Why companies should consider a formal tax strategy

A new publication advises companies on how to manage their tax affairs more effectively, writes Fiona Reddan

SCANDALS SUCH as the collapse of major corporates Enron and Parmalat in 2002 and the subsequent introduction of new regulations such as Sarbanes-Oxley, took tax out of its "splendid isolation" and put it firmly on the agenda of company directors, journalists and regulators.

More recently, there has been a flurry of UK companies taking decisions to move their headquarters solely for tax reasons, including investment firm the Henderson Group and pharmaceuticals firm Shire, who have moved their tax bases to Ireland.

Nevertheless, despite the promotion of tax from the back room to the board room, companies remain reluctant to formalise their tax strategies, and while tax risk management is more frequently discussed at board level, in many companies it has yet to receive formal recognition.

Like their global counterparts, Irish corporates remain slow to formalise their tax function. Earlier this year, accountancy firm PricewaterhouseCoopers (PwC) revealed in its 2008 CEO Pulse survey that almost two thirds (63 per cent) of Irish companies have either an informal tax strategy or none at all, while only around half of Irish chief executive officers believe there is an awareness at senior management level of what is the full quantum of business taxes actually paid.

This statistic reflects a wider trend. In the UK, a recent survey also indicated that less than half of companies had a formal tax risk management strategy.

The benefits of a formal strategy, whereby tax is firmly on the agenda in the boardroom, are many, including according tax the prominence which it warrants.

Mark Redmond, chief executive of the Irish Taxation Institute, acknowledges that tax awareness is not perfect in Ireland, but believes there is now greater awareness at board level.

For those Irish companies which have yet to formalise their tax strategy, a new book from PwC, Tax Function Effectiveness, might be of interest. The book offers advice on how companies can manage an effective tax function in order to optimise tax outcomes, manage risk, improve transparency and contribute value.

It sets out four key criteria that a formalised tax function should adopt: 1) it should lead on all matters related to tax; 2) it should pursue a clear strategy; 3) it should be flexible to cope with change; and 4) it should be actively engaged with shareholders.

However, while it may be important for a very large corporation to have a formal strategy, it may not be appropriate for a smaller company to spend that amount of time and resources on one.

Indeed as an alternative to a formal strategy in firms where the in-house tax department has just one person, and the company therefore has to choose between hiring a high level "head of tax" or a person with detailed compliance and tax accounting skills, the PwC book recommends that the company hires the person with the higher level skill base, and uses consultants for compliance services.

The book also gives a useful insight into what the role of the head of tax should be, saying that one of the challenges for this person is to keep above the detail and ensure that they focus on the bigger picture.

"The danger is that they will become too focused on one particular area at the expense of the wider agenda," say the authors. Or as one finance director remarks: "I was looking for a head of tax who didn't know too much about tax."

Whereas before, tax technical skills were all that were required from tax professionals, "softer" business skills such as communication and teamwork and project management skills have now become crucial.

Indeed, the book goes so far as to say that tax technical skills are sometimes less important. For example, when dealing with the Revenue, it identifies negotiating skills as being more important.

A formal tax strategy can also help companies in the area of change risk management. Although Ireland's corporation tax rate appears to be set in stone - at least in the short-term - as public finances continue to deteriorate, other tax rates are likely to be changed significantly.

And while previously budget changes meant tax cuts, this has all changed. One area that companies will need to examine in the months ahead is the impact of the €200 car parking charge, and how this can be implemented appropriately.

For companies making changes to their tax strategies, Liam Lynch, a partner with KPMG, stresses that decisions must be taken by the board, "because no one else can set strategy and tone for the group".

As for Mark Redmond, keeping on top of tax is always important because of the severe financial and reputational impact it can have on companies if they don't.

He says it is particularly so in the current environment, given that many companies are under cash flow pressure.

For companies who may get into tax arrears, he urges them to have a dialogue with the Revenue, and not to "put your head in the sand".