COMPANY directors are exposing themselves to potential legal liability...
10 September, Sydney, Australia - COMPANY directors are exposing themselves to potential legal liability and reputational risks because of an ongoing communication gap between boards and their tax advisers, according to one of the world's leading advisers to global corporations on tax and accounting products.
Brian Peccarelli, the president of tax and accounting at Thomson Reuters, said that directors needed to work harder to get abreast of complex tax issues, while it was also incumbent on tax advisers within companies to be more proactive in presenting boards with potential risks.
His comments come as the Australian Taxation Office cracks down on directors for unpaid pay-as-you-go and superannuation debts, while the recent introduction of new laws to fight Phoenix activity has strengthened the power of the tax office to fight payment avoidance.
This year, Tax Commissioner Michael D'Ascenzo also criticised the lack of information given by in-house tax advisers to chief executives in large companies.
Dallas-based Mr Peccarelli told The Australian on a visit to Australia last week: "I do think there is a level of engagement that has to increase amongst boards when they look at tax because of the pace of change, especially for a multinational.
"With the changes that are occurring globally, and with the potential risk profiles of getting something wrong that increase the potential damage to reputation, I think it is incumbent upon directors to look harder at what can be done and what is going on.
"But it comes from both directions. It is also the tax and finance function joining up to present to the board what are potential risk profiles and solutions on how could they be minimised."
A new survey by Thomson Reuters of the heads of tax at 250 of Australia's largest companies found almost half did not have a formal risk-management policy in place specifically related to tax, and 41 per cent said they did not meet regularly with their board.
"There is still a lack of communication between the tax function and the board," said Paul Brindle, Thomson Reuters' tax and accounting managing director in Australia and New Zealand. "This confirms what we have been seeing for some time. Whilst there is some pull from the boards to be engaged in tax, we recognise the tax manager or tax director really needs to build up their sales skills to build up the profile of the tax function."
The survey found that, while 55 per cent of respondents believed boards understood liability, 52 per cent did not know if their boards were concerned in light of proposed increased personal liability on directors for tax arrears. More than half were also concerned about the reputational risk associated with non-compliance with tax obligations and its effect on shareholder value.
Mr Peccarelli said it was not absolutely necessary for boards to install tax experts as directors.
"I am not sure if it is tax technical knowledge. They just need an awareness of what is going on and what the issues are," he said.
A new survey by the Financial Reporting Council released last week found almost half of company directors rated their knowledge of key financial issues such as foreign exchange and asset valuations as only fair to poor.
The regulator said it would write to the Australian Securities & Investments Commission, the ASX corporate governance council and major training organisations urging them to lift financial expertise on boards.
Mr Peccarelli said the situation with respect to tax was improving, but there was a long way to go.
"Different corporations are investing more to minimise the risk. Putting more transparency, more controls around the tax function and all the different aspects within the tax function. But it is still a small population of total corporations doing that. It is starting to happen," he said.
"There is a trend among some companies to implement more controls in the area of tax. We do see that now occurring. I see that trend continuing to accelerate."
Mr Brindle said effective dialogue between directors and tax advisers was even more important at a time when corporate profits were under pressure.
"There are some competing demands for the tax function. There will always be that pressure to manage as lower as possible an effective tax rate. But at the same time there is also a desire to be seen to be a good corporate citizen and to be paying your fair share of tax," he said.
"The finance and tax functions are being constantly pressured to cut costs, be more efficient, while the bar of the tax office is getting higher. That is why there needs to be a better level of engagement between the tax department and the board."
The tax office warned businesses this year to approach the agency about outstanding tax problems before they spin out of control.