New constraintsJanuary 13, 2012
The financial crisis is pressuring tax and finance teams in a range of ways, with firms facing a minefield of issues to navigate their way through.
By Dan Armstrong
The squeeze of regulation is becoming harder to escape. This is not solely because the rules have become stricter. In fact, many European regulations proposed after the 2008 market collapse have been put on hold as policy-makers grapple with the Eurozone crisis.
Yet the trend is clear: a new, tighter world of rules and policies is taking shape, which are putting new pressures on corporate finance and tax teams.
As a result, companies are being forced to add resources, invest in oversight and spend more time dealing with regulatory bodies. Not all of the following long-term trends apply to every country or industry, but collectively they highlight the new challenges and complexity that businesses face.
Governments need more revenue
The aftermath of historic banking crises is usually associated with an explosion of government debt. This crisis is no different, with individual and corporate taxpayers ultimately picking up the tab.
There is more public awareness
Tax avoidance has become a very high-profile public issue today. From demonstrations against rock band U2 to the global spread of the Occupy Wall Street demonstrations, public anger against the idea of tax avoidance has grown.
Firms are being made to disclose more information
Global companies face rising pressure to increase disclosure, including every aspect of their financial activities, to a myriad of regulators around the world.
Governments are embracing technology
Data mining tools are increasingly being used to detect questionable tax claims, such as the United Kingdom’s Fraud and Error Assessment Tool (FEAST), announced in June 2011, which analyzes and identifies potentially suspicious tax credit applications.
There is more cross-border cooperation
By late 2011, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes will have issued peer reviews on 60 countries, including many offshore financial centers. These increase the exchange of tax information across borders, cutting down on secrecy.
New incentives for whistleblowers
Under proposed US rules, anyone can get paid for revealing compliance breaches, even third parties who have signed non-disclosure agreements.
In 2009, European regulators publicized the broad objectives of new rules for financial service providers. But the sovereign debt crisis has delayed the process, with little chance of a full overhaul until 2013, at the earliest. As a result, financial services firms face significant regulatory uncertainty.
Rules with broader scope
The coming raft of new European derivatives regulations will affect end users who use derivatives to hedge, not just the intermediaries that structure and sell the products. Any entity with trading operations over a certain threshold will be subject to rules on trade repositories and clearing houses.
Avoidance, not just evasion, is being targeted
The United Kingdom has begun to look into a “General Anti-Avoidance Principle” designed to fight transactions with tax avoidance as the main objective. It is one more sign of the willingness of governments to abandon past practices in order to capture more revenue.
For corporate tax and finance teams, finding a safe path through all these wide-ranging challenges is becoming more difficult. Resources are part of the answer. A bigger part is the ability to consider tradeoffs, weigh risks and make choices — while simultaneously preparing to respond to the unexpected.
This article was first published in Issue 06 of Ernst & Young´s T Magazine publication which can be accessed using the links below: