Being transparent on tax is the “tip of the iceberg"

For today’s tax leaders to remain relevant, they need to continuously reinvent their approach to tax, rethink how tax fits into a complex operating environment, and be more transformative in their approach to tax, their tax operations and their tax narrative.

A fundamental framework to demonstrate a responsible and considerate approach to tax

In our Building public trust through tax reporting publications, we explore trends in voluntary and mandatory tax disclosure and tax within the context of value creation.

A company’s approach to tax has an impact, both externally and internally. Looking outward, tax is a matter of public interest. In addition to raising revenues to fund public services, governments also use tax as a tool to achieve a range of goals. These include influencing behaviour; fostering investment, growth and jobs; and pricing externalities. Tax is also a reflection of a business's significant contribution to society – often its largest one – and, therefore, of critical importance in delivering on the business’s sustainability goals.

Looking inward, tax provides an opportunity to create lasting value throughout the organisation. Organisations need visibility, transparency, and insights-driven participation from tax throughout the business value chain. Tax operations need to be adaptable to changes in the tax and business landscapes. Agility enables tax professionals to work smarter and faster by aligning leading practices and emerging technologies, freeing capacity to focus on insights. Armed with the right information at the right time, tax functions can move from being task focused to becoming value-adding business partners that facilitate a proactive planning and analysis environment.

However, to achieve this state of lasting value creation, we need to constantly go back to the basics. An essential element of building trust and transparency among different stakeholder groups is a robust framework that governs tax and an understanding of how tax fits not only into the business model but also into the operating and technology model that enables it. The mindset change is significant, but necessary.

Tax transparency is often considered to be the 'tip of the iceberg', as it represents only what is visible to the reader. What lies beneath is the complex reality of the tax function, which not only requires a robust framework that governs tax but also demands an understanding of the operating and technology model which enables it – and, ultimately, an understanding of how tax fits into the bigger business model.

The quality of an organisation’s framework to govern tax is an important element in building trust by showing governments and other stakeholders that businesses take their obligations seriously. Stakeholders often look at how businesses manage their tax affairs as an early indicator of how they might manage other aspects of their sustainability agenda and their business in general. Understanding and defining good governance can be a complex task. There is, however, no universal tax governance standard, as enterprises vary greatly in terms of their operations, jurisdictions, and business organisations. Nevertheless, we have observed an increasing wealth of best practices emerging from the experiences of large companies as they strive to establish robust tax governance frameworks.

Slightly more than half of the business leaders polled in our Global CEO Survey believe that changes in regulation will impact profitability in their industry over the next ten years. Tax-related rules will be a big part of this and will create a whole new set of challenges – challenges that companies won’t be able to address without a solid tax governance framework.

Publications by The B Team and the European Business Tax Forum provide some excellent examples that showcase best practices for good tax governance. The OECD has also been highly engaged, providing guidance on building better tax control frameworks.

A robust framework to govern tax is crucial for managing the tax affairs within a group. It allocates accountability for the design, implementation, and effectiveness of all measures, activities, and processes related to tax within the organisation. It places tax matters under the purview of company leadership, including the CFO, CEO, audit committee, risk committee, board of directors, and other executive managers.

In this blog we look at what we consider to be the imperative elements of a framework to govern tax.

_{Diagram 1: A framework to govern tax}

Reaping the benefits

A framework to govern tax requires the establishment of tax governance structures, a sustainable tax strategy, tax risk management, and robust tax operations. Such a framework should allow for performance management and regular assurance to ensure that what was designed is implemented and is operating effectively.

Failing to prioritise a formal approach to tax governance significantly increases the probability of exposure to unnecessary financial and reputational risk. It can also lead to missed opportunities to enhance the status and influence of tax across the organisation and externally.

It is worth noting that according to the Global Reporting Initiative, having robust governance, control, and risk management systems in place for tax can be an indication that the reported approach to tax and tax strategy is well embedded in an organisation and that the organisation is effectively monitoring its compliance obligations. Reporting this information reassures stakeholders that the organisation’s practices reflect the statements it has made about its approach to tax in its tax strategy or equivalent documents.

Once the framework to govern tax is in place, the organisation can craft a credible narrative for taxes and how they are being managed. This will transparently demonstrate its intention to do the right thing, act responsibly and build public trust.

