New Private Company Tax Disclosure will challenge how you manage reputational risk

Transcription

1 New Private Company Tax Disclosure will challenge how you manage reputational risk Are you prepared for what will happen when large private company tax information becomes public property from July 1, 2015?

2 Executive Summary 1. From 1 July 2015 approximately 1,000 previously private companies and their family group/individual owners will be subject to unprecedented and intense political, media and community scrutiny over their tax affairs. 2. In an environment of Federal Government revenue shortfall, calls to ensure the wealthy pay their fair share will only grow louder. 3. Activist groups are likely to seek targets to name and shame as tax cheats, regardless of the facts. 4. Professional financial advisers will also come under scrutiny for the role they play in providing advice on the structuring of private company tax affairs. This debate has already started in Europe. 5. As a result, private companies and their owners will face three major reputational risks - political, personal and brand - any of which, or a combination, could significantly affect their businesses and professional standing. 6. The question is are these companies / individuals adequately prepared to deal with the scrutiny and possible public attack they will face? Once branded a tax cheat it will be a hard label to remove. 2

3 Background From 1 July 2015, approximately 1,000 private companies will face significantly increased public disclosure and scrutiny on a level never experienced before. Private companies with over $100m in annual revenue will have their ABN, company name, total revenue, declared taxable income and tax payable published by the Commissioner of Taxation, for the first time ever. As the Corporate Tax Association and CPA Australia have stated: In some cases this lack of contextual information could lead to companies having their reputations unfairly tarnished. Unfortunately, there are recent international examples where social justice groups have unfairly targeted large companies on the basis of their alleged poor tax performance when the facts do not support their position. 1 CTA Accordingly, to review taxpayers based predominantly on information they disclose will inevitably continue to lead to uninformed public comment. This could be both unfair and damaging to company reputations and their businesses where companies complied fully with their legal obligations but are perceived by some commentators to have paid insufficient tax 2 CPA Australia This will subject private companies, and their individual or family owners, to the full glare of political, media and community scrutiny over their contribution to the Australian community, via the tax they pay. Many companies are under-prepared for the political and reputational risk that will follow. The Contemporary Environment In its submission to the current Senate Economics Reference inquiry into corporate tax avoidance, PwC acknowledged: that public interest in the tax affairs of multinational business has never been greater than it is today. 3 Consistent media coverage and subsequent political commentary about profit shifting in the last six months for companies like Apple and Google has reinforced the issue of fairness of taxation levels in the Australian public consciousness 1 Response to Discussion Paper: Improving the transparency of Australia s business tax system, Corporate Tax Association of Australia Inc., April CPA Australia submission to Senate Economics Committee, Pg3, Submission No 73 3 PwC submission to Senate Economics References Committee, Pg 2, Submission No 39. 3

4 The same will now apply to some of Australia s wealthiest and, to date, mostly private individuals and family groups from the start of July. Public interest in the tax affairs of major businesses and wealthy individuals and families has never been more acute. Scrutiny once reserved for public companies and multi-nationals will now apply in equal measure to private companies and those that own them. The question posed will be: Are they paying their fair share of tax? Those deemed not to be will likely face the wrath of the public, media and politicians. The ATO stated in its submission to the same Senate inquiry that, Some private groups, linked to wealthy individuals with complex group structures, display more aggressive tax behaviours and characteristics. 4 The ATO goes on further to state that: Wealthy individuals and their private groups often have complex arrangements and utilise flow-through entities such as trusts and partnerships in addition to companies. On average High Wealth Individual group structures consist of five companies, five trusts, one Self-Managed Super Fund and one partnership. 5 The fact that a private group may use multiple entities for tax planning purposes does not in itself suggest non-compliance with taxation laws, but it does present a major communication, reputational and political challenge to justify why they are utilised. With complexity comes an assumption amongst many in the community, including politicians, that there is something sneaky going on, that something is being hidden. Family groups and individuals will now be overtly linked to these planning arrangements and will attract a level of public scrutiny for which many will be unprepared. Government Revenue under threat From a government and political perspective, the contemporary debate is focused on the struggle governments are facing in balancing the budget, particularly at a Federal level. Central to this discussion is how government will pay for the never ending call on the public purse. This, in part, has driven much of the debate on e-commerce and the issue of profit shifting. It is not unique to Australia, and is being debated in most western nations along with being addressed through the OECD and G20 at macro policy level. 4 ATO submission to the Senate Economics Reference Committee Pg 3, Submission No 48 5 ibid Pg 12 4

