“Tax risk and corporate governance” by Emmanuel C. Alcantara (March 15, 2010)

SUITS THE C-SUITE By Emmanuel C. Alcantara
Business World (03/15/2010)

Your company’s books for taxable year ending Dec. 31, 2009 have recently been closed. The external audit of the company’s financial statements has either been completed or will soon be, and you are getting ready to file the company’s annual corporate income tax return (ITR) soon.

As chief financial officer (CFO), you review the ITR, paying close attention to the underlying items of income and expense, and then you ask these necessary questions:
Did the company compute its income tax correctly?
Is the company taking any uncertain tax position or is it being aggressive on certain issues?
What was the company’s tax planning strategy?
What is the extent of the company’s tax risks and tax compliance?
Indeed, these are vital questions to ask; but you are confident because, throughout the year, your tax managers and external tax consultants have provided strong support.

Ordinarily, tax issues affecting the company need not reach the board room. However, with the lingering economic crunch, increasing pressure on government to raise revenues and for companies to reduce their effective tax rate, managing a company’s tax affairs has become so critical, that the question arises: must the board of directors now be involved?

The concept of tax governance (or the way that a company’s tax affairs are managed, directed and administered by the board) must be given serious consideration in view of how doing business has changed.

Tax governance should now fit into management’s corporate governance action plan. It is both necessary and inevitable.

A recent Ernst & Young (EY) report, entitled: “Tax Administration Without Borders,” noted that the C-suite is increasingly considering tax risk management as part of overall corporate governance. This is consistent with the tax administrators’ increasing expectation for “corporate boards to understand their responsibilities with regard to their business tax strategies and outcomes to fulfill their corporate governance responsibilities.”

As the struggle to protect corporate image continues, good tax governance urges the board to take ownership of the company’s tax strategies and to consider the reputational and financial risks associated with the implementation of corporate tax policies. In his October 19, 2009 speech to the National Association of Corporate Directors, US IRS Commissioner Douglas H. Shulman stressed that tax issues should be on every director’s “radar screen.” He encouraged directors to establish specific mechanisms to oversee tax risk as part of the corporate governance process.

Here in the Philippines, we can expect to see tax governance take center stage and become more relevant as tax administrators continue to develop and implement measures that are meant to substantially increase revenue collection.

This means that more pressure is going to be exerted on management — and not just on the CFO — to ascertain that the company is tax-compliant while it addresses the financial bottom line.

The EY study noted that some jurisdictions are even beginning to hold individual company officers accountable for the financial numbers they approve. The Philippines is no exception.

Just last February 25, the Bureau of Internal Revenue (BIR) issued Revenue Regulations 3-2010, requiring taxpayers to henceforth submit a statement of management’s responsibility together with their annual income tax return. In the declaration, management must state that it is responsible for all information and representation contained in the annual income tax return, the accompanying audited financial statements, and in all other tax returns for the reporting period. These include returns covering secondary taxes such as value-added and/or percentage, withholding and documentary stamp taxes.

The president and managing partner, chief executive officer, CFO or other officers with similar function, regardless of designation, must also affirm that the audited financial statements accompanying the annual income tax return adhere to the books and records of the taxpayer.

Management must likewise confirm that the financial statements and the returns are complete and correct in all material aspects, and that the return was prepared in accordance with the Tax Code and pertinent rules and regulations.

There should also be an affirmation that any disparity of figures between the return and the financial statements due to financial accounting and tax accounting rules was “reported as reconciling item and maintained in the company’s books and records.”

Most importantly, the designated officials must state that all applicable tax returns have been filed and that all taxes have been paid for the reporting period, except those contested in good faith.

It is evident that tax authorities will carefully scrutinize the tax affairs of companies. Management must be cognizant of this development to seriously consider adopting and implementing tax planning strategies responsibly. This will help them avoid making tax-related decisions that ultimately will erode corporate profits and overall shareholder value.

The relevance of tax governance can probably be best appreciated when viewed in the context of corporate governance in general. Broadly defined, corporate governance is a system or a set of processes ensuring that a corporation is governed in a manner consistent with the principles and practices of a free and moral society and a competitive environment. The board of directors assumes the responsibility of corporate governance, which is deemed to be good when all the aspects of decision-making reflect fairness, accountability and transparency.

Having said that, we can see clearly why the board of directors needs to be directly involved with tax governance as it is an intrinsic component of overall good corporate governance. If they ignore or negate it, then a corporation cannot, in essence, claim that it is truly practicing corporate governance.

In practicing good tax governance as part of its corporate governance process, a corporation will contribute to building enduring and credible relationships with its shareholders, employees, customers, suppliers and the community.

It will also benefit the company in the terms of enhancing and preserving its reputation, brand and integrity, improving its commercial value and promoting its corporate social responsibility.

CFOs are highly encouraged to report tax issues and bring tax awareness to the board. In this way, responsible decisions by the board — as it relates to the tax affairs of a company — are made consistent with the company’s goals, mission and vision. With good tax governance, an enlightened, informed and involved board will truly matter.

In sum, good tax governance is simply doing the right thing as far as taxes are concerned.

Emmanuel C. Alcantara is the Head of Tax Services of SGV & Co.

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.