|It’s important to condense the maelstrom of tax changes into something digestible for the board|
The only thing tax departments can be certain about is that tax uncertainty is growing. Those that negotiate it well can become very successful, and those that are caught out or delay excessively often suffer financial loss.
Four months before leaving the EU, the UK’s plans for doing so are still far from settled. The EU’s Anti-Tax Avoidance Directive (ATAD) comes into force on January 1 2019, but several member states haven’t yet released their domestic interpretations of it. The US Tax Cuts and Jobs Act contained last-minute, hand-written additions as it was passed just days before its effective date. Governments around the world also want to tax the digital economy but can’t decide how to do it.
“It’s a crucial topic for tax teams to think about, everybody needs to be ready,” Alan MacPherson, group head of tax at mining company Anglo American, tells International Tax Review. “Uncertainty is the new normal.”
“The technical stuff is normally okay,” adds another head of tax. “It’s the volume of change and the compliance it brings [that] is rising all the time.”
Know your opponent
The first step to tackling problems is understanding them and, where there’s uncertainty, that means planning for different eventualities.
Anglo American, which is the world’s largest exporter of platinum and also owns diamond company De Beers, works in many non-OECD countries. It is important for the company to keep an eye on how each of these countries is approaching the BEPS project.
Key to MacPherson’s role is “trying to work out where the world appears to be going, not waiting for change but anticipating change”, he says. “If there’s a situation we know is going to come under pressure, we try to get there in advance. [It’s about] getting ahead of any difficult audits, pre-resolution of disputes and having conversations with governments and tax authorities.”
The managing director of tax at a real estate company says their company is facing multiple threats in the EU.
“In the UK there’s been lots of changes in taxation of capital gains for offshore investors,” he tells ITR. “The principal challenge is trying to manage our way through. There’s greater clarity that came out in the Finance Bill earlier this month, but there’s still some uncertainty.”
“In France there’s been some changes in the tax treaty with Luxembourg,” he adds. “That’s impacted us more in terms of we know what’s coming but not when it will be implemented.”
He says that his first port of call is setting out different courses of action for each problem, and then assessing their potential impact.
“The first thing is trying to compute the impact by running different sensitivities, to figure out the worst- and best-case scenario.”
“Worst case is you can do nothing,” he explains. “You just have to take the hit, update all of our underwriting to reflect the hit. Best case is there is something we can do, compute the savings and what it would cost to get us to there.”
Explaining to the board
The job of a tax director is not only to ensure the company is tax compliant, but to keep leadership informed of tax risks and opportunities moving forward – this includes explaining multiple possible impacts, and pitching for investment in the tax department when necessary.
“I think it’s a question of trying to be transparent with [the board] in the first place, indicating if there is an opportunity, gauging their risk rating/appetite and the uncertainties to manage people’s expectations,” says the real estate company tax director.
“If I’m uncertain about [changes] I can’t really tell them there’s a certain way through,” adds another in-house tax executive. “Management understand what you’re saying, but it’s not a nice, solid conversation about what we need to do and where we need to go.”
Uncertainty and the existence of many possible futures can have the additional consequence of making resource discussions more complicated, too. “The trouble when you have so many possibilities to go to senior management with is you say ‘this is what I need’, knowing full well that two days later it could be a completely different menu you’re picking from,” says the tax chief of a top fintech company.
Dialogue gets you ahead of the game
MacPherson emphasises the importance of transparency and open dialogue with governments and tax authorities, with whom he and his team discuss Anglo American’s tax model and the way it may change in the future. “We try to be open about when we’ll have to have challenging conversations,” he says.
“There are some assumptions about the way that different countries engage with taxpayers, with businesses,” he continues. “We try to just be ourselves and our approach is to be open, to be transparent and to have dialogue. There aren’t many places that don’t engage with you when you have that approach.”
“Sometimes local advisers will tell you you’re being brave, or that you’re sticking your head above the parapet so to speak, but we have to be open and if that’s a risk it is one we [are prepared to] take.”
Limbering up for change
The most important resource for MacPherson when it comes to dealing with uncertainty is his tax team of around 75 professionals. Anglo American is active in around 40 countries, and has tax staff in 11 of them.
“One of most important things is making sure people aren’t only capable of dealing with one country’s tax system,” he says.
“[We deal with that by] seconding people to other countries, moving people around our global team, making sure we have a mix of people from different countries in each of our offices, and by encouraging people to branch out and not over-rely on technical knowledge of one country.”
“Being well resourced is crucial,” he adds. “When you get fundamental issues in a country where it’s difficult to get really good help from advisors, you need your own people. Advisors can take up some of the slack but on most important issues you want your own people doing it.”
The challenges of a small team
Of course, this isn’t possible for all companies. The main impediment to planning for uncertainty is budget constraints, says the fintech tax director. His company, like most, faces compliance challenges on numerous fronts, most notably in the indirect tax sphere around the EU, and around the UK’s Making Tax Digital plans.
He is also particularly concerned about what a change of government in the UK could mean – proposals by Jeremy Corbyn’s opposition Labour Party to remove the withholding tax exemption on euro bonds would have a big impact on the way the company brings debt to the UK for planning purposes.
“It’s the volume of change which is making the uncertainty greatest because it’s really hard to work out what the plan is moving forward,” he says.
“You don’t have an endless budget to flex resource around, you’re stuck with what you’ve got and you’re trying to prioritise exactly what you need. Ultimately, no one wants to give you extra but all the compliance costs are going up.”
This company’s tax team is staffed by less than 10 people, spread across the US, UK and India – and a headcount freeze just after two members of the team left due to normal attrition recently pushed this number even lower.
The only way to ensure compliance, therefore, is longer hours – a common theme for tax departments in 2018.
However, being short-staffed is one thing that makes dealing with short lead times for new legislation particularly difficult.
“The lead time is very challenging. It’s not too bad in the UK, you have time to explain to people and put things into a different budget cycle, but some of the changes around Europe happen much quicker,” says the tax director, whose company is owned by a private equity firm.
An often-discussed answer to some of these problems is automation, which can free up workers from compliance-based work, giving them more time for higher-value tasks.
“When you can’t predict what you’re going to do next year, it’s important to have a flexible team that is able to work in different ways in different countries,” says MacPherson. [We do that by making sure they are] freed up from predictable compliance work and repetitive tasks.”
Although automation doesn’t solve uncertainty, it can help put companies in a better position to react to changes. At companies like the aforementioned fintech business, it can even be a way to keep an under-resourced tax team afloat.
“That’s what we’d have to do to maintain the status quo, as automation becomes more important. Automation works if you’ve got control of data. We’re not too bad at that – we’re not great, but we’re certainly not anywhere near the bottom.”
“We’ve got the opportunity, and if we can get the one-off investment into that, which is probably the better answer for us, it would move us forward. But at the same time, the uncertainty is that you’ve got to know that it’s going to do everything you need it to do.”