ESG: Meeting stakeholder expectations with a solid tax governance framework

To anticipate and respond to the needs and expectations of a growing number of often disparate stakeholders, your organisation needs a credible tax narrative built around a solid tax governance framework. There are four main Dimensions to this: tax strategy and leadership, tax operations, tax risk and control, and tax transparency. We’ll be looking at these in more detail in subsequent posts.

First, though, let’s take a look at the overarching framework.

A solid tax governance framework has many benefits. It gives you a strategic direction for your tax function. It provides you with clear mandate for the tax function and it helps you explore and capitalise on the opportunities that come from a deeper understanding and analysis of tax within your business models. It additionally ensures the proper tax risk management and defines a tax transparency strategy in meeting the highly increased tax transparency requirements.

By the same token, without such a framework there’s a danger that your tax management platform will crumble as soon as you try to build on it, or the (tax) weather takes an unexpected turn.

Why is a tax governance framework so important?

Tax is becoming an increasingly important component of companies’ ability to negotiate a harsh economic environment. With PwC’s latest CEO Survey revealing that 73% of business leaders believe gross domestic product will decline over the next 12 months, knowing how you currently operate and what your options are to operate more efficiently and effectively has to be a priority. In an upcoming post on Dimension 2, tax operations, we’ll be looking at the importance of including tax in the efficiency and effectiveness equation.

But tax also needs to rise to the challenge of a new and even more important role within booming stakeholder capitalism. Share price and profits are no longer the only things keeping CEOs awake at night. There’s a whole new range of stakeholders - ranging from the media to customers; suppliers and employees - with different views and priorities to be taken into account. These stakeholders expect environmental, social and governance issues to be addressed. And an increasingly important component of the “G” of ESG is tax governance. 

Why now?

As the world changes more and more rapidly, tax needs to be able to keep pace. Slightly more than half the business leaders polled in PwC’s 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. Laws and regulations under Pillar II of BEPS 2.0 (the OECD’s Global Minimum Tax), for example, will create a whole new set of challenges ‒ challenges companies won’t be able to address without a solid tax governance framework. The EU’s Taxonomy Regulation and CSRD, which implicitly or explicitly govern tax as a key component of ESG requirements (more on this here), coupled with the enhanced capabilities of increasingly digitized tax authorities, mean that the tools that serve you well today will no longer be fit for purpose. The tax function needs to be redesigned for the digital age.

Tax’s role within organisations is also changing. As compliance is automated and moves out of the business to meet cost targets and the changing needs of authorities, tax needs to refocus on its high-value, insight-driven position in the organisation. Tax planning is no longer possible in isolation. It must be integrated into decisions on how to develop and enhance the business model.

Another important development driving the changing role of tax is that tax is now a board-level priority. It’s no longer the specialist in the corner. A shift in stakeholders and a focus on transparency mean that the tax function must effectively broadcast its message to a wider audience.

What can you expect from a tax governance framework?

An effective tax governance framework is an important element of a kind of code of conduct for how tax affairs are to be managed within the group. It assigns responsibility for the design, implementation and effectiveness of all the measures, activities and processes related to tax within your organisation. It subjects tax matters to the oversight of company leadership, including your CFO, CEO, audit committee, risk committee, board of directors and other executive managers. It supports global heads of tax as they navigate and address the challenges in a rapidly changing tax environment. But it’s also motivating for employees on the ground in the tax function, empowering them to influence and change the way tax is governed within their organisation.

How does tax governance mesh with new technology?

If the heart of a tax governance framework is the vision of a state-of-the-art, future-ready tax function, then it is technology that is the oil that keeps the different components functioning smoothly in each of the Dimensions. When it comes to tax strategy and leadership, the role of technology is to motivate and develop. At the tax operations level, you need technology to drive operational efficiency. The main purpose of the technology around the tax risk and control Dimension is to track and monitor. If you’re looking to enhance tax and maintain tax transparency, you need technology to help you extract data and report. We’ll be talking about how this works in each Dimension in subsequent blog posts.

What guidance is out there on tax governance frameworks?

Large enterprises all differ in terms of their operations, territories and business organisations. This means that there is no single standard of tax governance that applies to all companies in all circumstances. What there is, however, is a growing body of best practices based on the experience of companies as they endeavour to establish solid tax governance frameworks.

One example is the Best Practices for Good Tax Governance, drawn from discussions among members of the Tax Executives Council of the Conference Board, The B Team, and the European Business Tax Forum. The OECD has also been very active, with guidance including Co-operative Tax Compliance: Building Better Tax Control Frameworks.