The Tax Department and Role of Strategy
The starting point in managing and controlling a group’s tax should be to define its tax strategy. Tax strategy is a plan of action, which an organization seeks to take to achieve its tax objectives. The Tax Director / Head of Tax (HoT) needs to set out the principal objectives, all of which should tie into the underlying business objectives. Laying out the tax function’s objectives in a tax strategy document ensures that they are communicated to and understood by the Board/ Executive Management, other stakeholders and employees whose activities impact tax numbers.
What is the role of the tax department?
When asked about the main objective of their tax function, many of the respondents indicated this to be managing tax compliance-related activities.
However, the objectives for which a tax department is set up should go beyond mere compliance management. An effective tax department has evolved into a function that focuses more on adding value to various aspects of business. It includes efficient tax planning, effective tax risk management, establishing strong tax control environments, proactively engaging tax authorities and tax professionals on issues which are not so clear and may have significant impact on business decisions, etc.
Written Vs Oral Objectives
63% of respondents say that their companies have written tax objectives. 40% of these respondents are from the financial services industry, while 32% and 28% are from the energy and consumer market/ other sectors respectively. The survey further indicates that these respondents are mostly organizations with foreign parent companies, which operate in environments with strong corporate governance requirements. More companies, especially indigenous companies and conglomerates, need to pay attention to articulating their tax strategies and objectives. This will help the tax function know how it fits into the company’s strategic plan.
It will also give assurance that the tax function’s own purpose and activities are properly aligned with the company’s objectives. In the case of respondents who do not have written tax objectives, we understand that this is usually communicated and understood orally. We must emphasize that it is not sufficient to communicate objectives orally. Tax objectives need to be formalized, their implementation monitored and subjected to independent oversight. If the tax department is to be taken seriously by the rest of the organization, it needs to adopt rigorous protocols just as is done by other business units.
Another area of concern is that even where formal tax objectives exist, they are not communicated to those that handle tax transactions outside the tax department e.g. sales operations teams in field offices who handle Value Added Tax (VAT) / Withholding Tax (WHT) on transactions. The excluded teams are often responsible for transactions that generate a significant proportion of the overall taxes in an organization. The exclusion of the ‘shadow tax teams’ therefore leads to sub-optimal implementation of the tax strategic plan.
Boards/Executive Management and Heads of Tax functions need to ensure that the tax and shadow tax teams are both equipped with the understanding of what to do to achieve the tax objectives of the organisation. Approval of documented tax objectives Only 30% of respondents obtain Executive Committee/Board’s approval of their tax strategy.This is however a surprise considering that only about two-thirds of this percentage have such objectives written, thus begging the question “how does the Executive Committee/ Board approve such objectives?” Tax management strategies however need to be discussed at Board/ Executive Management level as it is important that they play more role in the setting, agreement and approval of clear tax objectives that drive the activities of the tax team to deliver value to the organization. In large corporations which form part of a group, such discussions may be held and concluded at the global leadership/ parent executive level.This particularly ensures that the tax objectives agreed at the subsidiary/ local level align with that of the global or parent company.