Tax Risks Facing Multinational Concerns
Most Israeli technology companies need to export to survive. They usually do this by establishing subsidiaries in key markets abroad – the US, EU, Asia-Pacific and elsewhere – and paying corporate taxes in those countries at rates that typically range from 20 percent to 30%.
Foreign multinational groups that set up subsidiaries in Israel are usually aware that the Israeli standard rate of company tax is 26% in 2009.
Taxation is not the same as medicine: there are rules and practices in each country. Tax is an expense to be monitored and planned like any other expense. But tax authorities around the world object to noncompliance, aggressive tax planning and unreasonable transfer-pricing of products and services between related companies. If you are caught after a few years, the cumulative tax, interest thereon and penalties imposed can be severe.
A recent survey by a big-four accounting firm captures feedback and insights from tax and financial executives at more than 500 global companies on just how difficult tax risk-management can be (Steady Course – Uncharted Waters, Ernst & Young). The key findings of the 2008 global tax-risk survey are summarized below:
The majority of survey respondents said they spend up to 20% of their time on tax-risk issues. More than 90% of the respondents said tax-risk management would be an important area for them over the next two years.
The trend in tax-risk management is to be proactive, and tax executives said they were becoming more efficient and broadening their response to risk. Linking into other parts of the organization, such as internal audit or the company‘s enterprise risk-management program, is important.
Communication is critical. Companies that have regular communication with their boards about tax-risk issues are more likely to have specific measures in place to address those risks. Eighty-seven percent of the respondents said they had well-established communication with senior management.
Companies whose boards hear about tax risk employ data collection and work-flow technology more effectively. Seventy-seven percent of the companies said the absence of skilled resources contributes to tax risk. They also struggle to train the people they have. And as companies increasingly operate on a global basis, managing resources in overseas locations is an issue.
Managing legislative change is a key area of concern for tax executives. Sixty-eight percent of the respondents said new or changing legislation was a major challenge, while 88% reported that ‘‘success in dealing with tax authorities‘‘ was an important measure.
Companies are struggling to understand the effect of IFRS accounting rules on their global operations or deal with increasingly sophisticated tax audits.
Almost 70% of the respondents said effective tax-rate planning across the group was critically important for them.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
Leon Harris is an international tax specialist.