The ‘best practice’ tax function

Second edition

Tony Elgood and Damian De Backer are UK based taxmanagement specialists who work extensively with both UK andmulti-territorial companies looking at the role of their tax function,and with tax functions looking to improve their effectiveness.

Tony Elgood

PricewaterhouseCoopers LLP31 Great George StreetBristol BS1 5QDUnited Kingdom

Tel: + 44 (0) 117 930 7025E-mail: anthony.b.elgood@uk.pwc.com

Damian De Backer

PricewaterhouseCoopers LLPAbacus Court6 Minshull StreetManchester M1 3EDUnited Kingdom

Tel: +44 (0) 161 247 4024E-mail: damian.de.backer@uk.pwc.com

Second edition, 2006. Originally printed 2002.

01

ContentsPage

Preface to second edition 03

01 Introduction 05

02 Change drivers for the tax function 07

03 The tax strategy – and what should be included 11

04 The role of the tax function 19

05 Managing the tax charge 23

06 Managing tax risk 27

07 Managing the cost of the tax function 33

08 Tax department organisation 37

09 Communication within the business 41

10 Managing the tax team 45

11 Use of technology 49

12 Use of external advisers and service providers 53

13 Performance metrics 57

14 Effective global tax management 61

15 In conclusion 65

Appendix I: Tax function best practice 67

Appendix II: Tax function activity analysis 68

Appendix III: Tax strategy document: a sample framework 70

Preface to second edition

03

Most of the principles and ideas setout four years ago have stood thetest of time and the ongoing demandfor this guide suggests that theseideas are as relevant today as theywere then.

However the world has moved on,not least in the area of corporategovernance. One of the objectives ofthe first edition was to encouragebusinesses to ensure they had aproperly documented tax strategywhich had been discussed andagreed at board level. We now believethat such a document is a must,rather than a nice to have (not leastdue to increased investor interest intax strategy). We are often asked towrite, or help write, tax strategies forbusinesses. We believe that astrategy needs to be something thathas been produced and bought intoby the in-house team, rather thanbeing written by an external advisor.Having said that we recognise thatorganisations often need somesupport and challenge in producingtheir tax strategy document. We havetherefore included, in Appendix III tothis second edition, a framework thatwe often use to help our clientsproduce a tax strategy document.

Another area which has moved onconsiderably over the last four yearsis tax risk management. Rather thanre-write the section in this guide wewould now refer you to our separateTax Risk Management guide, whichwas published in 2004. On the backof this guide we are working with anumber of organisations helping themto produce their tax risk managementframeworks and their tax risk policies.This is undoubtedly an area that willcontinue to evolve as people developmore practical experience.

Since publishing the last edition,there has also been an increasingfocus on the issue of corporate andsocial responsibility. Many businessesare seeking to get a better handle onthe total tax contribution that theymake to the exchequers of differentcountries around the world.Corporate income taxes are perhapsthe headline figures that can bereadily ascertained from publishedsets of accounts. However, the totaltax contribution which businessesmake also include irrecoverable VATand sales taxes, payroll taxes, realestate taxes, capital taxes,environmental taxes, state and localtaxes, and withholding taxes as wellas customs and excise duties. In

addition to the public relationsbenefits of being able to explain thetotal taxes being paid by theorganisation, having this informationallows a more focussed tax strategyand a more focussed approach to taxrisk management. We have thereforeincluded, in this second edition, acouple of paragraphs on determiningyour total tax contribution; this isincluded at the end of section 5.

Finally, tax reporting andcommunication is another area that isreceiving increasing focus. Whilst wehave not made any changes in thisarea in this second edition, we areplanning a separate guide on taxcommunication and reporting.

Subject to the changes noted above,this second edition is essentially thesame as the first edition of four yearsago. We hope and trust that we cancontinue to stimulate the debatearound the role of the tax function ina business and help to bring focusand clarify as to what the functionshould be seeking to do in it’s day today activities.

The first edition of this guide was published in May 2002. Sincethen there has been various reprints of the first edition and over8,000 copies have been distributed on a worldwide basis.

Tony Elgood Damian De Backer

Global Compliance ServicesPricewaterhouseCoopers LLP

July 2006

01Introduction

In our work with in-house taxfunctions we are often asked “Whatdoes a ‘best practice’ tax functionlook like?” Whilst there is no one rightanswer, the purpose of this booklet isto encourage tax directors incommerce and industry to challengethemselves and their teams withsome fundamental, searchingquestions. These questions include:

• why are we doing what we are doing?

• should we be doing differentthings? or

• should we be doing the same things but perhaps indifferent ways?

The booklet is also aimed at financedirectors (or other people to whomtax directors report) who should beasking the questions “What am Ilooking for from our in-house taxfunction?” and “Am I getting bestvalue for the money being spent?”

This booklet follows on from theresearch carried out by Dr BrendaPorter (then of Cranfield School ofManagement) on behalf ofPricewaterhouseCoopers over thepast few years. The results of DrPorter’s research have beensummarised in our Tax function 2000

and Tax function 2001 reports.However most of what follows isbased on discussions with in-househeads of tax about the real taxmanagement issues they face. Muchof this experience is in respect of UKheadquartered businesses, but ourwork elsewhere and the experiencesrelated by our overseas colleaguessuggest that much the same themesapply in other territories too. We arealso grateful for the input of PeterDavies who has been there and doneit – Peter was head of tax at Unigatein the 1980s and National Power inthe 1990s.

This is not a manual on how to run atax function. Different circumstancesdemand different solutions (and hencebenchmarking data tends to be oflimited help in evaluating taxfunctions). What we have tried to dois provide ‘food for thought’ tostimulate discussion and to serve asan aide-memoire of issues to coverwhen a company addresses itsapproach to tax management. Byhighlighting these issues we hope wecan encourage tax directors to take afresh look at their approach to taxmanagement and how they run theirtax departments. As well as throwingdown these challenges, we have alsosought to provide some ideas andtools to meet these challenges.

What is best practice for anin-house tax function?

05

07

02Change drivers for the tax function

“If you’re not riding the wave of change,you’ll soon find yourself beneath it.”

In our experience, taking time out to sit back and rethink thegroup’s approach to tax management is not something that manyheads of tax have managed to get to the top of their to-do list.However we believe they should. There are many changingpressures on the tax function, some internal and some external,which should prompt most businesses to review regularly theirapproach to tax management. Diagram 1 illustrates some ofthese pressures.

These pressures, or change drivers as illustrated in Diagram 1, describedto us by heads of tax, are spelt out in more detail below.

At the corporate level

• An increasing focus on activitiesthat add to shareholder value, with tax functions therefore beingchallenged to show that they areadding value to the business, notjust sending the majority of theirtime on basic compliance.

• An increasing focus of a company’sresources on core businessactivities, with ‘back office’activities, such as tax, not beingseen as areas for investment.

• Greater focus by companies andBoards on risk management,where tax is often recognised as a key corporate risk.

• Globalisation producing larger,more complex, more diverse‘empires’ for the tax function to manage.

• The current climate of rapidcorporate change meaning thatcompanies need to ensure theycan be flexible in their approach totax management and resourcing.The increasing rate of change inthe size, structure and approach of businesses will require taxfunctions that are designed tocope with such change.

• Cost reduction pressures requiring process efficiencies from tax functions and theirservice providers.

Shareholder value focus

Core business focus

Cost reduction review

Corporate risk focus

Increasingly focused taxauthorities

HR and tax resource problems

Resources tied up incompliance work

Tax technology (in an e-business environment)

More complex globalenvironment

Keeping up with the leaders in times of change

Diagram 1

08

The fiscal climate

• A growing conflict between aglobal approach to managementand a local, jurisdictionally basedtax environment.

• Increasingly focused and co-ordinated tax authorities.

• Increasingly complex taxlegislation becoming more timeconsuming to understand andcomply with, as well as presentinggreater tax risks.

• In many countries, the economicdownturn damaging governmentrevenues, in turn leading to greatereffort from the tax authorities toidentify additional tax revenues.

• In the UK, an increasingcompliance burden brought about by corporate tax selfassessment, combined with agreater Inland Revenue focus onlarger corporate.

• New tax authority working methods,in particular in the IT field, enablingthem to look at levels of detail notpreviously practicable.

HR and tax resource issues

• Difficulty in recruiting and retainingquality tax staff (particularly forcompliance work).

• The need to keep a tax teamdynamic and fresh, whilst at thesame time maintaining continuityand business knowledge.

• Difficulty in offering careerprogression for tax staff in all butthe largest tax functions.

• The increasing drain on taxfunction time of staff performance,appraisal and development work.

Tax technology

• Advances in tax technology offerefficiency and performanceimprovement, but the increasingcomplexity of such technologymakes it more costly and risky tomaintain in-house. This is onlylikely to increase.

• Companies are reluctant to make ITinvestments in non-core activities.

Summary

To summarise, there is a recognitionthat, in the face of increasing change,tax functions are going to have tobecome increasingly adaptive in orderto keep up with demand and withbest practice. Tax functions are alsotypically under pressure to achievethis whilst at the same time havingtheir resources squeezed.

