The impact of Tax Codes of Conduct

On 18 May 2022, the Confederation of Netherlands Industry and Employers (known as VNO-NCW) published its Tax Governance Code. This code was promptly embraced by 40 major Dutch multinational groups (including 20 of the 25 AEX companies). In addition to VNO-NCW's code of conduct, the Dutch Association of Tax Advisers (NOB) has also published its Tax Principles. A shared goal of these codes of conduct is to give meaningful and concrete substance to the tax strategy of companies with an explicit focus on social responsibility. PwC itself has been using its Global Tax Code of Conduct with guidelines and principles on how and under what conditions our tax advice is provided for about a decade.

How will this development affect companies and - more broadly - society, both national and international?

Background

Over the past decade, society's interest in how companies handle their tax obligations has increased significantly. This has translated, among other things, into calls from politicians and social interest groups to be more transparent about tax payment on the one hand, and a plea for businesses to contribute a 'fair share' to society on the other. Internationally, the OECD (Organisation for Economic Co-operation and Development) and the European Union have taken important steps through treaties and EU directives to make countries' tax systems more aligned. This is increasingly limiting the room for certain forms of international tax planning.

There is also a growing consensus in boardrooms that tax structures with a main purpose of tax avoidance are not always acceptable, even when such a tax structure is in line with laws and regulations.

What exactly do the various Tax Governance Codes and Codes of Conduct encompass?

The codes of conduct are very similar when it comes to their basic principles:

Business structure and transactions should be driven by commercial considerations and should serve a genuine economic purpose.
Companies and their advisers not only abide by the letter of the written law but also incorporate the spirit of the law in their decisions.
The company and its adviser adopt a transparent attitude towards the tax authorities based on mutual respect and trust.

Because the VNO-NCW Tax Governance Code addresses companies as taxpayers, these principles include additional provisions on the formulation, recording and safeguarding of a transparent tax strategy. The responsibility for the actual tax strategy and its compliance is explicitly made the responsibility of the Board. Incidentally, this is in line with the Corporate Governance Code (known as the Tabaksblat Code). The Board transparently accounts for the strategy and compliance, for example in the annual report. For advisers, the NOB (and PwC) code of conduct stipulates that, in addition to tax-technical aspects, they explicitly consider economic, commercial and reputational aspects as well as the interests of internal and external stakeholders of the company in their advice.

Those who embrace VNO-NCW's Tax Governance Code commit to paying tax on profits in those jurisdictions where value is created in the normal course of commercial activities. This is directly in line with the objectives of the OECD and the EU. By the way, the codes of conduct are not only about profit tax, but about all taxes.

PwC Global Tax Code of Conduct

PwC Tax consultants' advice is based on a thorough technical analysis of applicable tax laws, regulations and case law. However, based on the Global Tax Code of Conduct, the standards for our tax advice are much broader in nature than just these technical analyses. In fact, within PwC advisers submit advice and projects to Tax Policy Panels (TPP) if certain criteria are met. A TPP will then assess the project against the background of the Global Tax Code of Conduct. They will not only consider the tax-technical merits of an advice but will also take into account the tax strategy that you as a client are pursuing, as well as any economic, commercial and reputational risks and how stakeholders might judge a particular course of action. The conclusions of the TPPs serve as a guidance on how to proceed in practice.

ESG: Environmental, Social, Governance

VNO-NCW's Tax Governance Code requires companies to formulate their tax policy by means of a tax strategy. The tax strategy is determined by the company's Board and explicitly communicated to stakeholders and the general public, e.g. by reporting on the compliance in the annual report. If parts of the Tax Governance Code are not or not yet complied with, the company must explain this (comply or explain). Further anchoring of the tax strategy in the operational management is achieved by requiring businesses to have a Tax Control Framework (TCF). In this framework, procedures define how particular tax risks are being controlled and monitored. Being open and honest about the fiscal strategy and reporting on compliance with the adopted strategy fits within the ESG objectives (especially in the areas of Social and Governance). By being transparent, companies can contribute to trust both among internal and especially external stakeholders. You can read more about how your company can set up ESG reporting on our website, here.

Tax planning a thing of the past?

Yet tax planning is not a thing of the past. Countries, the European Union and international organisations such as the OECD, have taken important legislative and regulatory steps to make the many different national tax laws more aligned. The measures mainly concern the taxation of corporate profits. They do so without giving up sovereignty, in other words: taxes remain nationally determined.

The OECD and EU tax law initiatives are understandable from a societal perspective, but have the downside of making the international tax system even more complicated, with the OECD's two pillars ('Pillar 1' and 'Pillar 2') being the latest addition. The international system is highly fragmented as each country has its own tax rules. It is a misconception to think that the OECD and EU initiatives (the BEPS project, where BEPS stands for Base Erosion and Profit Shifting) have led to less fragmentation. The additional layer of laws and regulations should eliminate or mitigate certain adverse effects arising from the differences between the various tax systems. Specifically, one can think of the EU's Anti-Tax Avoidance Directives 1, 2 and soon also 3 (known by their abbreviation ATAD), the additional rules on the distribution of profit base across different countries (Pillar 1) and the introduction of a global minimum tax rate of 15 per cent (Pillar 2). Furthermore, on top of the system of individual bilateral tax treaties, the so-called Multilateral Instrument was introduced, which amends or supplements certain provisions of tax treaties.

With the fragmented tax landscape and these new laws and regulations, companies risk facing double or multiple taxation on the same profit. Careful (within the limits of the codes of conduct) tax planning may be needed to achieve single taxation of corporate profits, and to do so in the country where the value is created. This follows directly from one of the objectives of the codes of conduct and is in line with what politicians and society demand from corporations.

Furthermore, it is an increasing task for you as a company to meet all compliance obligations nationally and internationally (returns, reports such as CBcR, GloBE Information Return, etc.). Advice on embedding taxes in business operations is a must here.

What does this mean for your organisation?

If you are considering endorsing VNO-NCW's Tax Governance Code, you should have or develop a tax strategy. Sometimes this will lead to new insights, but it may be all that is needed is to make existing practices and implicit guidelines explicit to stakeholders. It is not necessary for your organisation to immediately comply fully with all the principles of the Tax Governance Code. To the extent that your company does not (yet) comply (e.g. because there are entities in the structure from the past that are based in tax havens), this should be explained. However, it does not prevent you from endorsing the Code.

Even if you decide not (yet) to commit to a Tax Governance Code or another code of conduct, it may still be useful to consider internally what tax strategy to pursue and how it can be embedded into your organisation. When you seek tax advice, depending on the specific situation, advisers can discuss with you whether and how a proposed transaction fits within the chosen tax strategy. If you would like to read more about this, please consult the articles below under "Related content", or download our brochure here: "Corporate Tax Governance: Creating a sustainable tax approach in times of fundamental change" (PDF).