Tax governance

Governance extends beyond mere compliance and disclosure. The focus should be on maintaining a responsible business environment through effective performance, ethical behaviour and responsible stewardship. Leading companies view tax governance as a business imperative. And while the tone at the top makes a difference, as with many things, the real work is in the details – so how can boards and executive leadership fulfil their critical role?

Tax is an essential part of corporate responsibility and corporate governance. Tax should be overseen by a governance body. This means that the board of directors of an organisation should have a firm grasp of the company’s tax position as one of its oversight areas, as well as having a strong understanding of the organisation's approach to tax and key tax risk areas.

Leadership, sponsorship, oversight, and delegation structures should be formalised for tax.

A tone of tax governance from the top will grant the head of tax the power and authority to operate. Furthermore, it will empower the tax function to actively manage taxes. For example, in a multinational group, a tax strategy or tax policy that is formally approved by the board of directors can only be successfully rolled out and embedded in the day-to-day operations of the business if it has the appropriate support from, for example, the group chief financial officer as well as local finance directors. In the same scenario, a successful roll-out would need support from the audit committee (and internal audit teams), who would take ultimate responsibility for monitoring its effective execution.

Tax governance should be aligned to legal entity structures, business segments and value chains, even though this may be complex.

Managing taxes begins with the basics: understanding how the group is organised, what the functional reporting lines are, and how tax and finance interact with other parts of the business. Relationships are key. We often underestimate the importance of clearly defining and formalising roles and responsibilities across the organisation in relation to tax. The fact of the matter is that the responsibility for managing tax risk remains where the tax risk originates, which is often at an operational level. Given the changing tax environment and resulting increases in risk and uncertainty, it is essential that there should be strong and formal communication, proper approvals and regular interaction between the operational teams and the company’s tax team and leadership. Competing priorities can create significant risk.

Businesses are expected to take a comprehensive approach to managing their tax affairs.

As the global landscape continues to evolve at an unprecedented pace, companies must be agile, adaptable, and willing to challenge the conventional approach to redefine what constitutes "business as usual". Those that successfully rethink and reinvent formalised tax governance structures for compliance, decision-making, reporting, oversight, and monitoring at the core of their operations will be better positioned to be mindful of not only the commercial implications of tax but also its potential effect on their stakeholders today and over time.

A sustainable tax strategy

In order to meet the demands and expectations of an increasing number of stakeholders, each with their own unique perspective, you must have a trustworthy tax narrative. Building trust with stakeholders through engagement, communicating a clear strategy, and being transparent about progress can create resilient stakeholder relationships, attract and retain talent, build brand strength, drive revenue, and reduce capital costs.

Demonstrating value creation through the tax strategy

Our market experience has taught us that a strategy that is not sustainable over time is unlikely to be the most effective way to add value.

When designing a company's sustainability strategy, the tax function is usually not initially involved. However, the increasing importance of environmental taxes and carbon pricing and their impact on product price and margin will likely transform the tax function into a key player in sustainability strategy, value chain, and business discussions.

The board should identify opportunities to optimise the tax strategy to align with the organisation’s purpose and support its sustainability goals while ensuring that it meets stakeholder expectations. This may involve considering the costs of green taxes, leveraging available incentives, evaluating regulatory exposure and the associated reporting obligations, and effectively managing risks. The tax function should view sustainability as an opportunity to transform itself and a chance to evolve and enhance its role as a strategic business partner to management and operations.

Be mindful of boilerplate language

Designing a tax strategy is often a significant challenge for tax leaders. The head of tax must collaborate with the executive team and other key stakeholders to establish concrete tax objectives that define the vision and mandate for the tax function. This includes outlining key tax principles – a coherent approach that tax can effectively communicate to the wider business and other stakeholders.

Connecting your tax strategy with daily organisational activities can be challenging. However, vague, boilerplate, or generic language reduces the usefulness of decision-making around tax strategy and can have a negative commercial and reputational impact on the business.

Implementation with impact

While it is widely recognised that an organisation’s governance body is responsible for regularly reviewing and approving its tax strategy, this is just one step in the process.