It is not that tax functions are failingto evolve. We have observed a cleartrend away from the tax functionbeing ‘back office storekeepers’ and‘technical boffin’ to being ‘at thebusiness end’ of an organisation,having much more influence oncorporate activity than historicallywas the case (moving towards the leftof Diagram 2 below). Neither are wesuggesting that most tax functionsare in some sort of ‘burning platform’situation (though we do see somethat are). Rather we suggest that inthe face of the pressures listedabove, heads of tax should belooking closely at their tax function’sroles, strategy and operationalpractices. We hope that the followingmaterial will help with this.

Value driven tax function

• Forward focus

• Managing the effective tax rateworldwide

• Integral part of corporate mission

• Focus on value added

Compliance focused tax function

• Accounting for last year’stransactions (deadline focused)

• Non core/non strategic functions

• Labour and technology intensive

Conflicting demands onlimited resources

Diagram 2

“... in the face of increasing change, tax functions are going tohave to become increasingly adaptive in order to keep up withdemand and with best practice.”

11

03The tax strategy – and what should be included

What do we mean by ‘tax strategy’?

An outline of what the tax function has to achieve and the plan for getting there, starting from the currentposition (see Diagram 3).

Why set out a taxstrategy?

Most tax functions we know haveobjectives and task lists, but notmany have set down what we wouldcall a proper tax strategy. Operatingwithout a strategy has beencompared to making a long roadjourney using only the speedometerand the fuel gauge for information,but without a map, traffic informationor road signs. The speedometer mightshow that you are continuing to makegood progress, but will you end upwhere you need to be?

When we are working with taxfunctions who are ‘taking stock’,clients often ask “How many staffshould a tax function have in abusiness this size?” or “What shouldmy budget really be?” They are often

frustrated when we suggest wecannot give such an answer until the tax function is clear as to its roleand strategy. It is pointless trying todictate resource until it is clear what the resource is needed for. We suggest that the tax strategy is the starting point for settingobjectives and priorities, and then for negotiating for and allocatingresources accordingly.

You may have noticed that rather than suggest that tax functions do nothave strategies, we referred to ‘nothaving set down’ or ‘not being clearas to’ tax strategy. Most tax directorsdo of course have some form of taxstrategy in their minds (though, bytheir own admission this is often noteffectively communicated to seniormanagement). However our practicalexperience is that setting down thetax strategy on paper is normally avery useful process to go through.Here are some of the benefits wehave seen.

• The strategy can provide theframework/protocols by which the tax function operates.

• Senior management can confirmthat the tax strategy aligns with thebusiness strategy (and indeedidentify whether the businessstrategy should incorporate sometax issues).

• It can also serve as a usefulcommunication tool with theexecutive, the tax function,business staff and externaladvisers. (More on communicationin Section 9.)

• Circulating a tax strategy helpsraise the profile of tax issues andpushes tax higher up seniormanagement’s agenda.

• When the strategy is set out onpaper, it is easier to spot gaps oradditional opportunities.

What are youaiming for?

How will you get there?

Who isresponsible?

Diagram 3

12

• The strategy document becomes a useful tool against which tocheck progress.

• Re-visiting the strategy on aregular basis (annually?) becomesan easier discipline.

Who uses (or indeedcontributes to) the strategy?

There are a number of differentparties who have an interest in awritten tax strategy. These include:

• the head of tax who needs a mapas to where he/she is taking thetax team. The head of tax will also be the key player in designingthe strategy;

• the CFO to whom most heads of tax report. The CFO will usuallyhave high level input into thestrategy design and use it as aframework in making tax relateddecisions and in monitoring howthe tax department is performing;

• the rest of the tax team, includingthe overseas tax function andbusiness/divisional tax staff, toensure there is a commonunderstanding of purpose and also for motivational reasons;

• the Board with whom agreeing thekey points of the strategy can be a very useful exercise. Sometimesthey prove to have a different viewfrom the tax function and theprocess of discussing tax strategywith them has, in our experience,often added senior backing to thetax function’s approach. Whateverthe view of the Board, getting thetax strategy debated in front ofthem is good for the profile of thetax function;

• external advisers, where it canhelp them deliver moreappropriate advice and filter outunsuitable ideas. They may alsohave a lot to contribute,particularly where they havehelped other businesses with theirtax strategies;

• operational people – who areresponsible for decisions withpotentially significant taximplications;

• the auditors, in order to give themcomfort as to the likely level of tax risk and help them plan theirwork accordingly;

• other departments including legal, treasury, risk managementand internal audit and evenfinance function staff responsiblefor provision of tax sensitiveinformation; and

• the tax authorities? We are awareof some businesses that haveshared their tax strategy with taxauthorities in order to helpdemonstrate ‘lower risks’ thanmight otherwise have beenperceived, although this is not a common approach.

The overall approach

When we ask companies about their tax strategy, the initial answer is often along the lines of “Isn’t itobvious? It’s to minimise the taxcharge and ensure we comply with thelaw”. There are not too many businesswhich would take issue with such astatement. However when we probedeeper, it is surprising the variation inapproach we find. To stimulate thediscussion about the ‘real’ taxstrategy, we often use the tax strategytemplate (see Diagram 4).

This is an overview tool. It is notmeant to be a scientifically perfectmodel of a tax function’s strategy. It is a tool that helps clarify opinionsas to overall approach and startdiscussions that draws out some of the underlying issues.

The three scales on the templaterepresent the three areas we believe atax function can control.

• The tax charge itself (and what ismeant by tax charge is addressedlater).

• Tax risk.

• The cost of running the tax function.

Not managed

0 1 2 3 4 5 6 7 8 9 10

Minimum legallyachievable

<Reactive Proactive>

Minimum

0 1 2 3 4 5 6 7 8 9 10

Cost not themain issue

Basic tax planning

Tax charge

Tax managementcosts

Tax risk

0 1 2 3 4 5 6 7 8 9 10

Aggressiveschemes

Unaware ofissues

Maximum awarenessof issues

Diagram 4 – The tax strategy template

13

The scales run from nought to ten.Nought represents a very reactiveapproach to tax management;probably little more than completingand submitting tax returns. Tenrepresents a very proactive(aggressive?) approach, where thehead of tax would be prepared tospend time fighting a case in thesenior law courts. We believe that,broadly, the three scales arecorrelated. One cannot have a veryaggressive approach to managing thetax charge without incurring somelegitimate tax risk and withoutincurring some extra costs. (There isa slight complication in that there iseffectively an ‘ignorance of theissues’ risk scale, which runs in theother direction.)

To get an overall view of someone’sapproach to their tax strategy, andbecause of the correlation notedabove, we ask them to draw a verticalline down the template giving a singleoverall ‘score’ between nought andten. The more conservative andreactive groups would have a lowerscore than those who manage theirtax more aggressively and proactively(see Diagram 5).

In theory, to reflect efficiency, the line could slope from bottom left totop right, but for the purposes ofunderstanding overall attitude to tax management, a vertical line is the clearest way of indicating one’s viewpoint.

The template is a very simple way ofclarifying where on the ‘proactivityscale’ somebody sits. However whereit really does come into its own iswhen it is used to compare the viewsof different individuals workingtogether in the same business.

Some real life examples we have seenwhen using the template include:

• a tax function that told us they hada good shared understanding oftax strategy, but then when eachmember of the team individuallycompleted the template, their‘scores’ ranged from two to nine;

• a company that completed thetemplate whilst recruiting a newhead of tax, and then tore up theirdraft recruitment advertisement as they realised that their desiredstrategy suggested they needed a very different individual from

the one that the draftadvertisement suggested;

• a group whose Board identifiedthat the tax function’s robustapproach was fine in currentcircumstances, but going forwardwould need to become lessaggressive as the group neededsteady results due to aforthcoming flotation; and

• a number of groups where theBoard fed back that the taxfunction should be further to theright of the scale. (We often findthat the tax function is more riskaverse than the Board would likethem to be.)

In helping clients formulate a strategy,we often start by getting them toidentify where on the scale they are atpresent and then where they wouldlike to be in two/three/five years time.This gives an idea of the scale ofchange that the strategy needs tobring about.

Not managed

0 1 2 3 4 5 6 7 8 9 10

Minimum legallyachievable

<Reactive Proactive>

Minimum

0 1 2 3 4 5 6 7 8 9 10

Cost not themain issue

Basic taxplanning

Tax charge

Tax managementcosts

Tax risk

0 1 2 3 4 5 6 7 8 9 10

Aggressiveschemes

Unaware ofissues

Maximum awarenessof issues

Diagram 5

More than one tax strategy we have seen has included policiessuch as “We will not undertake any tax planning transaction whichwould reflect adversely on the group if details of it were to bepublished in the business pages of [Daily Newspaper Title].”

What areas should a taxstrategy address?

This will of course vary very muchfrom business to business, but typicalareas that could be addressed in a taxstrategy are illustrated in Diagram 6.

However, as we will discuss later, atax department will have to decidewhich of these sometimes competingfactors are its top priorities – and thusput some focus into where itsresources are best used.

For the document to be a truestrategy (rather than just a list of highlevel objectives), it should also:

• set out the goals;

• outline the route-map for achieving them;

• be clear as to the timeframe; and

• set out responsibilities.

We include a sample template for atax strategy template document atAppendix III.

Focus

A tax strategy covering all the factorsset out in Diagram 6 (plus relatedtactics and objectives) might be avery impressive document and wouldcertainly demonstrate the hugepotential workload facing the taxfunction. However there are not toomany tax functions that have the timeor ability to implement successfully astrategy covering all these points. As with most managementchallenges, the best chances ofsuccess will be where the tax teamfocus their resources on a limitednumber of key issues where there isthe potential to make a significantimpact without major investment orunduly complex projects.

