A new PwC study shows that the need for change is certain given the challenges tax functions are currently facing and those on the horizon. While a tax function may have been a passive participant in transformational and enterprise efforts in the past, it must now be a strong advocate for change. Tax functions should take ownership of their business case and pursue actions to ensure it is ready for the future.
The tax transformation journey will not be easy, but it is now imperative and the return on investment can be significant. With a thoughtful roadmap, the positive impact on the organisation may be felt for many years to come. The potential benefits will not only reduce above and below the line costs, but will improve company-wide risk management and tax governance, resource management, recruitment processes and many other areas. Through continuous transformation, the tax function will be viewed as not only as a critical and efficient compliance function, but also as an even more valuable strategic organisational asset.
Organisations often don’t grasp the true financial impact of an economic crime until after it has happened — sometimes well after. As in previous years, The Global Economic Crime Survey underscores that the cost of fraud — both in financial and non-financial terms — is significant.
Nearly one in five (18%) organisations suffering fraud experienced a financial impact of between US$1 million and US$100 million. And the percentage of respondents reporting losses in excess of US$100 doubled, from one to two percent.
These large losses may be connected to the reported increase in incidents of bribery and corruption — frauds which can be especially costly to organisations, with regulatory fines, legal fees and remedial expenses easily reaching billions of dollars.
But economic loss is not the only concern that companies face when combating fraud. Survey respondents pointed at damage to employee morale, corporate and brand reputation, and business relations as some of the most severe non-financial impacts of economic crime.
When taking into account the secondary damage, the true cost of an incidence of economic crime can be long lasting. Consider the long chain of adverse events can follow a single, high-profile incident of economic crime:
lost revenues, as customers look for other business partners;
delayed entry to new markets due to regulatory issues;
a battered stock price; and
declining productivity and morale.
Fortunately, top management appear to understand the importance of collateral impacts: the 2014 Global CEO Survey reports that half of chief executives (a sharp increase from 37% just a year ago) see a “lack of trust in business” as a key marketplace issue, with significant majorities recognizing that business has a wider role to play in society than just building shareholder value.
There are radical proposals under discussion related to tax and how tax systems operate. It may change the way in which the international tax system works so a closer look today can help preparing our position papers for future legislation.
PwC recently launched Paying Taxes 2014, the eighth edition of their joint annual report with the World Bank and IFC. This is a unique study which investigates and compares tax regimes across 189 economies worldwide, ranking them according to the relative ease of paying taxes. Paying Taxes looks not only at corporate income tax, but at all of the taxes and mandatory contributions that a domestic medium-size case study company must pay. It considers the full impact of all these taxes in terms of both their tax cost and their compliance burden on business.
The study can be downloaded from www.pwc.com/payingtaxes. You can find out how your economy compares with others or you can try out the comparative modeler tool to create your own peer groups from all the economies and regions in the study (tool available at www.pwc.com/payingtaxesmodeller )
As in previous years, the report is expected to be a catalyst for some interesting debate with tax authorities, governments, and business around tax systems and how they can be reformed. Paying Taxes 2014 continues to focus on the trends from the data included in the study. The analysis looks at this from a regional perspective and this year they have taken a more detailed look at the trends for the types of tax within each of the sub-indicators. This has provided some interesting findings around how governments are choosing to levy taxes.
Some of the key findings in this year’s report include:
On average in 2012, it took the case study company 268 hours to comply with its taxes. It made 26.7 payments and paid an average Total Tax Rate of 43.1%.
Reforms in business tax systems continue around the world. The number of economies reforming increased from 31 last year to 32 in the most recent study. The focus continues to be on reducing the administrative burden of the tax system.
All three paying taxes indicators have fallen consistently over the period of the study reflecting the reforms that governments have implemented with a view to making paying taxes easier and so easing the burden for business and government.
While the global average Total Tax Rate has continued to fall in 2012, 14 economies have significantly increased their Total Tax Rate while 14 have reduced it. If the exceptional rate reductions which arise from replacing cascading sales tax with VAT are excluded, the global average Total Tax Rate has started to rise in 2012 (0.2 percentage points).
Over the nine years of the study the Total Tax Rate attributable to profit taxes has fallen faster than for the labour taxes borne by the case study company so that labour taxes are now the largest element of the Total Tax Rate
On average consumption taxes have always taken the longest time to comply. Over the nine years of the study the time to comply has improved most for labour taxes.
Central Asia & Eastern Europe is the region that has seen most reform over the nine years of the study, with the largest fall in the average for both the time to comply (by 220 hours) and the number of payments (by 25).
