Tax’s role in ESG performance – part 3. Unlocking the strategic value of tax governance
ESG objectives are now firmly embedded in the corporate agenda, and how companies handle tax plays an increasingly important role in hitting those objectives. But without much existing guidance, and so many pitfalls to avoid, where do tax teams fit in? In this three-part series we discuss the role of tax in companies’ wider ESG picture, and how the right technology investments can unlock its true potential.
We've already discussed the E (here) and S (here) so for part three of three, we’re looking at governance – the ‘G’ of ESG, and how businesses can change it from a chore to a source of strategic value.
Conversations around ESG normally focus on the first two letters. ‘E’, or environment, is top of every agenda. The focus of the world’s media on COP27 is just the latest example of – quite rightly – how important environmental footprint is to everyone from the public to governments, investors to employees. The ‘S’, social, is similarly a hot topic of discussion. The social contract which a business holds with other parties, and the impact of operations on the fabric of markets where they operate are all factors that shape our impression of businesses as strong or weak on sustainability.
The ’G’, or governance, rarely gets the same attention. But there is no “E” or “S” possible without the “G”. Indeed, without strong governance, environmental and social commitments, however well-intentioned, are always at risk of failing to be properly carried out. Tax is a prime example. In previous blogs, we’ve looked at how a business’s tax function has an essential role to play in ensuring that the wider organisation delivers against its environmental and social obligations. But without robust governance and control, companies will often have no way of ensuring they deliver.
This doesn’t just hold a company back from doing the right thing, it actively stops then unlocking the value that a strong tax strategy, backed up with solid objectives and policies, can deliver. To tick both boxes, the concept of a Tax Control Framework for businesses is gaining traction. Most tax leaders are convinced about the strategic value they have, and how they are essential for improving cooperation and assurance with third parties. But the problem is that these frameworks are mostly presented as theoretical models, something passive living in a spreadsheet with little indication of unlocking its potential.
The strategic importance of an operationalized Tax Control Framework cannot be underestimated. First, it is a ticket-to-play in policies which more countries are introducing. The OECD International Compliance Assurance Program has even included it as a requirement. Furthermore, it is an instrument to establish trust in the relationship with tax authorities, and boost tax morale (i.e. the intrinsic motivation to pay taxes), according to a recently published OECD document.
What tax teams are discovering is that to bring the framework from the page to reality is better technology. Using analogue methods to test actual tax behaviour (e.g. tax compliance activities, controversy management) against the norm in real-time is simply not possible. You need an integrated solution that links “doing the work” with capturing the data from that work and unlocking testing results, insights, and learnings.
What does this look like in practice? Mainly it takes the form of structured and automated workflows which can be designed for every domain of tax, and every tax job-to-be-done. These should result in controllable, repeatable, and scalable processes, with integrated data inflow. Review and data validation layers can be made part of the overall workflow, whereby a strong audit trail is kept backing up all the activities, which thus reinforces the Tax Control Framework’s assurance levels.
Interactive dashboards and predictive intelligence draw the attention of tax leaders and the C-Suite immediately to the required risks, allow for prioritization, and are the basis to kick-off new projects and set out tasks to mitigate any of the shortfalls in the overall company’s global tax management.
In reality, an overall ‘framework’ can be a series of small baby steps which allow businesses to get started today, rather than waiting for the theoretical to magically become reality. And the urgency of starting now has never been more apparent.