Whilst we have not seen it used bythat many tax departments webelieve ‘value driver analysis’ may beuseful here. If the full list ofgoals/actions, probably drawn fromthe factors in the diagram, is plottedon a graph according to both the

expected economic impact and theprobability of achieving success (asshown in Diagram 7), logic willprobably suggest that the activitieswhich fall in the top right sector of thegraph will be the ones to prioritise.

Hopefully the number of factorsfalling into the ‘area of focus’ sectoris small enough for these to be thekey issues which will drive both thetax strategy and the actions of thetax function.

Once the tax strategy has beendrafted, we suggest it should besubjected to a challenge process,probably using a second party(maybe an external tax adviser). Partof this may entail challenging what ispresent and what might be missing,but the real value a second pair ofeyes can add is in forcing the ownerof the strategy to be realistic aboutwhat will be achievable and to setfocus and priorities accordingly.focusand priorities accordingly.

Area of focus

Probability of success

Econ

omic

impa

ct

Diagram 7

Above and below theline impact

Risk (upside anddownside) vs

certainty

Cash tax/shareholdervalue

Resourcing andresource costs

Corporate values

Reputation withpublic. Ethics

Accounts tax rate/EPS

Competitor tax rates

Global v local impact

Staff developmentissues

Corporate structure

Key tax drivers

Deadlines, interestand penalties

Flexibility/ability tocope with change

Business impact oftax issues

Reputation withauthorities

Diagram 6

15

Objectives

The tax strategy needs to be a highlevel document, which will probablycover a multi-year timeframe, but at the same time it has to besupported by appropriate objectivesand tactics. In order to ensure that the tax team and individual teammembers are working to implementthe strategy, team and staff objectiveswill need to connect to and stem from the strategy.

In our experience where there is ahigh-level tax strategy in place, the dayto day activities, and in some caseseven people’s individual objectives, areoften fairly disconnected from theoverall strategy. We see making thisconnection as one of the keychallenges for a best practice tax department.

Good objectives will of course providethe ‘milestones’ against which effortto achieve the aims of the tax strategycan be measured. The classic test ofeffective objective setting is whetherthey are ‘SMART’, in that they are:

Specific

Measurable

Achievable

Results-orientated

Timely

We see no reason why tax objectivesshould be any different.

Making it happen

The most important thing is that thestrategy needs to be ‘lived’. Weregularly observe groups that setstrategies/plans/objectives, but then a year later come back and explainthat they have failed to achieve theiraims because ‘events intervened’. Of course events will nearly alwaysintervene. Which tax person has not been driven away from the overall strategy by a transactionwhere advice has been needed in a hurry or a computation which needs submitting before a deadline?However a realistic strategy will allow contingency time/resource forthe unforeseen.

Achieving the tax function’s strategicgoals will nearly always also depend onthe actions of others. At the very leastthis requires good communication ofwhat is required of the others. Theremay be some organisations where asingle memo will do the trick, butprobably not too many. In most casesmuch effort will be needed to get ‘buy-in’ and commitment from those on whom the tax function will be relyingin order to achieve its goals.

However what is just as important is to keep a discipline of checkingprogress against the strategy. Wewould suggest regular (monthly?)checks. Where we see regularchecks happening they are oftenon an annual basis and we questionwhether this is often enough.(Regular and frequent checking is also a good discipline for membersof the tax department to ensure theykeep to their own personal andcareer plans.) This will ideallyinvolve setting some key milestonesagainst which to check progress.(More on performance metrics inSection 13.)

16

Action plan

• Agree the need for a strategy.

• Identify interested parties.

• Identify key issues, opportunitiesand risks.

• Draft, debate and agree thestrategy.

• Communicate the strategy andensure buy-in.

• Link it to team and individualobjectives.

• Set and monitor key milestonesand measures.

04The role of the tax function

Therefore a clear definition of rolesand responsibilities is important toensure that the tax function focuseson the issues identified in thestrategy. Otherwise the business’expectations of the tax functionwill extend to everything evenvaguely related to tax and thefunction will inevitably struggle tomeet expectations.

When analysing the role of the taxfunction we have often found it helpful

to split the activities into three‘domains’; strategic/high levelplanning work, work in supportingthe business and, of course,compliance work. There is also afourth ‘domain’ into which successfultax departments direct someenergy, this being the time spentmanaging the tax function (andresources) itself.

The role is illustrated in Diagram 8.

19

We have seen a significant number oftax functions whose role seems to beperceived as “to deal with anything that is in any way related to any issuearound any tax”. This is clearly not agreat recipe for success in a businesslooking to pursue a clear tax strategy.

+ Tax team management

Operational/businesssupport

Strategic/highlevel planning

Compliance

Diagram 8

To give some examples of the sort ofactivity that might fall within each ofthese domains:

The above is not just an academicanalysis. It is a framework we haveused with a number of businesses to help them clarify the role of theirtax function and their future areas of focus.

As Appendix II, we include a copy ofa worksheet which analyses theabove areas of activity in some moredetail, and encourages tax functionsto assess firstly how they currentlydivide their time between them, andsecondly how they would aim toallocate their time going forward. Thedocument was prepared for use withcompanies looking to reduce theproportion of time spent on

compliance activity and re-focusresource on higher value-addingactivity. This is a general trend we are witnessing.

Agreeing areas of focusand responsibility

Few tax functions are likely to havethe resources to enable them toaddress all the activities in the tableset out above. We see and hearabout demand for tax services fromcustomers commonly outstrippingsupply; tax departments are veryoften resource constrained. Thereforewhen the tax function is planning theresources it needs and how it will use

these resources it will need toconsider whether various activities:

• must be done at all (are there anylow-value, low risk activities thatcan be jettisoned?);

• can best be done by somebodyelse (by the shadow taxdepartment, an external adviser,an outsource service provider, orby delegation of responsibility tobusiness units); and

• can be done more effectively (byprocess streamlining or use of new technology).

20

Strategic

• Group tax strategy

• ‘Blue sky thinking’

• Political/industry lobbying

• Major tax driven businessre-organisation

Business support

• Building a tax aware groupculture

• Group tax communication

• Tax technical & transactionaladvice and support

• Tax scheme evaluation andimplementation

• Product tax (for example forfinancial services businesses)

• Tax data and knowledgemanagement

• Tax forecasting

Compliance

• Tax risk management, controlswork and self-audit

• Tax accounting

• Group tax compliancemanagement

• Multi-territory tax control

• Entity tax compliancemanagement/ detailed work

• Data collection

• Routine business queries

• Revenue enquiry management

Tax team management

• Staff coaching, performance management anddevelopment work

• Resource allocation and budgeting

• Recruiting

• ‘Away days’ and other motivational and team buildingactivity

• Management of advisers

• Liaison with business and finance colleaguesregarding their use of ‘shadow’ tax resource

The roles of the shadow taxdepartment and external advisers are dealt with elsewhere. Howeverone key issue that we are discussingwith more and more tax directors iswhether some of the lower value work they and their teams do(typically compliance work) really is an appropriate use of their resources– often highly trained tax specialists.They regularly explain that theyrecognise the work itself is low-valueadding, but that it serves as a keyinterface with people in the businessand therefore it has to be done theway it is in order to preserverelationships and help detect highvalue/high risk issues.

Undoubtedly undertaking such low-value work can serve as an interface.However the real question to ask is“could we achieve the same benefitsthrough other more effective and lesstime consuming ways?” Of coursecompliance data gathering can beused to ensure ‘face time’ withbusiness and accounting staff, butthere may well be better ways ofachieving this. In particular,compliance data gathering normallytakes place after the year-end andtherefore is hardly the most effective‘early warning radar’. If the taxfunction’s main contact with thebusinesses is when it is pressing it for low-level information analyses, this also may not do a great deal forthe tax function’s reputation andstature within the business.

There will usually be some politicsand diplomacy involved here. Inparticular, emerging tax functions may find they have to take on somedrudge or off-strategy tasks in orderto preserve relationships or gainaccess to particular individuals. More established or high profile taxfunctions are more likely to be able toresist this and therefore avoid havingto take on, for example, compliance

data gathering work or to serve aspersonal tax advisers on the directors’own individual tax affairs.

Once the focus of effort andallocation of internal and externalresource has been decided, it is thenvery important that roles,responsibilities and approaches areclearly communicated to all involved.If this is not done properly, the taxfunction risks being bothered withinappropriate issues, and then beingseen as unhelpful when customershave to be turned down or directedelsewhere. In a best practice scenariowe would recommend agreeing andcommunicating internal service levelagreements with business units, othercentral functions and any otherinvolved parties.

21

Action plan

• Agree roles, focus and priorities.

• Agree respective responsibilities.

• Ensure communication withinterested parties.

• Consider service levelagreements with ‘customers’and information providers.

05Managing the tax charge

What tax charge are wetalking about?

Our experience is that many heads oftax believe that senior management’smain focus is normally on theaccounts tax charge (‘book tax’) andthe impact it has on earnings pershare. The main exceptions to this are businesses that have a strong cash-flow focus, where cash taxobviously comes to the fore.Increasingly though, business analystsare focusing on the cash tax charge,as shareholder value analysis showsthat this is much more highlycorrelated with a company’sshareholder value. Some tax functionsdo actually use shareholder valueanalysis as a decision tool to assessthe potential benefits of various taxmanagement/planning activities.