The highest average tax cost is in Africa, amounting to 52.9%, the lowest is in the Middle East where the average is 23.7%. Over the last nine years the largest falls in the Total Tax Rate have been in Africa (by 16.0 percentage points), Central Asia & Eastern Europe (by 15.7 percentage points) and the Middle East (by 15.6 percentage points).
The highest number of hours to comply is found in South America with 618 hours, the lowest is in the Middle East with 159 hours.
The most payments made are in Africa amounting to 36.1 followed by Central America & the Caribbean with 33.7. The fewest payments are made in the North America where the company has to comply with only 8.3 payments. This is largely due to the ability of companies to file and pay taxes online.
During the last few years I’ve seen charts showing sharp growing rates of the middle class in Latin America. The charts look good but what they do not show is that, at least for the poorest economies, all this growth is based on wider access to loans. Basically, it’s not an increase in sustainable revenue but rather an increase in debt. The raise in debt is, of course, coordinated with a sharp raise of real estate prices.
As a side effect, the middle class growth is raising demands on governments and businesses for better public services which require more funds raised by either increasing taxes or getting public loans which leads to more debt.
The scenario tends to look familiar. In my opinion this is not going to last for long and we’ll see some real economical and social issues in Latin America over the next five to seven years.
In this year’s report PwC’s focus is on the key themes revealed by the latest study, and has put it in the context of the eight years of data they have compiled since the inception of their Paying Taxes survey (2004 – 2011). They’ve analysed this data both at the global and the regional level, and included additional analysis which compares the Paying Taxes indicators with some broader macroeconomic indices of growth and investment.
The economies in Central Asia & Eastern Europe have led the charge over the period of the study to improve their tax compliance procedures and also to reduce their tax rates. Economies in this region have shown the largest fall in both the time to comply (200 hours) and number of payments (22.2) and apart from the Middle East have the largest fall in the Total Tax Rate (12.6%).
While the Total Tax Rates for Africa still appear to be high, if the three countries with cascading sales taxes are excluded then the average falls to a level which is just above the world average, leaving South America as the region with the highest Total Tax Rates. Therefore, the highest number of payments is now made in Africa (37.0) whilst compliance continues to take longest in South America (619 hours).
The developed economies of Europe and North America not surprisingly have the most efficient tax systems but Total Tax Rates can be high, driven in many cases by numerous labour taxes and social contributions. The lowest number of payments is now made in North America (8.3) followed by the EU & EFTA (12.8).
It is not surprising that the economies in the Middle East feature so prominently in the top jurisdictions of the Paying Taxes indicators. This can largely be attributed to the relatively few taxes levied on the case study company and a reliance on other sources of government revenues. The expectation is that this will change as new revenue raising measures are introduced.Middle Eastern states have the lowest average Total Tax Rates (23.6%) and the lowest time to comply (158 hours).
For a closer look into your country’s tax compliance and a benchmark against other countries have a look @ http://pwc.to/XBSTiN
Proposed regulatory reform through the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III is causing significant change in the derivatives world. While the end goal of the derivatives provisions is ultimately to achieve less risk and greater stability in the derivatives market, new standards come at a considerable cost to corporate users.
Faced with the prospect of increased compliance costs, banks will look to pass these costs down to their customers. In addition, corporations will need to comply with new trading regulations and increased reporting and recordkeeping requirements.
Every aspect of business will likely be affected – from risk strategies and corporate funding to operations and accounting. PwC issued an easy to read one-pager that provides insight on the impacts of new regulation on corporate entities and what those entities need to do now in order to meet impending reform deadlines and ensure they’re well equipped to manage increased costs and compliance responsibilities.
PwC released its “IFRS pocket guide 2012” which provides a summary of the recognition and measurement requirements of International Financial Reporting Standards published up to August 2012. This quick-reference guide is intended for a variety of audiences, including finance directors, financial controllers and other members of the finance team, as well as broader management, actuaries, lawyers, merchant bankers and analysts.
The information in this guide is arranged in six sections:
Income statement and related notes.
Balance sheet and related notes.
Consolidated and separate financial statements.
More detailed guidance and information on these topics can be found in the IFRS manual of accounting and other PwC IFRS publications.