Implementing a robust tax strategy requires collaboration not only within the tax function but also with executive leadership and other key functions to ensure effective execution. This approach empowers the head of tax with the authority needed for operational effectiveness and enables proactive tax management.

The tax function has the ability to influence and impact positive change throughout the organisation. By engaging with the business – educating, supporting, and presenting the tax strategy while collaborating across business functions – it can serve as a catalyst for making strategic but tax-informed business decisions. This creates a culture of tax awareness and establishes a foundation for other tax governance initiatives.

A sustainable tax strategy entails a responsible tax approach that aligns with the business's strategy, vision, and mission. It is embedded in the business, with strong support and commitment from leadership, a clear mandate on tax matters, and key tax principles approved and reviewed by the governance body.

Tax risk management

A consistent approach to tax risk identification, mitigation, and management is required to support reliable and quick decision-making. This involves ensuring that all significant organisational decisions are made with a comprehensive understanding of the associated tax implications.

All transactions entered into by an enterprise can somehow affect its tax position. Although tax will not be the sole determining factor in any business decision, it is necessary to ensure full compliance with legislation. This means that the tax function should have a clear lens and be able to govern the tax risk originating from the full range of the organisation’s activities. Ideally, it should provide real-time insights for strategic decisions, facilitate decision-making without hindering daily operations, and establish clear links between business decisions and tax risk drivers.

It is key for the tax function to shift its tax risk management efforts from being primarily defensive to becoming increasingly strategic and proactive in nature – determining the factors driving tax risk and potential vulnerabilities and acting on them in a well-coordinated manner.

Although there is no specific guide for tax risk management that applies to all organisations, a company can ensure that it uses accepted best practice risk management methodologies that achieve the objective while also being sustainable, appropriate, and applicable.

Tax policy – a guideline for execution of the mandate as determined in the tax strategy

Leadership can endorse a well-executed tax policy as a valuable and practical tool for aligning the accepted enterprise-wide risk management methodology in the tax context. This policy can help achieve the objectives outlined in the tax strategy by:

Formalising the organisation's approach to tax;
Setting risk appetite and parameters;
Defining and classifying tax risks;
Providing guidance on identifying tax risks, analysing their potential impact and introducing appropriate safeguards for mitigation;
Coordinating information flows and authorisation levels among various stakeholders;
Determining what should be reported as well as when, how and to whom it should be reported; and
Mapping roles and responsibilities from both a top-down and a bottom-up perspective.

A tax control framework operationalises the principles set out in the tax policy.

Key tax controls, procedures, checks, and reviews are useful to embed a culture of tax risk awareness and are effective in ensuring appropriate standards of behaviour throughout the organisation. Implementation and awareness across the entire organisation, coupled with diligent execution, appropriate monitoring, and periodic critical review, give the tax executive and those in charge of oversight a reasonable sense of assurance in managing tax risk. Compliance with the tax policy and controls should be monitored on a regular basis.

Tax risk management remains a continuous process of enhancement and improvement. In our next edition, we explore the tax operating model, ensuring consistent delivery of high-quality services to the business and allowing the tax function to bring about positive change across the organisation.

Tax operations

A clear tax operating model ensures consistent delivery of high-quality services to the business.

In the ever-evolving business landscape, navigating the expanding agenda of tax leadership is complex. Strategies for success are no longer confined to compliance and reporting; they now encompass a broad range of challenges, including talent shortages, digital transformation, economic and geopolitical uncertainties, evolving tax policies, and increased sustainability requirements.

The efficiency challenge in tax operations

Tax operations need to be optimised to navigate the complexity of daily business, connect the dots to determine the tax consequences, and meet statutory obligations. To remain effective and relevant, tax operations must explore innovative approaches to enhance their workforce, improve processes, and collaborate with external entities to stay ahead of the curve.

A key finding from our Global CEO Survey highlights a significant concern: inefficiencies in routine activities across companies. Tasks like decision-making, attending meetings, and managing emails consume about 40% of the time spent and are often viewed as unproductive. In the context of tax operations, the focus is often on reducing costs and improving efficiency while responding to legislative changes. However, the potential for value creation extends beyond external demands. A deep dive into the inner workings of the tax function can uncover opportunities to address daily challenges, leading to a more satisfied and motivated workforce, which in turn enhances performance and contributions.