What taxes?

Corporation tax/corporate income tax or other below the line taxes arenormally the taxes which ‘stare out’from a set of accounts. Above the linetaxes such as VAT, import and exciseduties, and (increasingly)environmental levies are of coursealso taxes on the business. Theabove/below the line question isparticularly pertinent when agreeingrespective responsibilities betweenthe tax function and the businesses –with local businesses often beingjudged on a profit before tax (PBT)measurement, which is calculated aftercharging all the above the line taxes,but none of those below the line.

We are aware of a number ofsignificant sized businesses whereeven very senior management isrewarded on a PBT measurement –including, more often than not, the head of tax! This is hardlyconducive to proactive managementof the tax charge.

Who ‘owns’ the taxcharge?

Is it the tax function or is it thebusinesses themselves? Obviouslythe answer to this question has majorimplications for the way in which thetax function operates. If it is theresponsibility of business managersto manage the tax charge, then it ismore likely that the tax function willfunction as a ‘service provider’ to thebusinesses, albeit hopefully as a fairlypro-active service provider. The taxfunction may also need to take on arole of central co-ordinator, ensuringconsistency between the variousbusinesses and perhaps encouragingthe businesses through monitoringand publicising their respective taxperformance. If the tax function‘owns’ the tax charge then more of a leadership role will be called for, with the tax function takingresponsibility for driving taxperformance in all the businesses.

In our experience the ownership oftax is often a mixture of the two – andthis is probably the practical answer.Few tax departments have fullownership of all tax matters at group,head office and local level – inparticular where there are overseassubsidiaries (see Section 14).

However this can often lead toexpensive tax planning taking placethat has a local benefit, but no overallbenefit to the group as a whole. Wedo see a trend here though, in thatthe increasing move towards globalmanagement of businesses isreflected in a trend towards strongerhead office tax function control ofoverseas tax affairs.

Additionally in companies where VAT,or other sales taxes, are a major costwe often see these taxes being givenrather less attention than theydeserve. The ownership of thesetaxes is often given either to thebusinesses or to more junior people inthe tax function. As a consequence,we often find that the management ofsuch taxes suffers from a lack of co-ordination between different territories.

Is the tax chargemanageable?

Linked to the question ofownership/responsibility is the needfor recognition that the tax charge, orat least significant components of it,is actually manageable. To taxdirectors this will (hopefully) seem tooobvious to merit mentioning. Howeverit is surprising how many businessmanagers, and some at fairly seniorlevels, have told us that tax is an areathey have never really previouslyfocused on – with the whole businessemphasis being on the profit beforetax.

23

The next three sections focus on the three areas we believea tax function can control. These are the tax charge, taxrisk and the costs of managing the tax position – the threescales on the tax strategy template.

We frequently see seniormanagement devoting a great deal ofattention to managing operationalaspects of the business, but viewingthe tax function essentially as anoverhead. Getting seniormanagement to focus on tax as a manageable component ofshareholder value can be a powerfulway to raise the profile of tax in thebusiness. Often, the first time seniormanagement really think deeply aboutthe impact of tax is when theybecome involved in helping set thetax strategy.

Some elements of the tax charge areobviously going to be moremanageable than others. Clearly if agovernment changes the tax rate thenthe tax charge will probably changetoo. However some heads oftax/CFOs do seek to manage thisthrough their involvement in politicaland industry lobbying work. Other‘drivers’ of the tax charge may beeasier to manage. Thereforeunderstanding the key manageablecomponents of the tax charge, andthen managing the related drivers, willbe key. Some tax managers speakhighly of the benefits of presenting tobusiness management on key taxdrivers and future tax forecasts.

Simple overviews such as graphicalrepresentations of the reconciliationbetween the ‘book’ and statutory or‘natural’ tax rates can be verypowerful tools.

Past, present and future

An interesting question to ask a taxfunction is “What respectiveproportions of time do you believeyou devote to negotiating prior years’tax liabilities, computing the currentyear’s liability and managing futureliabilities?” Most will admit that theyare not devoting as much time to the future as they should be. (TheCranfield surveys show that most

tax functions still spend the majorityof their time on compliance work.)Again, this is an area that shouldperhaps be addressed in the tax strategy.

Tax forecasting will often be animportant aspect of managing the tax charge. This will require a goodunderstanding of the key drivers thatwill affect the group tax charge. We would suggest that, in a bestpractice tax department, the head oftax can readily answer the followingfour questions:

• What will the anticipated group taxcharge be over the next three (oreven five) years?

• Which are the main territories inwhich the largest part of the groupcharge will arise?

• What are the (three or four?) keytax issues in those territories? and

• Where are the group’s key taxassets (e.g. tax losses carriedforward, uncrystalised losses etc.)?

The answers to these four questionswill not only be needed for cash flowforecasting, but will also be useful ifdetermining where tax planning effortshould be directed and the resourcesneeded to do this planning. They alsooften highlight the important issuesthat external auditors will want tofocus upon.

The total tax contribution

Since producing the first edition of this guide there has been anincreasing focus on a company’s total tax contribution. Companies pay corporate income taxes on theirprofits. But corporate income taxesare not the only taxes that are leviedon companies. Social securitycontributions are a feature of alldeveloped countries’ tax systems and add significantly to business tax costs.

In the UK for example, thecontribution overall in employers’national insurance contributions iscomparable to that of corporation tax. In countries such as Germanyand France, the contribution is vastly higher.

When considering the overall taxburden on business we also have tolook at such things as businessproperty rates, irrecoverable VAT andsales taxes, and other more specificbusiness sector taxes. Multinationalcompanies obviously operate acrossa number of countries and the totaltax contribution should be calculatedon an international basis. Attemptingto add the figures together tocalculate the total business taxcontribution is difficult and the data isnot easily available. There are alsoarguments as to what exactly shouldbe included. But the result should bea clearer picture of what a companycontributes in taxes – and hence whattaxes could (or should?) be managed.Of course as well as providing auseful base for tax managementdecision making, total taxcontribution information cancommunicate some powerfulmessages in both internal andexternal reporting. Why shouldcompanies not get public credit forthe taxes that they pay?

24

A powerful message

• Use shareholder value analysisto model the impact a certainvariance in the cash tax chargewill have on the shareprice/market capitalisation.

• Contrast the change in productsales that would be needed toachieve an equivalent change inshareholder value.

“We frequently see senior management devoting a great deal ofattention to managing operational aspects of the business, butviewing the tax function essentially as an overhead.”

27

06Managing tax risk

Areas of risk

When looking to identify tax risk, it can be helpful to use a similar‘planning – operational – compliance’framework to the one used tosummarise the tax function’s roles(see Diagram 9).

• Planning risk – risk arising from taxplanning activity (where there canbe considerable ‘upside’ risk oropportunity). In such situationsthere is often little downside riskapart from the costs ofimplementing the planning andgetting it agreed by theappropriate tax authorities.

• Operational risk – risk arising fromthe operations of the businessunits and the extent to which theiractivities may give rise tounexpected fluctuations in the taxcharge. This can involve upsiderisk where there are potentialplanning opportunities or more taxeffective business decisions couldbe made. Equally there will bedownside risk where businessdecisions may be sub-optimalfrom a tax viewpoint.

• Compliance risk – risk ofadditional liabilities or penaltiesarising through non-compliance orfailures in the tax return process.

As with the earlier ‘roles’ diagram,these areas of risk are interlinked. Ifplanning activity is to be successful,clearly it will need to be properlyreflected in subsequent tax returnsand agreed with the tax authorities.

Taking risks – managingthe opportunities

When looking at tax planning activityin particular, it is good practice toclarify the likely level of both upsideand downside risk. This can then becompared with the group’s positionon the risk scale of the tax strategytemplate or perhaps on a moredetailed map of the group’s preferred

approach to tax risk such as Diagram10 illustrates.

Once a planned activity is included ina tax return, how will it change thetax authorities’ view of the group?How does what is planned lie with thegroup’s approach to risk generally (i.e.not just to tax risk)?

Sometimes, tax risk also needs to belooked at on a portfolio basis. If thegroup faces a large number ofrelatively moderate risk issues, doesthe aggregation of risk result in higheroverall risk? Could the group cope ifdisputes or enquiries arose on asignificant proportion of issues, or

The second scale on the tax strategy template is tax risk. This is not always something one should avoid.Uncontrolled or unidentified risk is clearly undesirable, but there will probably be occasions when a head of taxwill want to take calculated (legitimate!) risks. Winning in business is often about taking risks – and managing tax is no different.

Opportunity Planning ComplianceOperations

Hazard

Uncertainty /Variance

Diagram 9

28

would the tax function becomeoverwhelmed? What would be theaccounting impact if a number of risk issues all materialised at thesame time?

Tax risk review

Traditional tax risk reviews havefocused primarily on ‘tax technicalrisk’; for example risk of missed timelimits, mis-recording of transactions orof failed tax planning schemes. Thereare many such areas where things cango wrong, or lead to sub-optimalperformance and most tax functionshave a fair idea of where these riskswill lie. Understanding where theserisks are is important, but in order tobe able to manage the risks moreeffectively, it is normally important tolook at why the risks arise. In otherwords, to look at the causes of risk,not just the symptoms.

