Businesses must augment tax transparency readiness to mitigate increasing reputation risk

The FINANCIAL — Tax transparency is becoming the new norm as the OECD, European Commission and national governments demand more data from businesses. However, many companies do not have systems or resources in place to meet new requirements, according to EY’s report, A new mountain to climb: tax reputation risk, growing transparency demands and the importance of data readiness.

The report is the third instalment of the 2014-15 Tax risk and controversy survey series, which surveyed 962 tax and finance executives in 27 jurisdictions.

Reputation risk elevated in the boardroom

Amid increasing scrutiny of business’ tax arrangements by government and other groups, companies are more focused than ever on tax risk and controversy, with 83% reporting that they regularly brief the CEO or CFO about the issue. For many tax professionals normally accustomed to primary focus on meeting legal and regulatory requirements, this heightened scrutiny is a new and unfamiliar challenge.

The global drive for transparency is one key outcome of the debate on what constitutes a “fair share” of tax, and companies now must assume that tax data reported in one country will be available to tax administrators in others, particularly given the advent of the OECD’s Base Erosion and Profit Shifting (BEPS) Action 131. Notably, 94% of the largest companies having an opinion on the matter interviewed think that global disclosure and transparency requirements will continue to grow in the next two years. Not surprisingly, 71% of all respondents expressing an opinion said that they would need additional resources in order to gather and provide the information required.

Jay Nibbe, EY’s Global Vice Chair of Tax, says:

“We are at a critical stage as the global tax environment evolves. Increasing transparency readiness presents an opportunity not only to comply with new disclosure demands but also to proactively work to mitigate reputation risk. Getting prepared will require some additional investment in technology, data extraction capabilities, and new skills in people resources. It also involves increased awareness on how you think about your tax position, and how it could be perceived by a wide range of stakeholders.”

Transparency readiness can mitigate reputation risk

Greater transparency has the potential to provide benefits to companies, including reducing the number of taxpayer-authority disputes and helping to foster cooperative compliance relationships. But to meet new demands, tax professionals may need to change the way they report and track information related to the taxes they pay, and most certainly a need to re-align their IT systems to make sure that data can be collated quickly and easily.

The survey sets out the steps companies can take now to enable transparency readiness and thereby also prepare the data that can help them manage reputation risk:

Closely monitor public interest and regulatory developments to better understand the likelihood of new disclosure requirements
Develop and sustain the ability to source accurate data, in the right format and in a timely manner
Develop the deeper insights that allow them to present a “total tax picture” and to integrate what they learn into their tax risk management strategy