It is often said that the engine of any successful organisation is a well-executed strategy. While this saying can be considered a cliché, many of the global fortune 500 companies and successful organisations in Nigeria, have developed focused strategies which are evidently being implemented. For instance, in line with the strategy to promote climate change management, the global major oil and gas companies are transitioning from traditional providers of fossil related fuels to full energy companies - with phased expansion into renewable energies.
In lay terms, a strategy is an initiative that is implemented to achieve a desired outcome. Since the desired outcome for every business is to create value, development of the right strategy become essential to achieving this outcome. Typically, strategy derives from a vision or intended goal.
While organisations typically develop strategies for different aspects of their operations, like customer acquisition, procurement, wealth management and finance, only few organizations (and individuals) recognise "tax" as an extremely important area of the business. Based on the results from the Global Tax Function Benchmarking Survey conducted by KPMG in 2023, sixty (60%) percent of businesses indicated that tax reforms and amendments to the tax laws were significant disruptors to their business (Inside global tax functions - KPMG Global). This concern is underscored by the fact that taxation directly impacts on the financial performance of an organization, but it also impacts all stakeholders of the business: employees, shareholders, Government and the public.
These stakeholders are showing interest in how taxation affects them. They want organisations (and wealthy individuals) to demonstrate a high level of social and moral responsibility in line with the concept of "tax morality". Furthermore, the revenue pressure faced by governments globally has refocused tax as a sustainable source of Government revenue in many countries. In essence, every organisation should consider taxation as a significant area of concern for the business.
Tax strategy should not be confused with strategic tax planning, the latter dealing with operational ideas that optimize the tax exposures of an organization. The former refers to the action(s) developed by an organisation to achieve tax objectives (or set of tax objectives) –usually focused on creating a tax responsible and responsive organisation.
Developing a tax strategy begins with defining the tax goal(s) of the organization. These can range from traditional goals like ensuring high levels of tax compliance to more focused goals like, effective management of all tax risks across the organisation or deepening tax awareness across the organisation. Typically, the tax goals should align with or derive from the goals of the organisation and those of the broader finance team.
In some countries like the United Kingdom (UK), certain category of companies is required to prepare and publish their tax strategy before the end of each financial year. The UK Finance Act of 2016 (Paragraph 17(1), part 2 of Schedule 19 of the 2016 UK Finance Act), requires the tax strategy to cover specific areas such as approach to tax governance, attitude to tax planning, risk appetite and interaction with tax authorities. Applicable companies thus specify their strategic objectives for these areas as well as their strategic actions to aid their achieving of these objectives.
After defining the tax goal(s), the next step would be to develop the specific action steps that will facilitate the achievement of the goal(s). These action steps would be clear and evaluable, and they would address all the enablers, limiters, and interdependencies. For instance, if the goal is to strengthen relationships with the regulators, an action may be to set-up regular consultative meetings with principal officers on both sides. This action is evaluable and recognises the necessary level of engagement for achievement of the goal.
It is important to document and communicate the tax strategy to all stakeholders of the organisation - management, employees, investors, and tax authorities. This is necessary to ensure that the Company's approach on tax matters is clearly understood and that the documented actions are faithfully applied. As mentioned above, in the UK some companies are required by law to make their tax strategy document available. While companies in Nigeria are not statutorily required to develop and publish their tax strategy, our research has shown that there is a positive correlation between high performing tax functions and the existence of a document and well implemented tax strategy. For instance, we are aware that one of the leading telecommunication companies in Nigeria that was celebrated by the Federal Inland Revenue Service as a highly compliant taxpayer in Nigeria has a published tax strategy report with a focus on ensuring optimum tax compliance and open communication with tax authorities. In addition to the above example, having a clear and well-defined tax strategy document has been identified to improve investors' confidence and helps better indicate an organisation's commitment to its communities.
Typically, a strategy needs to be reviewed periodically and refreshed if necessary. This requirement is more pronounced for a tax strategy, due to the dynamic nature of taxation – significantly influenced by changing regulations and other external factors. Some tax experts have posited that tax strategy should be reviewed every six months. However, even when there are no external changes, it may be ideal for organisations to review their tax strategy annually to ensure that it is reflective of existing rules and realities.
>Conclusion
It is undebatable that a well-defined tax strategy for an organisation can drive the achievement of tax goals, reduce tax risks, and optimize tax positions. Yet, some have not developed tax strategies for their business. So, it begs the question - why are some organisations not deliberate about developing a strategy for their tax affairs?
Our experience shows two primary reasons for the above:
- The management of some organisations do not see the benefit of having a strategy to govern its tax affairs. Hopefully, this article will provide insights for such organisations to encourage them to develop a tax strategy for their business.
- Others do not know how to go about developing a tax strategy for the organisation. Again, hopefully, this article will provide insights for such organisations to enable them to begin the journey. However, it may be expedient to work with professional tax advisers in developing and evaluating a tax strategy for the business, in view of the additional insights and value that such advisers can add to the strategy development process, leveraging their experience working with other organization.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.