A typical discussion agenda we haveused when discussing ‘causes of risk’with clients would be:

• tax strategy and objectives;

• senior management approach totax management and risk;

• attitude to tax risk – and resourcesdevoted to it;

• international tax management risk;

• quality and quantity of resource;

• workload and prioritisation;

• communication;

• tax planning activity;

• relationship with the taxauthorities;

• tax systems and procedures;

• quality of underlying financialsystems and information;

• tax controls, review, self-audit etc.;

• tax knowledge within the business;and

• tax sensitive accounting andtransactions.

Often it is only when we get intodiscussion of some of the moreimportant items on this agenda that itbecomes apparent why risks are notbeing managed as effectively as theyshould be.

Risk mapping

As a discipline for helping manage taxrisk, cataloguing known or potentialtax risks (both upside and downside)and then mapping these againstmethods by which the risks arecontrolled can be very helpful.Improvements to controls can then beplanned and prioritised. As with taxstrategy, the potential economicimpact and the probability/ease ofsuccess should be used to assessprioritisation.

In terms of good corporategovernance, risk mapping does notjust help manage risk, it helpsevidence that it is managed. Riskmaps can prove very useful in thecase of review by Internal Audit (whomight also help develop them) orindeed by the tax authorities.Depending on the relationship withthe tax authorities, it may be worthconsidering sharing a risk map withthem or indeed co-developing one(getting the tax authority to work foryou, for free!) Certainly in the UKsome tax inspectors actively seek toinvolve tax functions in their riskanalysis work, furthering the UKInland Revenue’s ethos of ‘voluntarycompliance’.

Low

0 1 2 3 4 5 6 7 8 9 10

Not important Very important

HighMedium

Reputational risk

Low

0 1 2 3 4 5 6 7 8 9 10

Conservative: Aggressive:No risk Minimum amount possibleProud of the tax we pay

HighMedium

Tax position

Low

0 1 2 3 4 5 6 7 8 9 10

Zero tolerance no error rate Large acceptable error rate

HighMedium

Tax processes

Diagram 10

29

Benchmarking

For planning risk in particular, it iscommon for businesses to look atthe approach that competitors orother comparable businesses take toplanning risk and to particular typesof tax planning activity (“would ourcompetitors do this?”) Knowing whattransactions and risks yourcompetitors face can of course bedifficult. However we do see manygroups that have a good knowledgeof competitor activity through industrygroups, friendships and fromrecruiting staff who previouslyworked elsewhere in the industryconcerned. In some industries,competitors are actually quite openin discussing industry tax issuesamongst themselves, feeling thatthere will be a net gain to all thecompeting businesses resultingfrom collaboration.

Some practical steps

Here are a few steps we have seentaken by companies working onimproving their tax risk management.

Agree ‘materiality’ limits

Consider clarifying the group’sapproach to downside risk by settingout maximum acceptable cashadjustments stemming from controlweaknesses, process errors ortechnical error, then agreeing theselimits at a senior level. Discussionsaround these limits with the Board orAudit Committee can be helpful inagreeing the appropriate level ofresource for the tax function.

Address accounts coding risk

Mis-coding/mis-analysis ofexpenditure is a perennial problem fortax functions. Accounts clerks areoften not highly motivated to getthings right from a tax perspectiveand can be a fairly transient

workforce. Where they encounterexpenditure which is a little out of theordinary, it is far easier for them justto post it to a common accountscode than to research exactly how itshould be treated. Alternatively theymay just post it to other/sundry/miscellaneous and leave a (far moreexpensive and time-constrained)member of the tax team to sort thingsout. Production of a basic guide tothe coding of tax sensitiveexpenditure can be a very worthwhileexercise. This would sensibly includeguidelines on when to seek helpand/or a formal escalation and sign-off process for significant risk items.These are also useful controls toevidence to the tax authorities. Taxawareness roadshows or trainingsessions for such staff can also bevery worthwhile, though they do needto be repeated regularly if they are tohave an ongoing impact.

‘Self audit’

In the same way that auditmethodology has shifted away fromdetailed substantive work towardsplacing a greater reliance on systemsand controls, tax functions aretypically cutting down the detailedanalysis work they have done in thepast and instead devoting moreattention to controls and procedures.Where controls are being relied on, itdoes of course become necessary totest that they are continuing tooperate effectively. This might involvedevoting a greater proportion of taxteam time to ‘self policing’, or it mightbe that this work can sensibly bepassed over to Internal Audit or toexternal advisers.

Action plan

• Catalogue tax risks.

• Map existing controlmechanisms against risksidentified.

• Plan improvements to controls.

• Prioritise improvements.

• Timetable subsequent riskreview assignment.

Use of technology

HM Revenue & Customs (HMRC) andother tax authorities are makingincreasing use of data mining tools intheir audit and enquiry work.Conducting a similar exercise in-house (albeit probably requiring inputfrom specialist advisers) is likely toensure problem areas are identifiedand resolved before they are spottedby the tax authorities, and may alsoidentify additional tax savings as wellas managing the downside risk.

Post transactiondocumentation review

We imagine that most readers of thisguide will have seen cases wheretechnically sound tax planning workfailed, or was put at risk, due either toproblems with implementation or thedocumentation of the transactions.High level planning only works if thetax authority agrees the resulting taxreturns – and they will often ask tosee the underlying documentation.Having a tax investigations specialist(typically an ex-tax inspector) reviewdocumentation and feedback on riskissues can be very revealing. Formajor tax planning transactions wewould recommend this as somethingthat should be undertaken as amatter of course.

Consider outsourcing

There are areas of risk that will beavoided or reduced if the relatedactivity is outsourced to a specialistservice provider. Certainly in the UK,as the advent of corporate tax selfassessment has created concern thatit is now easier for companies to fallfoul of the new procedures andcompliance obligations introduced, a number of companies have decided this is the ‘trigger’ forcompliance outsourcing.

Tax risk aware culture

We regularly notice a ‘multiplier effect’or ‘virtuous circle’ following riskmanagement work. Particularly wherethe work involves people outside thetax function, it will often serve to gettax issues, and in particularly taxrisks, high on their agenda, which islikely to help uncover more risks andopportunities. The more of these thatbecome evident, the greater profilethe tax function will have, which inturn may well to lead to moreappropriate levels of tax resource (see Diagram 11).

Clearly it is not possible to control all risks or even reduce them to anabsolute minimum. Tax risk issomething that should be managed,not eliminated. Cost/benefit analysisand prioritisation will apply. Howeverthe ‘cost’ will not usually be pureeconomic cost.

The ethical, professional andreputational cost of tax risks is alsoan important factor. Equally importantto remember is that tax risk is not allone way. There are downside risks inmanaging tax, but there are upsideopportunities to be managed as well.

30

Virtuouscircle

Tax risksidentified andcommunicated

Tax risks high onmanagementagenda

Appropriate taxresources

Diagram 11

As noted in the preface to thissecond edition, tax riskmanagement has moved onconsiderably over the last fewyears. We would also refer you to our separate guide Tax riskmanagement, which was published in 2004.

33

07Managing the cost of the tax function

What does the tax function actually cost?

Our experience is that few companieshave an accurate picture of the costsof their various tax managementactivities. The tax function budgetmay be a good starting point forassessing costs, but it is unlikely toprovide the full picture. Costs to takeinto account will include:

Direct tax function costs

These include salaries, benefits,social security costs, pensions, profitshare and employee taxes. It mayalso be necessary to factor inrecruitment, severance, training etc.not forgetting the cost of temporarystaff. Overheads and other centralcosts will also be part of the picture.As a rule of thumb, our discussionswith businesses suggest that the fullcost of an employee is often over200% of their base salary.

Shadow tax function costs

Staff outside the tax function will alsousually carry out tax work. Typically amajor part of this will consist ofrecording, analysing and supplyingtax information to and answeringqueries from the tax function, but itwill also include dealing with taxreturns on VAT, sales taxes, dutiesand payroll taxes. The accounting,finance, legal, treasury andmanagement information/ITdepartments are areas wheresignificant shadow tax function costsoften lie. Our experience is that thesecosts regularly exceed the taxfunction’s own internal costs, and arealmost always much higher than thetax function believes them to be.However very few businesses haveattempted to quantify the costs of theshadow tax function.

Advisers’ fees

External advisers’ fees are probablyrelatively easier to ascertain than thecosts of the shadow tax function.However where individual businessunits/subsidiaries (and in particularthose overseas) are permitted toinstruct their own advisers, itbecomes increasingly difficult foreither the tax function or the CFO tokeep a good picture of what is beingspent and where. Things can geteven more complicated wheredifferent advisers are used indifferent territories.

Senior management time

Finally there is the time spent bysenior management, typically the CFObut increasingly the Board as a whole,in discussing the tax strategy andkeeping an overview of how the taxposition is being managed. Ourexperience is that this is often rather amodest cost, and one that companieswould sometimes do well to increase!

Managing costs

This guide is written at a time whenbusinesses are focusing on costcutting, and particularly on cutting thecost of ‘back office’ operations, withan increasing focus on core activities.Managing costs is clearly animportant issue for most tax functions.

