Corporations Concerned About Reputational Risk and Tax Compliance As Well As Transfer Pricing

Thomson Reuters Tax & Accounting Newsletters December 20, 2012

by Terry Hayes

Many corporations in Australia and New Zealand are concerned about reputational risk with regard to noncompliance with tax laws and its effect on shareholder value. Many are also concerned with the ATO’s review of transfer pricing rules. Significantly, two-thirds of respondents to a new Thomson Reuters survey said they spent up one-third or more of their time on tax compliance and reporting.

These results have come from the Thomson Reuters 2012 Australia and New Zealand Tax Survey. The survey, which will be conducted annually by Thomson Reuters, sought the views of tax directors, corporate tax managers, heads of tax and CFOs at major companies in Australia and New Zealand.

The results of the survey provided some interesting reading, as noted below.

Tax at a Board Level

  • Over half of respondents (56%) were concerned about reputational risk with regard to noncompliance with tax laws and its effect on shareholder value.
  • Despite this concern, 47% of respondents don’t have a formal risk management specifically related to tax in place and close to half (41%) don’t meet regularly with their Board of Directors.
  • Whilst 55% of respondents believe the Board of Directors understand liability, over half (52%) don’t know whether their Board was concerned in light of proposed increased personal liability on board members for tax arrears under the new Director Penalty laws. This highlights a lack of communication between the tax function and the Board of Directors — supported by the statistic above regarding irregular meetings between the tax function and the Board of Directors.

Transfer Pricing

  • 60% of corporations said they were concerned with the ATO’s review of transfer pricing rules.
  • Biggest concerns for corporations are associated costs incurred with increased documentation (31%) and retrospective application or rules (30%).
  • Transfer pricing has traditionally been a black hole for corporations, with a majority of tax functions outsourcing transfer pricing documentation to external advisors due to the complex nature of the tax. However, the tax survey results show a shift in focus, with over half of corporations (54%) now completing a majority of the documentation themselves, using external advisors to complete a final check.

Imperative role of technology

  • 44% of respondents believe advanced technology is imperative to an efficient and compliant tax function. Despite this, there is still a low uptake in the use of technology for data warehouse and workflow software (14%), transfer pricing documentation software (2%), and financial reporting/statement software (25%).
  • There is also a prolific use of Excel amongst respondents, with 94% of respondents using Excel in some capacity for data collection and reporting.
  • There is a low understanding of the role of the “cloud” in tax compliance, with 14% of respondents unaware of what the cloud means and over. 60% of respondents said that the cloud was not important when thinking of tax software.
  • 84% of respondents report electronically.

Standard Business Reporting

  • 48% of respondents didn’t know if they support Standard Business Reporting, highlighting a confusion and lack of interest in understanding the incumbent platform.
  • 41% of respondents only marginally supported the ATO’s approach to compliance, and still see flaws.
  • 61% of respondents have modified their systems in light of compliance scrutiny by the ATO, with 9% making “significant” changes.
  • With 84% of respondents already reporting electronically, a majority of Australian firms will be forced to transition when ELS is phased out from 2015.

General Tax function results

  • 66% of respondents spend up to 34+% of their time on tax compliance and reporting.
  • The biggest concerns regarding annual financial reports and statements are:
    1. Lodging on time (65%).
    2. Reputation risk if you need to reissue reports (40%.
    3. Compliance with the most up-to-date disclosure requirements (40%)
    4. Control, accuracy, and consistency of financial statements across the group (36%)
  • Interestingly, cost constraints of producing statutory financial results were of the smallest concern, with 82% ranking it at the low end of the scale.
  • 46% of corporations feel they don’t spend enough time adding value to management over and beyond compliance.
  • 32% indicated meeting compliance and reporting deadlines as one of the top measure of success.