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Business Struggling With Worldwide Wave Of Tax Regulation

by Jason Gorringe,, London

25 May 2007

Companies are grappling with a new and significantly tougher corporate tax environment which is sweeping around the world, driven by a combination of investor protection regulation and shareholder demands for information, a new report from KPMG International has found.

KPMG's report revealed that the new regime started in the US with the 2002 Sarbanes Oxley Act, and moved to Europe with the UK's Combined Code and the French Loi de Securite Financiere, both introduced in 2003. But it is only recently being felt in the Asia Pacific region, with regulations like Australia's 2004 Corporate Law Economic Reform Program 9 and Japan's Financial Instruments and Exchange Law, introduced last year.

Additional regulatory pressure is leading to greater pressure from shareholders. Fully 70% of companies surveyed in the Americas are reporting increasing demands for more and better information on tax from this quarter, compared with 46% in Europe.

But in the Asia Pacific countries, where the full impact of this movement is yet to be felt, only a third of companies are reporting more interest in tax from shareholders.

These conclusions came in two surveys, one conducted in the United States by KPMG's US arm's tax practice, and the second undertaken worldwide by KPMG's Global Tax Outsourcing practice, which together covered 753 tax professionals across 19 countries. The surveys sought to identify where tax departments are experiencing most difficulties in fulfilling their duties, and how they plan to adapt to meet new challenges.

Everywhere in the world, tax departments reported an increase in documentation requirements (73%) and a need for more accuracy (70%) with less time in which to do the work (64%).

But despite this, and the undoubted increase in interest from shareholders, tax risk is recognized as a rising priority by only 40% of companies surveyed.

Just under half (48%) have a formal tax risk management strategy. In the US, this figure drops to 30%. And of those who do have a tax risk management strategy, only 14% believed that it was well understood throughout their organization.

"At first sight, this might seem an alarming statistic" observed Chris Scott, partner in KPMG's Global Tax Outsourcing practice and part of KPMG's UK'S firm, "but it has to be seen in the context that this focus on tax risk management has emerged only relatively recently".

"It's only two years since tax began appearing regularly on boardroom agendas, and it may still seen by many as too complex or too specialized a subject to merit much board time. Only a third of boards worldwide surveyed have provided strategic guidance to their tax departments or reviewed their tax risk management strategy in the past 12 months. Only 26% have a tax department representative on their risk management committees."

"But things are changing, and rapidly. I believe, based on these results that the leaders in this field, those who see tax management as a source of value and are prepared to invest in it, could be stealing a march on their competitors in the eyes of the market."

Mr Scott pointed to survey results showing that time taken on compliance is crowding out activities which tax executives see as more valuable to their companies. "Many departments want to spend more time on activities such as assessing tax risk, tax planning and wider support for the business and ensuring the accuracy and speed of their reporting," he said, "but so much of their time is spent on documentation-related compliance that this work goes undone."

"It follows that companies which have well-resourced departments, able to deal with the compliance work and do the value-adding activities as well, will have a distinct advantage over their competitors when it comes to business planning and good corporate governance."

The report concludes that boards still need to spend more time on tax matters, but that much of the necessary improvement may have to come from better communication by tax departments themselves of the risks they control and the value that they can add.

"Tax professionals in a business should now accept that their objectives and processes should be subject to the same rigor of review as other areas of business," Mr. Scott explained. "This requires them to develop and communicate a strategy on risk that is well understood within the organization, and takes into account the whole risk spectrum, rather than focusing just on tax technical issues."

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