However businesses must bear in mindthat the manageable elements of thetax charge and tax risk may be farmore significant than the costs ofrunning the tax function. The biggestachievable cost savings may well be inrespect of reductions in the tax charge,not in the tax function’s budget. Thepurpose of having a straight line resulton the strategy template (see Section3) was to show the correlation betweenthe costs of managing tax and theability to manage both the tax chargeand the tax risks.

34

The UK Government launched a‘Spend to Save’ initiative where theyincreased resources available to theUK tax authorities in order to increasetax revenues. Companies looking for‘bottom line’ cost cutting may need toconsider mirroring this approach.However one of the big issues for taxfunctions is that the benefit they addis often below the line, whilst theircosts are charged above the line inarriving at the profit before tax. Weare aware of significant tax planninginitiatives being rejected solely onthese grounds.

Tax function costs depend on three basic variables:

• The volume of service delivered tothe business.

• The price of inputs (principallystaff salaries and advisers’ fees).

• The efficiency with which servicesare delivered.

If costs are to be cut, tax functionsneed to:

• do less (usually by cuttingheadcount), and probablytherefore having to gain consentfrom the businesses that they will henceforth receive a lowerlevel of service;

• convince staff/advisers to acceptlower salaries/fees; or

• look for opportunities to improveefficiencies.

There is perhaps a fourth option ofmoving costs/activities out of the tax function onto somebody else’sbudget in the company, but clearlythis is a political rather than a realcost saving.

In terms of reducing levels of activity,it may be that there will be somepotential to jettison some non-essential activities without having

a major impact on the value added tothe business. The tax strategy shouldclarify those areas of activity that thetax function will focus on and those itwill not. Indeed putting a tax strategyin place and agreeing areas of focusmay well highlight which currentactivities are adding least value to thebusiness – with the resultant changesleading to cost savings.

It may be possible to cut salarieswithout a reduction in service levels,primarily through ensuring the staffmix is right and avoiding the use ofoverqualified staff for junior levelwork. It may also be possible to cutadvisers’ fees through more carefulscoping of their work, requiringimproved efficiency or through ‘bulk buying’.

Improving efficiency

While better focus will normally lead to significant improvements ineffectiveness and/or cost savings,savings can also be achieved byimproved efficiency, which isillustrated in Diagram 12.

Effective processimprovement

Effective process improvementnormally involves addressing acombination of:

• people issues;

• process design; and

• technology solutions.

Our experience is that successfulprojects do not focus on just one of these aspects in isolation of theothers. We recommend that theplanning for any process

improvement project should addresseach of these aspects in turn.

From experience, we would raise aparticular note of caution regardinginternal process improvement/streamlining work. Tax directorsnormally have a good understandingof the steps that need to be taken toimprove tax processes, but few suchinitiatives prove successful indelivering significant processimprovement. Very few tax functionshave spare resource to devote toprocess improvement work and, even where they do, events nearlyalways intervene such that other workends up taking priority (‘too busy to be efficient’).

Here we have to declare an interest,given that PricewaterhouseCoopers isthe leading tax outsourcing serviceprovider. Nevertheless, does it reallymake sense to invest in in-houseprocess improvement, ‘re-inventingthe wheel’ rather than leveraging theexisting processes and tools that anoutsourcing service provider hasalready developed? What does makesense is for the tax function to ensurethey only start their compliance workwhen the business unit has provideddata in the right format as required bythe tax function. We have seen manycases where highly paid tax peopleare carrying out data collection,

analysis and reconciliation work,which in our opinion really should becarried out in accounting functions.

The greatest potential for improvingefficiency will normally be in relationto tax compliance work, given thatthis has significant process basedelements and typically makes up alarge part of a tax function’s (andshadow tax function’s) workload.However there may also be potentialfor improvement in research andplanning work, not least using newtechnologies (internal or external) toaccess ideas, precedent and advice.

Cost versus benefit

When seeking to control the cost ofmanaging the group’s tax affairs, it isimportant to distinguish betweenmeasures to improve efficiency andmeasures which reduce the level ofservice the tax function delivers.Nobody is going to argue againstimproved efficiency, but if cutting thecost of the tax function results in ahigher tax charge or greater tax risk,the net result may be a reduction inshareholder value. Having a propertax strategy in place will help ensurethat the tax function receives theappropriate level of resource and thatthe business gets value for moneyfrom the tax function.

Potential forcost saving

Ease of achievement

Processstreamlining

Basic Normally requires significant timeinvestment to build, implement andmaintain new processes

Processstandardisation

Improved Can involve significant cultural changeas well as process design,implementation, and maintenance

Outsourcing Most significant Easy to achieve by leveraging off theinvestment made by the serviceprovider

35

Diagram 12

37

08Tax department organisation

One of the questions we are regularlyasked, both by international and bydomestic tax directors, is “How can I best organise my tax department?”

Our first response will always be toensure that the group is clear aboutits tax strategy and the tax function’srole, as there is little sense planningthe structure and organisation of adepartment until it is understood whatthe business requires of it. Havingsaid that, we see two basic models,the ‘head office model’ and the‘business unit model’. Let us start byexplaining these two models and thepros and cons of each (Diagram 13).

In the ‘head office’ model, the taxfunction would be highly centralisedwith only limited tax resource presentin local businesses. In the ‘businessunit’ model, local businesses takeresponsibility for their own tax affairsand normally have in-house taxresource within the business. Anycentral resource would be used as‘adviser’ by the local business in-house tax resource, rather than havingdirect control over the business units’tax affairs.

The recent trend towards establishingglobal/regional shared service centres(SSCs) for accounting and financeservices creates an addedcomplication, because there are alsoarguments for situating tax resourceclose to finance information andsystems in the SSC. Whilst we havehad discussions with a number ofgroups on this issue, we have yet towitness any clear trends here.

What is right for you?

We have seen a large number of bothmodels, as well as some hybridstructures. So which one is right foryou? Again, this will depend on thebusiness’ tax strategy and key taxdrivers, for example:

• if the group has been set up (e.g.contract manufacturing) such thattransfer pricing is the key issue or,alternatively repatriation of cash to head office territory is the mainbusiness driver, then group co-ordination will be one of the key drivers for the in-house tax department. This naturallyleads to the head office taxdepartment model;

• if however the group tax charge is very much driven by the taxcharge in one or two majorterritories, then being close to thebusiness in those territories andhaving strong local tax skills willbe vitally important and this maylead to the business unit model.

Groups using the head office modeldo sometimes strengthen links withthe businesses by ‘man-to-manmarking’, where individuals in thehead office function are each charged with ensuring that particularbusinesses and/or locations areproperly supported.

In our experience, whichever modelis used, the senior person either at head office level or in individualterritories is usually a person skilledin corporate tax affairs. However in some business (e.g. financialservices) the corporate tax (onprofits) can be dwarfed by, for example, indirect taxes onexpenditure. The business unit model whereby there might be anindirect tax person in every territoryreporting through to a corporate tax person, can lead to situationswhere the most significant tax of

Advantages Disadvantages

Head officemodel

• Strong focus on group tax charge• Easier to align with group strategy• Good co-ordination• Easier to restrict headcount• Provides a pool of expertise

• Can be seen as remote from businesses• Will not have detailed territory specific skills for overseas

entitites• Can be perceived as a ‘head office overhead’

Businessunit model

• Close to business• Likely to have local-territory

specific tax skills• Can reduce reliance on local

advisers

• Less focused on group co-ordination or strategy• Can lead to inconsistent positions with different tax

authorities• Transfer pricing can be difficult to co-ordinate• Harder to supervise activity and control group tax costs• Reporting and/or loyalties will often be to local

management• Harder to ensure optimum resource levels• Tax staff in smaller locations can feel isolated

Diagram 13

38

the group (indirect tax) is not beingeffectively managed or co-ordinate.

What is clear is that there is no singlebest structure for all tax departments.The structure needs to fit therequirements of both the businessand the key tax issues that the taxfunction wants to manage. Whichevermodel is adopted, it will also beimportant that ‘dotted line taxreporting’ and consultation is alsomaintained between the tax function(wherever situated), head office andthe businesses (see Section 9 onCommunication).

‘Shadow’ and external resource

The tax function should not just bethought of as those staff sitting in thein-house tax department, but rather to include ‘shadow tax function’ staffbased in other areas of the businessand also external tax resources.Different businesses use very differentmixes of in-house, shadow andexternal tax resource. There seems to be no single best practice modelhere, other than in locations where the group only has a small presence,where the lack of ‘critical mass’internally will mean that externalresource will almost always berequired. Nevertheless the relationshipwith shadow staff and procedures forengaging external resource will needto be addressed when planning thetax function structure.

Reporting lines

Where should the tax function sit inthe group’s departmental structure?Again, there is no clear cut answer.There are though some interestingcultural differences here. For examplein the UK, the tax function willcommonly be allied with the financeor treasury functions. In the US itseems more common for tax to sitwith the legal department. This

typically also influences the type ofstaff employed in the tax function.

Historically, tax staff in overseassubsidiaries have normally reported to their local CFOs, albeit with ‘dottedline’ reporting to the global head oftax. However as the trend towardsglobal management grows, directreporting to the global head of tax is on the increase.

There is also a clear trend away fromthe tax function as a ‘back-office’function whose role was to givetechnical opinions and to completetax returns. Tax functions are nowmuch more involved with thebusinesses, ensuring effectiveimplementation of planning initiatives,working with accounting and systemspeople to ensure effective taxcontrols and working to raise the levelof tax awareness in the business.

