Tax directors need to ensure they understand the business they work in, know the different business operations and every other aspect because the tax department is often the last to be consulted on a business matter, or to benefit from budget increases. Tax executives say a tax leader needs to prove their worth to gain a seat at the top table.
“One of the most important things you can do is understand what it is that your company does, what their business is and [in order] to be a business tax person, ask for a seat at the table,” said one head of tax from New Jersey. Becoming a “tax partner” in the business raises a tax director’s value, especially beyond what a business could achieve by outsourcing the tax work.
However, tax directors must avoid getting technical about tax matters when speaking to colleagues who are not part of the tax function. Part of this is explaining the department's value to, for example the CFO, CEO or other members of the C-suite.
But, one New York-based global head of tax said it’s getting a lot more challenging to do this because tax is becoming more complicated, especially with the US tax reform amendments that brought in the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) provisions.
“I remember, in the first quarter of 2018, when all of a sudden we realised that with GILTI, we had to do an 861 apportionment and that my company would have a GILTI tax liability. My CFO said 'I don’t understand, we pay a higher tax'. So, here I am trying to explain to the CFO how an 861 apportion works and therefore it's going to impact his financial statements, it's really challenging,” said the global head of tax.
The New Jersey head of tax suggested using an approach that simplifies the language.
“When trying to explain something complicated in a simple way, I use the concept of explaining it to a five-year old. That's how simple one has to be,” she said.
However, the global head of tax countered that taking the concept of GILTI, or FDII and simplifying it enough to explain to a five-year old version of a CFO is not an easy task. “They don't understand it,” she said.
Instead, tax directors can start with the premise that most CEOs and CFOs know as much about tax as is explained in mainstream news publications.
“When new tax legislation [on the US tax reform] came out, I felt like everybody just knew what it meant based on a Wall Street Journal article that summarised it,” said the New Jersey head of tax. “At a Monday morning meeting with the CFO, sure enough he knew as much as there was in that Wall Street Journal article, which was three headlines.”
Nevertheless, that basic knowledge does help. The New Jersey tax director said this can be used as a basis to talk about tax, but it has to be discussed from their perspective.
Therefore, if it's the CFO, the perspective is likely to be about cash. If it’s the CEO, it is likely to be about business strategy and how their business compares to other similar companies.
“I try and put myself in their shoes and understand what's important to them,” said the head of tax. “I break it down by risk areas. I try to think of what the CFO or CEO or operations officer would really care about that in my opinion is a tax risk.”
The head of tax explained that when their company was trying to export equipment from Germany, they had to deal with a state tax issue that required such an approach.
“The company wanted to assemble the German equipment in a certain state, and then it was going to move to another state. All of sudden someone noted that it would cost a few million dollars in tax and I got a phone call. Then, I had to break it down for them,” the global head of tax said. In this scenario, the tax director asked the C-suite why the decisions were made through a series of simple questions and helping them understand how tax fits into the equation by laying out the anticipated cost for several different options.
“So, to get to the bottom of what's really going on, you’ve got to put yourself in their shoes, understand what they have to answer,” the head of tax said.
She added that they have always been advised to put themselves in their boss’s shoes, but it’s hard when the tax director is not part of the C-suite or does not have experience of being a CEO.
“The reality is that it is very hard as a woman to penetrate the C-suite and that's just where we are. And so it's even harder to understand how a C-suite would think when it's primarily men that are doing the thinking. We, as women, tend to think differently,” said head of tax. “So, putting yourself in a man's shoes at that level is not as easy as it sounds, but that's really what we have to do.”
The same principle applies to tax advisors, who need to put themselves in the shoes of their clients. For example, one tax partner said the needs of a general counsel and tax director are different to the CFO of the same business. A general counsel may want the theoretical answer, while the tax director wants a practical answer and the CFO wants case law examples.
Nevertheless, the key for every tax professional is to know your audience and convey the message in a way that your audience can use the information in their work. Think about their focus.