Understanding what drives the amount of corporate income tax paid by companies has become increasingly important in recent years as governments adapt their policies to encourage growth, while recognising the need to raise revenues to fund social investment programmes and to repair public finances in the wake of the global economic downturn. It is important to recognise and understand the impact of tax policies on the revenues received by governments, revenues that governments rely on to enable them to discharge their obligations to provide funding for infrastructure, education and public health. This includes the need to ensure that the tax system provides an economic environment which fosters economic growth, helping to increase the size of the economy from which revenues can be drawn.
For companies, this has become important as they come under increased scrutiny over how much tax they pay and whether they are paying the ‘right amount of tax’. For companies the amount of tax that they pay represents a key element of the contribution that they make to the economies in which they operate. Taxes are a cost that has to be managed like any other cost, and the level of taxes paid is one of a number of factors that are taken into account when making decisions on where, when and how much to invest.
Over the last seven years PwC has worked with the World Bank on the “Paying Taxes” study which measures and compares how easy it is to pay taxes in 183 economies around the world using a case study company with a standard fact pattern. The study looks at all of the taxes that a company might pay including corporate income tax. It showns a consistent downward trend in the statutory rates of corporate income tax which have been applied over the last seven years, as governments have looked to ensure their tax systems remain competitive in a globalising economy. Another consistent feature of the results of the study is that the amount of corporate income tax actually paid can often be different and on occasions very different from the amount derived by simply multiplying the accounting profit by the headline rate of corporate income tax.
The results are quite striking
They show how the downward trend in statutory rates has resulted in those now applied falling within a fairly narrow range. More than half of the economies around the world have a statutory corporate income tax rate between 15% and 30%. And as regards the rate of tax actually paid by the company, the study identifies 40% of economies which make adjustments which increase the amount of tax paid while 60% reduce it. PwC’s analysis identifies the key reasons for these differences and provides some interesting insights on a regional basis and for a selection of individual economies.
It will be interesting to see how corporate income tax regimes around the world continue to develop, and whether the need for governments to demonstrate that their systems are competitive takes priority over the need to generate much needed funds.
Political leaders rarely campaign for office on a platform of government effectiveness. In many cases, tackling the bureaucracy is perceived as high risk and low reward compared with passing new laws in the legislature. Yet few succeed without achieving some reform. Many departing presidents, prime ministers, and cabinet secretaries reflect on how the engine of government itself was at the very heart of their successes or failures.
What it takes
Those that have achieved sustainable and significantly higher levels of government performance did so by explicitly designing and executing multiyear reforms that push beyond everyday initiatives designed to improve management capability.
McKinsey recently published a report – “Government designed for new times” in which they identify 40 such programs that have been enacted around the world in the past two decades. There were a number of objectives these programs were designed to achieve: significant fiscal consolidation, better outcomes across multiple public services, and economic growth. Here is a map of programs in a selected number of countries that McKinsey has put together:
How much control should political leaders have over government effectiveness?
The intense pressure for reform makes innovation a critical capability. In many areas, government agencies around the world are redesigning how services are delivered (for example, through one-stop shops and e-portals) by providing greater data availability and through mobile services that allow citizens to get instant help and support. McKinsey shows that Governments that are willing to reform and build such capabilities are better able to achieve major breakthroughs in the most fundamental policy areas, even in the absence of new policy or legislation.
I would raise a question mark whether such a discussion should take place from the very beginning. Should government agencies look at themselves for making their services more efficient or should this fall under political control? Let’s consider that, regardless of the fiscal policy, efficiency of the fiscal agencies should follow a consistent improvement track so the question is: should its efficiency be influenced by the policy itself?
PwC is running an yearly survey to highlight the contribution family businesses make to economies and communities around the world. This year, 1,952 family businesses took part in this survey from over 30 countries, including, for the first time, Australia, China/Hong Kong and India. From Singapore to South America, the results look at the unique challenges that family businesses face regardless of where they are in the world. The respondents could not have been more varied in size, industry and location, yet there was marked similarity in their approach to business and in what they considered to be distinctive characteristics of businesses like theirs.
Here are some key findings:
65% have grown sales in the past year (compared to only less than half in 2010)
Almost 60% say attracting the right skills/talent will be a key challenge in five years’ time
64% think the general economic situation will be their key challenge in five years’ time
Over 60% see the need to continually innovate as the key internal challenge in five years’ time
A quarter of our respondents’ sales are currently international; this will rise to 30% in five years’ time
How do your challenges, strengths and resilience compare to those of your peers across the world? What are your plans, if any, for expansion — and succession — in the coming years? What do you see the role of government being?
PwC has an online tool available for you to benchmark your business across a range of crucial, family-firm-relevant metrics.