Flexibility

Historically, tax functions havetypically been organised around thestructure of the business. However as the rate of corporate changeaccelerates this is increasingly lesssensible and less common. Whencorporate structures were relativelystable, mirroring their structure in the tax function was logical enough.Nowadays the rate of corporate re-organisation, merger, de-mergerand re-engineering means it is oftenmore sensible to have a small flexibleteam which will be well placed toadapt to (and indeed influence) futurechanges in corporate structure andcan marshal additional tax resourcesas required.

The head of tax

The role of the head of tax is perhaps worthy of specific mention.In best practice tax departments, the role encompasses:

• developing and implementing a tax strategy;

• being a business advisor to senior management;

• having an international focus;

• being an ambassador whochampions tax within thebusiness; and

• managing the tax function –although we have even seen thisdelegated to a deputy.

The skills required include rathermore than just tax technical ability,and in some of the larger taxdepartments current tax technicalknowledge is probably fairly low onthe list of what a business looks for in its head of tax (more on skills inSection 10). We have come a longway from the days when a head oftax was expected to spend his dayswith his head buried in tax legislation.

09Communication within the business

However strong the skills of the tax team, it is unlikely to performeffectively if it does not manage itsrelationship with the businessproperly. This will involve regular,quality communication. If a business’main contact with the tax function is in connection with provision ofdata and answering low-levelquestions relating to tax returnpreparation, the relationship with thetax function will probably not be avery strong one or be at the rightlevel. Part of the tax function’s planor team ‘job description’ should be a section addressing how the team will maintain effectivecommunication with management,the businesses and other keycustomers and information providers (and possibly also withexternal advisers).

Who to communicate with?

Any communications plan will need to identify who the tax function’s main contacts should be. Thesemight include:

• the Board and other members of the executive and seniormanagement. (Often a seriouslyneglected area);

• the people who run the businessunits – and are making decisions,on a day to day basis, whereproper tax input is important;

• key ‘customers’ and providers ofinformation such as the finance,treasury, legal, property,information systems and humanresources departments;

• external advisers;

• other industry heads of tax and tax teams;

• the tax authorities; and

• risk management and internal audit.

How to communicate?

Some ideas we have seen that haveimproved communication with thebusiness include:

• circulating the tax strategy – oreven better, presenting it tointerested parties;

• scheduling regular update meetingwith key contacts;

• a brief one page tax summaryincluded in the monthly mainBoard papers, highlighting key tax issues;

• tax customer user groups;

• a tax sub-committee of the Board;

• soliciting feedback on servicequality by way of customersatisfaction surveys;

• tax awareness meetings;

• ‘man-to-man marking’, whereeach member of the tax team has a set of contacts (s)he isresponsible for keeping in touch with;

• periodic awareness updates, eachbuilt around a particular (easy toremember) theme;

• published ‘league tables’ ofbusiness units’ own individual tax performance;

• speaking slots at business and finance ‘away-days’ or conferences;

• publishing flyers, contact cards,tax helpcards etc. which staff can keep handy or pin up by their desks;

41

“like technicians”“need to give practical answers not caveated opinions”“only come to me to ask questions (too many)”“need to understand the business issues more”“should get out more”... all real quotes taken from a survey of a business’ view of

its in-house tax team.

• tax pages on the corporateintranet; and

• use of other technologies such aswebcasting, video conferencing etc.

The important thing is to have acommunication programme which fitsin with the communication culture ofthe business.

Communication within the tax team

We have found that tax functionsoften benefit from a review of theirapproach to communication withintheir team, particularly where theteam is spread across different sitesor territories (more on global taxmanagement later). We have alsoseen numerous problems arisethrough lack of good teamcommunication. A typical risk area isensuring that knowledge of high levelplanning issues flows through theimplementation and complianceprocess such that any transactions orplanning are properly dealt with in thefinal tax returns. Compliance workitself generates little additional value.Value is added mainly through havinga good understanding of the impactof tax on the business and throughplanning work. However if this is notsupported in the tax compliance workthen the value can be lost ordestroyed (see Diagram 14).

Use of technology

New technologies offer excellentchannels for communicating with the tax function’s ‘customers’ andinformation suppliers, but can alsomake it easy to slip into less effective communications practices.Simply sending notes out through the ‘e-mail blizzard’ is fast and easy,but probably not a good way to build the tax function’s profile in most organisations.

When used effectively, intranets orcommunications databases can bepowerful tools. Prior to the advent ofthe web and/or communicationsdatabases, tax manuals, policydocuments, guidance notes etc.would often be sent out to thebusiness, where they would be briefly looked at, filed on the shelf (or in one case used as a doorstop)and then soon lost or forgotten. Even worse than this is whenbusiness users may act on out ofdate guidance, resulting in sub-optimal or even illegal consequences.Using an intranet to keep suchmaterial ‘live’, up-to-date, visible andat the fingertips of anyone who needsit can be very effective. Ourpreference is to keep such facilitiessimple and brief, otherwise the costof keeping them up to date can easilyspiral. If this is not done, parts of thesite risk falling into disuse.

Does the cost structureencourage goodcommunication?

Opinions vary on how best (or evenwhether) to charge businesses for theservices of the tax function. Somepeople believe recharging shouldreflect the demands various parts ofthe business put on the tax function.Others believe that a fixed (or nil)costs structure is more appropriate as‘pay for use’ charging can discouragebusinesses from involving the taxfunction. This can lead to sub-optimalperformance for the business as awhole. There are also arguments for ahybrid charging structure where ausage charge is made for compliancework, but planning and consultancywork is provided at no additional fee,though this no doubt creates disputesabout where the boundaries lie.

42

Tax impact on the business

Tax planning

Returns Tax

team

com

mun

icat

ion

Diagram 14

Summary

Whatever other methods ofcommunication are used, ‘face toface’ contact will nearly always makethe key difference to a department’srelationship with its ‘customers’ andinformation providers. Our experienceis that the more effective tax teamsreally do spend a good deal of theirtime out of their offices.

Finally, we would recommend askingthe businesses and other contactshow well you are communicating(and indeed working) with them. Asan example, we worked with one taxfunction who told us they believedtheir communication with theirbusinesses was good. We thenfound business units that did notknow that the in-house taxdepartment existed and had evenapproached the tax authorities fortax advice! Communication is a bigissue which tax functions can notafford to ignore.

43

45

10Managing the tax team

Ensuring appropriate focus

The activities of the tax functionshould be driven by the tax strategy,but ensuring that individuals stay ‘on-strategy’ normally takes someeffort. People will naturally gravitateto work they like, work they feel theywill be rewarded for and work theyare being pressured by ‘customers’ to deliver. This will not necessarily be the same work that will add most value to the business through effective implementation of the strategy.

Therefore, the tax director willnormally need to monitor how the tax function is using its resources and ensure that the strategycontinues to be followed. Care willalso be needed to ensure that teamand individual objectives andworkplans continue to support thestrategy and do not degenerate intotask lists of routine or urgent tasks.We are aware of a number of taxfunctions where, as the deadlinelooms for filing tax returns, everythingelse is put on the back burner –irrespective of where it fits into theoverall tax strategy.

Individual job descriptions and formalstaff evaluation systems are a usefuldiscipline in keeping individualsfocused on the overall tax strategy.We are aware of feedback from thetax function’s customers being usedin this process. However, at the endof the day, people will do what theybelieve they are being measured on –and it is much more difficult tomeasure added value than whether all the tax returns have beensubmitted on time. Too often we seepeople focusing on those activitieswhich are easy to measure – such as compliance matters.

Like any other business function, the tax function will notbe able to devote 100% of its resources to serving its‘customers’, and for a tax function to run effectively, sometime and resource will need to be devoted to managementof the tax function itself. Some of the activities under thisheading are discussed below.

46

The right skill sets

Tax functions have come a long wayfrom the days when only tax technicalskills were considered important.For most tax functions, strongtechnical skills will constitute abasic requirement, but other ‘softer’business skills will prove crucial ifthe tax function is to be effective inactually managing the tax chargeand risks. Indeed if a tax functionsources its technical input fromexternal advisers, it may not evenbe necessary to foster in-housetechnical expertise. Even whendealing with tax authorities, taxtechnical skills are probably lessimportant than negotiating ability.Typical ‘soft’ skills that are much inevidence in more effective taxfunctions are illustrated in Diagram 15.

The task for the head of tax is toensure they have the right mix andbalance of these skills in thedepartment. They will need to work toensure that existing staff possess (ordevelop) and use these skills, or thatpeople are recruited into the taxfunction to bring in the skills required.Training of these softer skills for in-house tax departments is, in ourexperience, seldom given theimportance we believe it deserves.Indeed our experience is that trainingis often fairly ad hoc; best practicewould dictate that formal trainingplans are developed annually for eachmember of the tax department.

One particular comment we haveheard from a number of CFOs is thattax people can sometimes seem toneed too much base informationbefore a decision can be made. Tax isof course an area where one cannotdivorce planning from the underlyingbase data, but given that decisionsincreasingly have to be made quicklyon the basis of imperfect/incompletedata, the ability to work in suchcircumstances is likely to become aprized asset.

