Sustainability is one of the biggest strategic issues facing companies today and this also extends to a corporate’s tax affairs. So what is ‘sustainable tax’, why is it so important and what are the business benefits of a sustainable tax strategy? In this Q&A with Aude Delechat-Patel, Head of International Corporate Tax Disputes at Mazars and sustainable tax expert, we explore the issue, the challenges and why the matter should be at the top of corporate agendas.
Q: What does tax sustainability mean?
A: Tax sustainability is about corporates adopting a long-term strategy that takes into account all stakeholders - employees, society, customers, investors and the authorities - and does not focus solely on shareholders. In other words, a company should aim at delivering value to all stakeholders, across all jurisdictions in which it operates.
Now more than ever, and increasingly so as we emerge from the pandemic, corporates must achieve an equilibrium between, on the one hand, standing up to ferocious scrutiny from the tax authorities, and on the other hand, doing their fair share to be an integral part of society (ie. pay the right amount of tax and be tax compliant). Tax disputes resolution and good tax governance play essential roles in striking this balance.
Responsible tax planning means welcoming transparency and being ready to demonstrate accountability and answering questions on the structuring of tax affairs, globally.
Q: So that means making an appropriate contribution to the societies in which companies operate?
A: Yes. Companies ought to be and be seen to be responsible taxpayers. It’s linked to the fact that a new ‘social contract’ is being drafted between corporates and their different stakeholders.
Q: Why is it important to address the issues around tax sustainability?
A: Tax should no longer be considered just an operating cost. Instead, tax can be viewed as an investment in the jurisdictions where a company operates: a corporate can achieve this by paying the right amount of tax and complying with all its legislative and regulatory requirements. In doing so, corporates maximise their chance to operate in these jurisdictions in the long term. In other words, corporates become sustainable from a tax point of view.
Transparency is the new norm in both domestic and international tax and corporates are being held to a higher level of accountability.
Q: What expectations are there on tax sustainability?
A: Boards of Directors must come to terms with what tax transparency means for their companies. Regulators and tax authorities globally are expecting and encouraging a change in behaviour and the message has to come from the top.
Tax transparency results in greater opportunity for scrutiny for both historic and future periods. Apart from the scrutiny from the tax authorities, stakeholders expect corporates to play their part in forging a fairer world and a tax system with a level playing field. These stakeholders are rendering the corporates accountable.
Tax governance should be viewed as part of the “G” in ESG. Boards will have to answer questions about their commercial rationale and plans, along with the tax consequences of these. Tax arises as result of the commercial business strategies of an organisation. Tax ought not to be the reason why a business does anything.
One may go a step further in expecting boards to be ready and willing to discuss their tax affairs unprompted and transparently.
Q: What are the risks if corporates fail to address tax sustainability?
A: Reputational risk springs to mind, which could adversely impact financial results and damage a corporate’s growth trajectory.
As a stakeholder, society has a vested interest in the actions of corporates. Correspondingly, it is not uncommon for tax to make the front page of newspapers.
Recently, global papers carried news of the “ground-breaking tax deal for the digital age” agreed by 136 countries: a minimum corporate tax rate of 15% to be imposed by 2023 on multinational enterprises. This equates to more than USD125bn of profit from the world’s largest and most profitable multi-national groups being reallocated across countries around the world.
That represents a significant amount of money for governments to spend on their education and health care systems, infrastructures, public services and other areas.
The press also covers financial scandals, like the recent Pandora Papers. One focus of these allegations is the opacity of the tax affairs of a select few taxpayers (individuals and corporates) which creates an unlevelled, unfair tax playing field. The public is now acutely aware of taxation and is eager to see unfairness - real or perceived - being addressed and rectified.
Q: What are the challenges in implementing sustainable tax?
A: The first challenge is for organisations to understand and agree what ‘good’ looks like with regard to sustainable taxation. This gives rise to the age-old debate of tax evasion vs tax avoidance. Once addressed, the theory behind the concept of sustainable taxation is easily grasped. The cookie crumbles when it comes to practical (eg. what exactly needs to be done) and pragmatic solutions to render organisations becoming sustainable from a tax viewpoint.
An initial step is for leaders to look at modelling their tax functions, eg. what needs to be done by whom, when, where and how. For the tax function to work efficiently it often means the internal teams of an organisation and their external adviser work together seamlessly. Also, the use of a tax governance matrix has proven a very effective tool in helping companies understand and embrace their tax affairs and obligations.
Another challenge faced by organisations is to respond to the scrutiny from the tax authorities with regard to their past. The only way to address this is via dispute resolution, which is needed because a fair trial is non-negotiable.
Q: Should companies be preparing for scrutiny?
A: Absolutely. It’s not ‘if’ scrutiny is coming, it’s ‘when’. This is where good tax governance is a fantastic dispute prevention tool, to be used in addition to disputes resolution mechanisms.
It is worth bearing in mind that good tax governance may not eliminate the risk of scrutiny entirely but it will assist in answering questions and render the scrutiny process smoother.
Q: How does a company know if it is and is being seen as being sustainable taxpayer?
A: It is a journey. The gold standard is to be in a place where the CFO or head of tax can confidently answer questions raised by tax authorities and explain the decisions taken by the Board.
I see my role as a trusted advisor to my clients, helping them understand and navigate the tax complexities and assisting them along this journey.
Q: In summary, how important is it to get to grips with tax sustainability?
A: With 136 countries representing over 90% of the global GDP coming together to agree a ‘first of kind’ global solution to a global issue, it is of paramount importance. One could say it is not a matter of choice anymore. We are all in this together.