5 Those deemed not to be paying their fair share will be targeted for criticism and inevitably there will be calls for changes to be made to taxation laws in order to ensure they pay a greater amount. This heightened level of public scrutiny is evident in the current Senate inquiry into corporate tax avoidance. To date the inquiry has received 89 submissions from individuals and organisations ensuring a public platform for both supporters and opponents of the current corporate tax regime. This almost guarantees the issue of tax fairness, and who pays, will well and truly be kept in the public eye for the next three to six months. Activist Groups The activist group Tax Justice Network in conjunction with one of Australia s largest left wing unions United Voice in September last year released a report, Who Pays for Our Common Wealth? Tax Practices of the ASX 200. This garnered significant public attention. While the report itself contains a number of factual errors, it has given large exposure and spurred significant public debate on the issue of corporate tax avoidance. Senator Milne, Leader of the Australian Greens in the Senate who sought the Senate inquiry, made specific mention of the report in the Senate when she moved the following motion in the Senate on 2 October 2014: That the Senate (a) notes: (i) the recent release of the Who Pays for our Common Wealth? Report by Tax Justice Network and United Voice; and (emphasis added) (ii) that the report found that of Australia's largest 200 companies, 29 per cent have an effective tax rate of 10 per cent or less, and 14 per cent have an effective tax rate of 0 per cent; (b) recognises that instead of targeting the poor, the sick and the young with its cruel budget, the Government could raise billions in revenue if companies paid the full 30 per cent tax rate; and (c) urges the Government: (i) to act on corporate tax evasion in Australia immediately, rather than unnecessarily waiting for the G20 in November 2014, and (ii) introduce legislation that requires Australian corporations to disclose all foreign subsidiaries in their financial statements. 5

6 This motion was supported by the Senate. While it relates specifically to ASX publicly listed companies, the same level of scrutiny can be expected to apply to private companies from 1 July A simple online search of the term Tax Justice Network Australia garners 142,000 hits alone. Interest in this issue will not dissipate for some time, and until there is seen to be a fair resolution. Ongoing Political Focus On the 24 November 2014 the Shadow Assistant Treasurer, Andrew Leigh MP introduced a private member s bill. Tax Laws Amendment (Tax Transparency) Bill 2014 to amend the Tax Laws Amendment (2013 Measures No. 2) Act The purpose of this bill is to bring forward to the financial year the requirement for the tax commissioner to publish certain tax information for corporate entities with a total income of $100 million or more. In his speech to Parliament the Shadow Assistant Treasurer stated: and yet the Abbott Government has threatened to scrap Labor's existing tax transparency measures entirely. Former Assistant Treasurer Sinodinos told The Australian Financial Review in January, 'We don't want to get into a situation where we're putting more and more information out there.' Labor disagrees. If the recent PwC 'Lux leaks' tell us anything, it is that greater transparency in taxation is needed now more than ever. Passing this bill will deliver that. What the proposed bill highlights is that political attention will remain intense on the issue, and that new legislation will expose formerly private companies to significantly increased public exposure. Since the election of the Abbott Government the term tax avoidance has been mentioned in Hansard two hundred times and tax evasion sixty two times by various parliamentarians. This is an issue that will only increase in profile once public exposure of taxation among private companies begins. The AFR reported on 18 March 2015, under the headline Tax Disclosure Exemption, that: The Abbott Government will try to exempt 700 big private companies from disclosing how much tax they pay, because of fears the wealthy families behind those companies could be targeted by kidnappers. 6

7 While this may give some of these companies cause for optimism, the reality is for this to happen an amendment to the current taxation law starting on 1 July 2015 would need to be passed by the Senate. The chances of the current Senate agreeing to such an amendment is effectively nil. Both the ALP and the Greens would oppose such a change, and there would not be enough Senate cross benchers to support the Government on this issue. Key Senate cross benchers will not want to be seen to support less transparency for wealthy private companies and their wealthy owners. As an example key Senate cross bencher Senator Xenophon stated in the Senate on 24 June 2014 in a speech on tax evasion: The poorly resourced tax offices of developing countries and indeed, I might say, of developed countries as well, given the job losses that the ATO will be hit with are no match for the sharp business practices of multinational corporations. Clearly, steps must be taken to ensure that developing economies are not being robbed of their rightful tax income. He went on further to say in the context of transfer pricing: There are, potentially, tens of billions of dollars of tax that ought to be paid in our nation that are not being paid because of this. As a result, the current law is unlikely to change, and companies and their owners need to plan accordingly. The Risks to Private Companies Larger private companies that will experience public disclosure face three key risks 1. Political: negative exposure among political and public activist stakeholders; 2. Personal: negative perception of personal reputation and standing in the public domain; and 3. Brand: a reduced willingness to buy their branded products or services. Political Risk Once private and unknown companies will now be subject to the full glare of political scrutiny. This will be reflected in the naming of previously private individuals and family groups. Once companies and family / individual owners are identified, those deemed to be suspect taxpayers will be targeted and made examples of by politicians and groups like the Tax Justice Network as well as mainstream media. 7

