Corporate board governance of tax risk has become particularly relevant in the US since the commissioner of the Internal Revenue Service (IRS) raised the issue with company directors. It was one of the main topics for discussion at the IRS Oversight Board's public meeting on February 3.
The panel principally discussed the risks and benefits associated with the IRS and corporate boards entering into a dialogue to discuss tax management. In October last year, Doug Shulman, the commissioner of the IRS, told the annual meeting of the National Association of Corporate Directors (NACD) that it would be appropriate for boards to have an understanding of the way tax is managed as part of corporate strategy.
"Other tax authorities have also stated that they would like a relationship with corporate boards as well as tax experts, because it is the board that sets the overall tone of the corporation and they are the custodians of corporate reputation and management of risk," said Loughlin Hickey, global head of tax at KPMG and member of the corporate governance panel at the Oversight Board meeting.
Tax authorities in other countries, such as Australia, have issued formal guidance for corporate boards. The corporate community's reaction has been mixed. While many boards experienced scepticism, a small minority has seen the benefits, like a greater understanding of tax risk.
Board members are concerned about the benefits they would receive from such a dialogue, and have implied that they will only be willing to participate in such discussions if it is in the corporation's interest and amounts to more than another disclosure avenue for the IRS.
Many company directors already feel as though they have an adequate grasp on corporate tax issues, and are not hearing of problems from their chief financial officers (CFOs) or tax directors. They have indicated that the accounting requirements in the Sarbanes-Oxley Act and FIN 48 disclosure requirements are sufficient means of ascertaining tax risk.
"If the commissioner can come to them and suggest how they are not managing risk correctly, or can share some of the best practices of other corporations, then they would be prepared to listen to that," said Hickey. "In today's corporate environment, boards have huge responsibilities and they can't afford to be distracted by something that doesn't add value and doesn't help them manage risk."
Shulman has emphasised that he wants to enter a dialogue rather than issue instructions because he is not interested in dictating to boards how to run their companies.
Such an arrangement will draw comparisons to another programme that a group of companies has started with the IRS, called the Compliance Assurance Programme. "There is a sense that that has been a successful experiment," said Hickey. "The programme reduces risk and the cost of compliance and increases the speed with which issues with the IRS become resolved."
"The overarching theme is that there must be a tangible benefit to both sides. "The IRS has real obligations to the American people and equally, corporations have a responsibility to their shareholders. The ultimate goal must be to make the tax system more effective and fair."
Congress created the IRS Oversight Board in 1998. It is composed of nine members that are responsible for supervising the IRS in the execution and application of the internal revenue laws.
