By William Taggart, PwC Global Financial Services Tax Leader –
In today’s international environment, global tax risks for asset managers are more important than ever. Traditionally, the primary focus of the tax functions was the production of tax information for investors and transactional consulting. Today, however, significant changes in tax laws and the rapidly changing attitudes about taxes in general mean taxes need to be viewed as an operational risk, not just a compliance function, and they need to be managed as such. While there are many traps in the global tax landscape, and accepted norms can change quickly, a good risk management program for tax can actually be a differentiating factor for your fund. This is the theme of the panel I moderated recently at PwC’s Assets & Wealth 2016. Want to learn more about how to make your risk management program for tax a differentiator for your fund? Keep reading. More details about managing global tax risk are provided below.
The economic recovery has been uneven since the global financial crisis, and wage growth has been relatively stagnant. Combine that with a rash of anti-globalism and a perceived broken global tax system, and the environment is ripe for tax foot faults that can be blown out of proportion, affecting not only your fund’s net asset value but also your brand. Three main themes underlie the current tax environment: anti-globalism, transparency, and substance. The combined reaction to each of these by governments, tax authorities, and the public has created a situation that needs a proactive approach.
From an anti-globalism perspective we have seen the Brexit vote, President-elect Trump’s call for high border tariffs, the EU’s focus on state aid, and the OECD’s base erosion and profit shifting (BEPS) initiative. From a transparency perspective we have FATCA, the Common Reporting Standard (CRS), and Country by Country Reporting. From a substance perspective we have the recent OECD multilateral instrument text, Internal Revenue Code Section 871(m), new carried-interest rules in the UK, and carried-interest tax treatment as a topic of discussion in the recent US presidential election.
With all of these new rules, changing perspectives on taxes, and the prospects that many of the transparency initiatives will make large amounts of taxpayer information available not only to governments but also possibly to the public, business as usual will not cut it.
Firms need to think about taxes as an operational risk, and the entire organization from the board to the C-suite to the tax director need to be involved in this process. Some questions:
- Does the CFO know what the top 10 tax risks for the business are?
- Do you have a risk management program in place that reviews tax positions, local tax perspectives, and business operations on a regular basis to assure that any changes are addressed?
- Does the tax director interact with the board to demonstrate what the tax function is doing to manage risk?
While these questions may seem obvious, and most organizations aspire to this operating model, movement in this direction is slow.
Engaging the organization in the tax discussion not only provides institutional buy-in but fosters an understanding of what exposures could exist for simply missing a business or tax law change, or working with data that suffice for financial statement purposes but do not provide the detail needed for tax purposes. With this engagement of tax into the bigger organization, there may also be an appreciation that the tax function may need more help. In an environment in which profits are squeezed, additional manpower may be the easy answer, but it is not a sustainable solution. Recent advances in tax technology bring new solutions to the puzzle. With a little up-front work, and a scrubbing of your organization’s data, tax technology can increase efficiency, quality, and speed while enhancing tax risk management.
In addition to the more obvious benefits of tax technology, we see some firms beginning to use the mountains of information from the tax return process for data analytics to help manage their business going forward, as well as in assisting with investor relations. The ability to compare tax efficiency of funds, or to scenario plan for changing tax rates, or to understand what exactly is driving taxable income, are all key outgrowths of a move to more tax technology solutions as a part of the global risk management.
It is clear that there is a great deal of organizational risk associated with global taxes. This risk needs to be managed differently and much more proactively. What if a firm treats taxes as an operational risk, utilizes tax technology and data analytics, puts a leading edge plan into place to manage the tax risk, and then touts the quality of its risk management program? This could be viewed as an enhanced Alpha, an “organizational Alpha”. Whatever drives your decision to spend more time on managing global tax risk, this is an area in need of a vision, a plan, and some investment. It can no longer be business as usual.