By integrating tax considerations into strategic business planning, the tax department can contribute to enhanced returns and ensure that business outcomes are appropriately measured on an after-tax basis.

Activating tax talent is a significant area of value creation for organisations. Professionals in the tax field, whether in-house or outsourced, require a diverse skill set across various domains, including data analytics, risk and governance, technology, and operations. Beyond tax-specific expertise, tax leaders and specialists need to develop a broader skill set to navigate the evolving landscape. Upskilling is essential to keep pace with changing requirements and technological advancements. Tax teams should prioritise both technical and soft skills, fostering effective business partnering and stakeholder management. Continuity and succession planning are crucial for building and maintaining a strong tax team. Strategies such as outsourcing, co-sourcing, and collaboration with other functions can help tackle talent challenges and enhance organisational value. Additionally, strategically locating personnel ensures tax efficiency and operational effectiveness.

In today’s business environment, it is essential for the tax function to be integrated into every stage of the business lifecycle. This integration helps prevent unexpected tax-related issues and ensures that tax considerations are factored into business decisions from the outset.

Establishing structured procedures and guidelines for incorporating tax into decision-making processes is crucial for consistency and efficiency. Proper documentation of these processes not only facilitates smoother internal and external audits but also clearly defines the scope and responsibilities of the tax department, covering areas such as risk management, compliance, technical support, governance, and reporting. Simplifying and optimising compliance processes enhances transparency and efficiency, while regular testing of tax risk management approaches ensures readiness for discussions on tax significance.

Exploring alternative processes for delivering tax functions is another critical consideration. Flexible and scalable solutions, such as captive shared services, third-party co-sourcing or outsourcing, and execution-managed services, can help companies manage the increasing workload associated with tax management, reporting, and compliance. These alternatives can increase productivity, reduce fixed expenses, and allow in-house teams to focus more on business analysis and support. Additionally, they provide the capacity to adapt to changes in tax regulations and continue investing in cutting-edge technology.

A clear understanding of data requirements is essential for fulfilling reporting and compliance obligations. Centralised data platforms are becoming a priority for tax functions, providing easy access to crucial analytical capabilities and ensuring that numbers published are consistent with day-to-day reality. Establishing a single source of truth with well-defined parameters for structured data collection is the foundation of effective tax data management. Systematic processes for consistent data gathering, supported by robust data governance frameworks and controls, are necessary to ensure data quality.

Activating data involves preparing it for filing across jurisdictions and transforming it from accounting records to meet compliance standards. Reporting goes beyond numbers; it involves crafting a compelling narrative that considers stakeholder interpretations, consistency, and potential risks. Tax data should be recognised as a valuable resource for effective business planning, with visualisation tools aiding in risk identification and generating business insights.

For a tax function to effectively support the organisation’s business plan, strategic decisions regarding technology tools and systems are crucial. As tax authorities increasingly adopt AI and data analytics, businesses should prioritise digital audit trails, data quality, and secure AI implementation. A well-considered approach to technology can enhance tax content generation, streamline document processing, and provide valuable insights, helping to meet growing reporting demands and adapt to new tax reform requirements.

Organisations should leverage enterprise architecture for tax data sourcing and reporting, integrate technology-driven risk controls, and use tools for managing and visualising data quality. Decisions on whether to develop technology in-house or to purchase tax technology outright or co-source/outsource it should carefully consider ownership and maintenance, ensuring that the chosen solutions align with the organisation’s needs. Smart technology solutions such as AI enhance the strategic value of tax functions without diminishing the expertise of tax professionals.

Embracing technological advancements is crucial for the transformation of tax functions. With the rapid changes in the global tax landscape, it is increasingly unlikely that companies can handle the workload of various tax reforms and reporting requirements without automating a significant portion of the compliance process. While the adoption of technology in the tax sector has been slow in the past, primarily due to challenges in demonstrating the value of automation, the growing demands of regulations have shifted the focus. It is no longer just about the return on investment but also about the consequences of not making the necessary investments.

By addressing the challenges and opportunities within tax operations, companies will not only meet regulatory requirements but also create value that extends beyond compliance, driving strategic business outcomes and ensuring long-term success in a dynamic environment.

