The changing world of Tax Management in the FTSE
I remember a conversation I had with the Tax Director of a significant FTSE 100 company some 10 years or so ago.
He prided himself on his technical ability (as evidenced by the well- thumbed ‘Yellow Book’ on his desk), had little or no connection with the underlying businesses of the company – in his words ‘no need’, tried to avoid his CFO as much as possible, and managed his Effective Tax Rate (his only priority) by his strategy around provisions and the management of a “portfolio” of tax planning ideas he had purchased from accounting and law firms.
A 2015 Pure Search Survey of FTSE 100 Heads of Tax, “Changes in the UK Tax Market” (‘the Pure Survey’), reaffirms what I already knew – that the world inhabited by that Tax Director has pretty much been consigned to history.
What has changed?
Well, pretty much everything!
1. A Tax Director’s priorities
2. The skill set needed to effectively manage the tax burden of a FTSE 100 company
3. The relationship between the Tax Director and third party advisors
4. The mix and composition of the in-house tax team
Let’s examine these in turn.
1. The Tax Director’s priorities
It is clear from the Pure Survey that Reputational Risk and Stakeholder management have now become the most important issues for Heads of Tax. A greater weighting on these issues and those associated with them – risk management and compliance, relationship management and communication – dominates the answers given by FTSE 100 Heads of Tax. Effective Tax Rate and Cash Tax, on the other hand, are nowhere near as pre-eminent as they were ten years ago and, amazingly, Technical Expertise is consigned to last place in the Pure Survey rankings.
It should in many ways be no surprise, given the activities in recent years of the Fair Tax lobby, Parliamentary committees (of which I have first-hand experience!), NGOs, the press, regulators and the associated response by HMRC and the OECD.
US multinationals may feel themselves immune to this wave of change, but to the FTSE it is very real indeed, and the differences in attitude on either side of the Atlantic is palpable.
2. Skill Sets
In parallel with these changes in priority, the modern Tax Director needs to be a communicator, strategist and business leader. He or she needs to engage with their CFO and other stakeholders and feel comfortable connecting with the underlying business to identify risks and opportunities.
How many of the current Heads of Tax have these skills? It’s a good question, as the Tax Director of old did not always need to develop them. It’s those that are willing to adapt to these new priorities and have the appetite to develop the requisite skills who will remain effective and grow their company’s competitive advantage.
How easy is it to assess their effectiveness?
3. Relationships with Advisors
These relationships are under threat, in my opinion, for two reasons:
Audit rotation and restrictions on tax services provided by the audit firm mean that historic relationships may be in jeopardy. The Tax Director may be forced to take action on long term contracts to avoid changing provider mid contract (such as compliance and human capital global mobility programmes) and must be prepared to act quickly and have a plan in advance if the current main supplier of consultancy becomes ‘offside’ when the audit changes.
The third party advisor may no longer be best placed to support the Head of Tax today with the issues he or she is currently grappling with, in the way they could in the past.
Some of the main priorities around risk get into the detail about the effectiveness of internal systems and the heart of the business. Many planning opportunities are now found deep in the supply chain – can any third party advisor help identify and manage these deeply embedded issues from afar, in a cost effective way?
There is also a question that should be asked regarding whether the advisor has the depth of resource and expertise to support the FTSE in these areas of new importance. Historically compliance, risk, statutory reporting and systems have been under invested in, in favour of international corporate tax planning – which is now no longer as relevant to Heads of Tax in the FTSE.
Ask a simple question. How many of the multitudes of professionals in firms advising the FTSE are dedicated to Tax Risk Management, systems, statutory reporting, transfer pricing and compliance?
4. The in house team
Historically there has always been a cycle of in sourcing v out sourcing of tax functions in the FTSE, usually driven by economic factors.
I predict a new trend in the FTSE 100, where for the foreseeable future businesses take more in house and place less reliance on external advisors.
Some of the new priorities of the Head of Tax arguably can’t be supported cost effectively by third party advisors. The issues that are relevant today can only be dealt with from within the company rather than by an external advisor.
There is an overall skill shortage in the areas that are now a priority to FTSE Heads of Tax – do third party advisors have the in depth bandwidth to support the FTSE in these issues?
The Head of Tax needs to remove some of the volatility in having changes of advisors imposed on them by audit rotation.
The Pure Survey illustrates the start of this trend, with 40% of respondents reporting they were spending less on external advice than they did three years ago, and 21% of Heads of Tax in the FTSE 100 planning increases in the size of their in house teams.
A similar Pure Survey of the FTSE 250 Heads of Tax indicated that the issues are magnified in this group. Heads of Tax often have to wear many hats; Tax, Treasury and M&A to name just three! Here the size of in house tax teams averages only 7 people globally and 60% of Heads of Tax have reported skills gaps in their teams – not surprisingly in the areas of importance discussed above!
FTSE Heads of Tax and their CFOs should, therefore, actively discuss their tax management priorities and consider whether a greater proportion of the budget for external advisors should be redirected in recruiting in house to deal with the issues above.
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