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Demand For Tax Transparency Posing Challenge To Global Business

by Robert Lee,, London

31 January 2007

Four global trends are combining to force companies to improve the management of their tax functions, or face unexpected financial and reputational penalties, according to big four accounting firm KPMG.

Loughlin Hickey, Head of KPMG’s Global Tax practice, said that companies that embrace the change can generate value for investors and enhance their reputations by demonstrating a clear strategy on tax planning, good financial control, and sustainable results through good compliance.

Speaking in Sweden, Hickey told an audience of 300 business leaders that tax competition between countries, new regulatory pressures, the modernisation of tax administrations, and growing public interest mean that companies everywhere are being measured against new standards of transparency in tax.

“In a competitive world, tax is a lever that governments have used to attract or retain investment,” he said. “But they still need to fund increasingly expensive social spending. This means that any shortfall in budgeted tax revenues has to be made up by a shift towards indirect taxes and greater vigilance on the amount of tax paid by corporate taxpayers operating in the country – often through more aggressive tax policing, particularly in relation to transfer pricing.”

Hickey went on to note that the drive for greater transparency is reflected in greater media interest in tax governance issues, and a renewed interest in tax among analysts.

“The analyst community accepts that it does not specialize in tax, but what concerns them is that sometimes the companies they speak to do not seem to instill confidence that tax is under control and is adding value wherever appropriate,” said Hickey.

“Tax policy now encompasses far more than headline corporate tax. It includes indirect and employment taxes, and it is not enough just to get things right in the country of the head office. Global tax management needs to work, and to be seen to be working," he added.

Hickey argued that one of the most effective ways to discourage excessive prescriptive regulation around accountability and disclosure could be voluntarily to adopt a more open and better communicated approach to tax. He identified as leaders in the field those companies that were determined to win some benefits from the process of change. These benefits included a solid defence against aggressive tax challenges, and better business planning, particularly in supply chain management. Leaders would also be able to create value for investors through communicating a strong, sustainable and responsible tax policy to the market, Hickey noted.

“Some will not move until there is a crisis, within the company, the country or the industry,” he said. “Rather than wait for the crisis, I want to highlight signs that tax and corporate governance is an emerging issue, it is a global issue, and it is likely to set new standards for transparency in tax across the whole world.”

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