Performance management and assurance

Having a clearly articulated strategic approach to continuous evaluation and improvement enables the tax function to periodically check in and see how tax is managed against set targets and provide reassurance to the board that the organisation operates against a governance framework that is congruent with it being a responsible taxpayer.

A case for performance management and assurance

In the modern corporate landscape, there is a growing expectation among investors, consumers, and stakeholders for companies to demonstrate transparency and uphold ethical standards. Robust tax governance is essential for meeting these expectations and fostering trust. Consistent assessment of the tax governance framework entails the formulation of systematic protocols for the ongoing evaluation of the efficiency and effectiveness of tax policies, defined roles and responsibilities, reporting lines, tax processes and procedures, risk management, and controls. This proactive strategy fosters ethical behaviour and accountability within the organisation by assisting businesses in reaffirming their core principles and ensuring that employees adhere to ethical standards.

Further, continuous oversight allows organisations to detect potential challenges at an early stage, facilitating prompt interventions to avert consequences that could jeopardise operational integrity or damage reputation. An agile framework that governs tax allows for an effective response to external shifts, including regulatory changes, advances in technology, and fluctuations in the jurisdictions in which an organisation operates. Furthermore, an effective monitoring and review process promotes clear communication across multiple divisions, ensuring that tax considerations are seamlessly integrated into overarching business strategies. This alignment serves to mitigate possible conflicts between tax obligations and company objectives, thereby fostering informed decision-making throughout the organisation.

Moreover, diligent oversight can reveal areas where staff may require further education and draw attention to shortcomings in their knowledge, enabling organisations to implement focused training initiatives that deepen employees’ comprehension of tax regulations and compliance obligations.

Tax risk management, efficiencies, effectiveness, and sustainability have become more important than reducing or optimising the tax burden. Without a high-level view of what is important – key success factors – it is difficult for tax functions to establish the right objectives to achieve value within the organisation and convey it properly.

Ensuring optimal framework functionality and value

There are several fundamental factors to consider to guarantee that the framework functions optimally and provides meaningful value.

Organisations should establish responsible KPIs that accurately reflect the key factors influencing their tax strategy to effectively measure the effectiveness of tax governance. Conventional performance evaluations typically emphasise past data; however, strategic CFOs and Heads of Tax must embrace a future-orientated approach. This process entails refining compliance and performance metrics to pinpoint those that significantly influence the company's tax goals and correspond with stakeholders' expectations.

An essential element of corporate governance is creating an environment in which employees feel secure in reporting unethical or illegal conduct. Organisations ought to establish a publicly accessible code of ethics and ensure legal protection for whistleblowers. Creating channels for confidential reporting, such as through an audit or ethics committee, allows stakeholders to express concerns regarding any actions that may jeopardise financial integrity. Furthermore, organisations should provide resources to assist employees in understanding ethical practices concerning tax and the reporting process.

Ongoing assessment of the tax governance framework is essential. Organisations should incorporate this assessment into their comprehensive assurance programme. Considering that internal assurance teams may not have specialised knowledge in tax governance, it could be beneficial to involve external service providers to develop efficient monitoring and testing procedures. It is essential to document, report, and address findings from these evaluations as needed, ensuring that all monitoring processes are in accordance with stakeholder expectations.

It is essential for executives and the board to have a thorough understanding of tax risks within the organisation. This understanding should include how business processes can improve tax governance and risk management. One prevalent issue is the alignment of the tax function with overall business operations. To tackle this issue, it is essential to ensure real-time collaboration and communication between executive and operational levels. The tax function can drive positive change throughout the organisation’s value chain by educating stakeholders and collaborating with leadership.

Tax reporting – a data-driven approach

Transparency begins with data

In an era marked by escalating socio-economic and environmental challenges, organisations must articulate their impact on the economy, the environment, and communities effectively. Our series Building public trust through tax reporting explores how to create a compelling narrative on tax that resonates with stakeholders. Although non-financial reporting is voluntary in South Africa, many businesses are preparing for a future in which it becomes a legal requirement. Companies must identify the tax transparency metrics and guidance that best suit their own needs and those of their stakeholders. The uncertainty about which guidelines to follow should not hinder the adoption of tax transparency and disclosure, as it makes organisations consider their tax disclosure in terms of ‘for whom and what purpose’ they are reporting.

