With the international landscape rapidly changing and the need for risk management growing, is it time to put in the work and embrace diligence and good governance?
A year ago, we were at AmCham’s annual Tax Forum in Athens, discussing the changing landscape of international tax with fellow EU and US Taxand colleagues. It was clear then that significant change had been driven by a number of factors, including a long-lasting economic crisis, a crisis of political values, the digital revolution, and the growing ubiquity of social media.
A year later, amid an ongoing European war, we are reaching an accelerated consensus to proceed with the Pillar work and to apply a fair global tax. We are also in active discussions around tax integration in the ESG and the need for businesses to make tax a top priority for the boardroom. Such discussions go beyond traditional forms of legal responsibility for directors. It is an additional layer of liability that can have a devastating impact on the most important element of any business: its reputation.
By law, the board of directors already carries significant liability in the event of tax violations. Such liability differentiates between civil liability (liability to pay the taxes jointly with the entity) and criminal liability (arising from the failure to pay taxes). In brief, directors’ liability lies upon various factors, such as the position and powers, whether there was intention involved, and the type of tax assessed. If the lawful requirements are met, liability is triggered regardless of the nationality and tax residence of the liable directors. Depending on the type of infringement and liability related to that, the liable person may deal with enforcement measures against personal property and criminal sanctions. Other significant practical side effects such as blocking of a tax clearance certificate (therefore blocking transactions such as property sales) are also coming into play.
Is the liability of directors sufficient to avert an aggressive tax planning strategy? It has not been in the past.
Corporate law introduces a broad responsibility for internal control processes in cases of listed companies, but also a duty of diligence of the directors for good and prudent governance, spanning all types of entities, be they listed or non-listed. The duty relates in principle to the diligence of a prudent businessman acting in similar circumstances. It appears that the duty to apply good corporate practices includes the ESG factor, which brings risk management and a fair tax strategy onto the boards’ agenda through the back door, irrespective of the responsibility introduced through tax legislation.
Directors cannot disregard this responsibility, and it appears that tax is a quick fix for ESG compliance. So, what do directors have to do? Is compliance box-ticking enough?
In my view, diligence and good governance require the following:
- Building a tax strategy in cooperation with finance management that addresses efficiency, transparency and cooperation with tax authorities;
- an internal audit procedure that ensures quality review of strategy implementation, namely a sound check on compliance levels;
- a system of efficient and speedy risk management, should risk arise; and
- a flexible and dynamic process to revisit the strategy as required to adapt to changes in business conditions.
This is a priority for all businesses and will require management to work with their tax teams to create tax strategies in advance of new projects. It is also an element of good governance that forms part of directors’ duties towards the business, the shareholders and society as a whole.