8 Quite simply companies, families and individuals face a public naming and shaming and how they prepare for this in advance will determine whether they become public tax cheat enemy number one. Personal owner Risk With public disclosure and potential negative commentary comes reputational risk, for the company and its ultimate owners. A tax cheat label will be very hard, if not impossible, to remove. Well known families and individuals, some of whom may be considered pillars of the community, may well find their reputations publicly tarnished if they are associated with a corporate or family group deemed by the community or activist groups as not paying their fair share. The reputation risk for previously private companies and their owners is real and will become realised once disclosure starts post 1 July Brand Risk A number of affected private corporates run significant, public-facing brands, with the community currently unaware as to who actually owns the brand. With public disclosure more than likely, the accusation of tax avoidance may well cause major brand damage, and with activist groups like the Tax Justice Network and others looking for the next company / family to name and shame, targeting a well-known public brand is a high probability. A consumer brand associated with a parent company and owners publicly accused of tax avoidance could easily lead to an activist group advocating a consumer boycott of that brand. The Role of Professional Advisers The role professional advisory firms, lawyers and other advisers have played in structuring the tax affairs of major private companies may also come under scrutiny during this period. While media and political attention to date has been scant in Australia, it has become a political issue in Europe particularly given the revelations over HSBC activities in Switzerland in helping hundreds of people hide income and assets. On 22 February 2015 it was reported that Mr Danny Alexander the Liberal Democrat Chief Secretary to the UK Treasury would push to introduce a new offence of corporate failure to avoid preventing an economic crime and that advisers who helped facilitate and encourage such activities should face the same penalties as the evaders themselves. He went onto say, Organisations, be they accountants, banks or whatever, who help people evade tax will be liable for this new offence and crucially liable for financial penalties. (BBC News UK Politics) 8

9 The Australia Institute submission 6 to the Senate Committee inquiry makes specific mention of the role PwC has played in facilitating tax arrangements for clients with Luxemburg authorities. It specifically mentions the AFR article of 6 November 2014 International PwC tax schemes exposed. 7 While advisers to date have not been subject to public scrutiny and PwC is not the only firm to have provided professional advice to major corporates and others, it is very likely that advisory firms will come in for scrutiny. While there is nothing to suggest any Australian advisory firm has done anything other than provide clients with totally appropriate and professional advice as to their tax affairs, there will be questions asked about the advice these companies were receiving. Professional advisory firms also need to consider risk mitigation strategies regarding both the upcoming Senate inquiry, and exposure and commentary that will follow post 1 July What should companies, their owners and advisors be doing? 1. Prepare This includes: a. Review current taxation approach and identify any areas of potential criticism or misinterpretation b. From this evaluation, develop and test a narrative outlining the company s position on taxation, as the central content piece for all communication c. A tight, strong set of key messages based on this narrative for use publicly in any situation d. Specific coaching on how to deal with questioning from the media/politicians and third party groups e. An early warning/flagging system that picks up on mainstream, digital and social media coverage of the issue f. Specific messaging and a Q&A for use with employees and an easy to find position statement on the company website to explain the company s position g. A media holding statement prepared and ready to go 2. Align for consistency a. Align the company s public position with that of their accounting professional advisors and internal Finance Director, to ensure consistency of message and position 6 Australia Institute submission to Senate Economics Committee, Pg2 7 Chenoweth O (2014) Global tax schemes exposed The Australian Financial Review, 6 November

10 3. Specific Issues Preparation a. Prepare an issues management plan which co-ordinates effective communications and risk management should the company be targeted 4. And for advisors a. Review how allegations of assisting companies to engage in tax minimisation activities align with their corporate mission statements and adherence to ethical behaviour. They will need to evaluate their vulnerability to such claims. 10

11 Timeline: Private Company Tax Disclosure 11

12 For further information contact: Sydney Level 3, 63 York Street, NSW, 2000 Melbourne Level 16, 330 Collins Street, VIC,3000 Jody Fassina (02) Mobile: Matt Foran (03) Mobile: Craig Badings (02) Mobile: David McCarthy (03) Mobile: