enhanced reporting on tax. But this will necessitate a tax control framework in operation and companies being able to demonstrate that they are in control over tax.”