By providing comparable, verifiable information on its approach to tax and the outcome thereof, an organisation is able to demonstrate a genuine commitment to the communities in which it operates. However, achieving comprehensive, relevant, balanced, and accurate reporting is a significant challenge. Therefore, it is crucial to determine the necessary data strategy and intersections with other reporting and compliance requirements when establishing a framework for its collection and analysis. Understanding what matters to stakeholders enables organisations to report the information they need. However, this process can be complicated, particularly when data is dispersed across the organisation.

Effective data collection requires careful planning, specialised expertise to measure and assess the information, mechanisms to ensure reliability, stringent oversight, and strategies to address the results. Businesses will have varying data strategies based on geography, sector, and other factors regarding how much and what information they should disclose to build trust – there is no one-size-fits-all solution.

Promoting transparent reporting

The underlying objective of standards that promote transparent tax reporting is to foster changes in business conduct and demonstrate value creation. Concurrently, business leaders require high-quality data to inform decision-making and drive transformation. Collecting total tax contribution data on a jurisdictional basis can be a sensible starting point for companies to assess their data readiness as they formulate their approach to tax transparency and prepare to comply with new reporting obligations.

Some companies are already gearing up to meet demanding regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD), which stands out in terms of its scope and complexity in that it asks companies to assess the materiality of sustainability topics throughout their value chains and then consider which of more than 1,000 data points to disclose. The directive applies to some 50,000 businesses that are listed in the EU or have significant operations there, regardless of where they are based. CSRD mandates companies operating in the EU to publicly disclose information on material sustainability topics. For some companies, tax could be considered as a material sustainability topic, given the significance of tax contributions to society and also heightened investor scrutiny of tax. This means that they will need to publicly disclose information on their tax situation.

Equally, new Pillar Two tax calculations require more than 270 distinct data points for every constituent entity, of which there can be hundreds in truly global firms. Based on our work with clients, only about half of this granular data is currently held in companies’ central systems. The rest must be tracked down, verified, and combined from applications and spreadsheets throughout the enterprise.

How should executives' approach this?

Supporting the involvement of the tax function in data strategy from the beginning, using tax transparency or the regulations mentioned above as a catalyst, can drive transformation. The answer also lies in joined-up conversations among senior leaders about a non-fragmented and sufficiently resourced data strategy across tax and other aspects of sustainability. The objective should be to achieve integrated data sources, automated processes, and real-time monitoring. Many organisations are transforming their compliance processes in response to these new reporting obligations. They are investing in tax governance to ensure that their disclosures reflect the operational realities of the business.

Being well-intentioned but having imprecise and incomplete data is a big red flag for investors and other stakeholders alike. Unless companies are fully confident about the quality of the information they disclose, they are running reputational risks with potentially serious business consequences. Moreover, they expose themselves to the risk of non-compliance leading to unexpected cash outflows.

Next steps

To help you think through how to best govern tax within your business, here are six key questions for you to consider:

What steps has your company taken to formalise its tax governance structures? This includes leadership roles, delegation, and communication between operational teams and the tax function.
Is your tax strategy actively integrated into your sustainability goals and daily operations while maintaining transparency and alignment with stakeholder expectations?
Does your organisation ensure that tax risk management is integrated into the decision-making process across all levels of operations?
Is your organisation exploring innovative approaches to optimise tax operations, enhance workforce capabilities and improve processes so it can stay ahead of business complexities and meet its statutory obligations?
Is there continuous evaluation and improvement of the tax governance framework. What measures are in place to align the business's tax strategy with its broader objectives while promoting transparency and ethical standards?
How are you ensuring the accuracy, completeness, and seamless integration of tax data across the business?

Most tax functions are swamped and are often just 'fighting fires'. However, investing time in developing a strong framework to govern the organisation's taxes reaps numerous rewards. The earlier and more decisively you act, the more the tax function can provide a clear direction and a strategic framework to make sure it works with the company's main goals. These goals would usually include following the rules, improving ethics and risk management, and providing better sustainability metrics and reporting. Please contact one of our specialists to find out more about how we can help you elevate your tax governance framework to support your strategic goals.

Being transparent on tax is the “tip of the iceberg”