One finance director told us he was seeking a head oftax who “didn’t know too much about tax” – admittedlya slightly ‘tongue-in-cheek’ comment, but he did want atax manager who would focus on managing the impactof tax on the business, rather than become drawn in totechnical research and computational work.

Communication andpeople handling skills

Impact/profile/gravitasLeadership

Informationtechnology skills

Data gathering/handling skills

Change skills

Project managementskills

Negotiating skillsCommercialawareness

Diagram 15

47

The one-person tax function

For those medium sized businessesthat decide to have a tax department,but one that is to consist of just asingle individual, a further decisionwill normally need to be made as towhether the individual should havehigh level ‘head of tax’ skills orshould be more suited to detailedcompliance and tax accounting work.It is rare that a single individual will besuited to both. Clearly this will alsoneed to be reflected in the allocationof work between the in-house taxindividual and external advisers andservice providers. In our experiencethe more successful model for oneperson in-house tax functions iswhere the person has the higher-levelskill base.

There are of course also some largebusinesses that also have one-persontax functions due to the businesshaving outsourced nearly all of its taxmanagement activities. Here the headof tax will normally need to be a high-level individual who will effectivelymanage the relationship between theoutsourcing service providers and thebusiness and ensure the tax strategyis being followed.

Career issues

Particularly in a smaller tax function,ensuring team members have acareer path open to them can be aserious issue. Most heads of tax arekeen to ensure they retain the staffthey have so that experience andcontinuity is preserved. Howeverretaining long serving staff canpresent three particular problems.

• Staff become overqualified for theroles they hold. Most staff will lookfor periodic promotion and salaryincreases. Where such staff alsohave to spend some of their timeon (for example) compliance work,

this can lead to them beingoverqualified and overpaid for thework that they do.

• Staff can start to go stale if thework they do lacks developmentopportunity.

• A resistance to change can arise.If staff do not have the chance tochange their roles and develop itis very easy for inertia to set inand for work to continue much inthe way it always has. Of course,this can sometimes be anadvantage, but given the rate ofchange that most businesses(and indeed their tax functions)are currently experiencing, webelieve that flexibility and ability tochange are important advantagesfor tax teams.

For these reasons, some heads oftax we know actively encourage areasonable degree of staff ‘churn’in order to keep the tax functionfresh. This is often the case for morejunior tax staff, typically those whohave joined the company shortlyafter qualification. Such staff, inconjunction with their heads of tax,are often quite open about the factthat they only intend to stay withthe company for a couple of yearsin order to build up their experienceand then move up the careerladder elsewhere.

In larger tax departments, whereproviding career progression is rather easier, it is beneficial to identifythose members of staff that are the‘stars’ and discuss a career path withthem. These are often the staff thatthe business can least afford to loseand not providing them with a chanceto progress is the surest way to lose them. If career progression is not possible inside the tax function,then a well-trodden route for taxpeople is into the treasury department– and having ex-tax people in otherparts of the business is very

beneficial in ensuring the importanceof tax is recognised elsewhere in the business.

Work-life balance and fun

The late 1990s and early 21st Centuryhave seen an increasing focus on‘quality of life’ issues and on thebusiness benefits of improvingpeople’s working lives. We believethat a team will perform moreeffectively if it is happy and the teammembers are content with theirworking life and therefore ‘keeping itfun’ is important. Many leadingcompanies are starting to pay seriousattention to such issues and taxfunctions need to ensure that theyreflect this.

Summary

The key asset of a tax function isits people. Having the right peopledoing the right things will be crucialto the success of the tax function.Keeping them focused and motivatedis hence a key part of the role of thehead of tax.

11Use of technology

Today, as with all other areas of business, the tax function’s use of computers has moved well beyond purecomputational work and the most common areas of use are knowledge management, communication andcollaboration. Typically, depending on the specifics of the tax function, technology might be used for:

... and all that without even having mentioned the Internet!

49

In the early days of tax technology, there were some whopredicted that by the year 2000 all tax planning would bedone by complex computer systems, eliminating the needfor the poor old human tax professional. Over the past 20 years we have moved well beyond the first primitivespreadsheets and technology now provides us with thepotential to radically change how we approach both taxcompliance and tax consulting. Despite this, andfortunately for those of us who earn our living in the tax profession, there is little sign of this particular visioncoming to reality.

Knowledge management and group working

• Electronic text books and knowledge sources

• Sharing and/or dissemination of information

• Document storage and document management (thepaperless office does exist!)

• Allowing groups (and their advisers) to work togetherfrom different locations through shared databasesand ‘e-workrooms’

• Managing global tax issues and projects through ashared global database

Planning and compliance

• Preparation of tax computations, returns and taxaccounting calculations

• Compliance data gathering, not least automatedextraction of data from accounting systems

• ‘What if?’ modelling and calculations

• Data mining, particularly in the context of taxauditing of accounting data

• Monitoring of time limits and other diary events

Communication

• Sending and receiving e-mail, voicemail, instantmessaging etc

• Electronic meetings, presentations, conferences andtraining

• Document production and desktop publishing

Control/administration

• Project and task management

• Controlling workflow

• Personal diaries, address books, to do lists etc

In other words, there are now almostendless uses for technology in the taxfunction. However the questionshould not be “What can we do withtechnology?” but rather “How can weuse technology effectively?” We haveeach seen many occasions wheresomeone has created a spreadsheet,database or some other IT tool toperform a task and a year later it isout of date or unused. Technologycan be very powerful, but the costsand risks of buying/building a solutionand then maintaining and developingit thereafter often prove much greaterthan was ever originally envisaged.

Sometimes people seem to think thatIT is part of the core business of thetax function – it is not; tax functionsare about managing tax charges andtax risks, and IT tools are just asolution to help them do so.

We would add a particular word ofcaution on automated compliancedata gathering. The potential benefitsof automating tax return productionare clearly substantial. Set-up costscan, of course, be significant, butoften the real costs/risks are inmaintaining a heavily automatedsolution, not least as accountingsystems and accounts codingstructures change. This is not to saythat companies are not yielding greatbenefits from tax automation; manyare. However, our experience is thatthe real winners are those whoimplement carefully targeted ITsolutions, rather than those who tryand automate everything in sight.

Where a potentially cost effectivetechnology opportunity is identified,the next question should be whetherthe solution should be owned andmaintained in-house or whether itwould be more effective to ‘rent’ asolution from a service provider and

leave them with the costs and risks of development and maintenance. Itwould also be a lot easier to benefitfrom economies of scale throughleveraging a service provider’stechnology than through use of abespoke in-house solution. To quotean advertiser’s phrase, “You don’tneed to buy a cow just because youwant a glass of milk!”

We hope that our comments here arenot mistaken. We are not suggestingthat we are ‘lukewarm’ about taxtechnology. On the contrary, we haveseen huge benefits brought aboutthrough use of technology, but wehave learned that it is important torecognise the full costs and risks oftechnology as well as the potentialbenefits. Only the largestorganisations with the greatesteconomies of scale are likely tobenefit from going it alone.

Full automation requires that systemsshould anticipate every potentialsituation and as a result manytechnology projects have failed tomeet expectations or have taken farlonger to realise benefits thanoriginally envisaged, because ofunforeseen levels of complexity. Wehave also met several tax managerswho have carefully thought throughhow to institute technology drivenprocess improvements and moreoverhave the skills to achieve what theyset out to do by themselves, but who,one/two years later, have failed toachieve what they set out to dobecause, inevitably, other issues haveintervened and taken priority.

Current ‘best practice’

Rather than just highlight specificsuccess stories, we would suggestfive ‘cultural’ indicators typicallyobserved in tax functions that aremaking effective use of technology.

• The tax function is recognised as a co-owner of (or at leastsignificant stakeholder in) theaccounting system. Rather thanextract accounting data and thenmanipulate it into a ‘tax ready’form, the tax function will havehelped design and modifyaccounting structures so thatmuch of this work is done by theaccounting system itself.

• Any remaining extraction andprocessing of compliance data ishighly automated, with a particularfocus on ‘the difficult bits’ thattraditionally account for significantproportions of the tax team’s time.

• Documents and reference material are stored and accessed electronically.

• Status and progress reporting ishighly automated. When taxfunction management needs toclarify the status of work or issues,they do so by viewing real timeprogress information, not byhaving staff compile monthlyprogress reports manually.

• The tax function lives the ‘nowculture’ of the Internet world, withresearch (even for simple tasks,like checking a train timetable)instinctively done on-line, materialbeing retrievable instantly on-screen rather than requiring asecretary or a junior to trace thedocument concerned, andinformation being obtained anddelivered in ‘real time’ as needed.

50

Future growth areas

If the first paragraph of this sectiondid not make it clear, makingpredictions about future technologyalmost guarantees that one willsubsequently be proved wrong. Withthat caveat, here are six areas whichat the time of writing, are starting toshow early promise.

• The use of financial reportingmark-up languages (such as XBRL– a standard backed by theaccountancy profession and majortechnology companies) has thepotential to simplify andstandardise the extraction offinancial information required fortax purposes. More broadly, therapid adoption of this and otherXML-based standards is generallymaking the movement ofinformation around and betweenorganisations far easier.

• Automated workflow – a conceptwhich has existed for quite sometime, but which is now yieldingreal benefits, both in terms ofefficiency and in reduced risk.

• Tax data warehouses, where onesingle set of tax data is maintainedin a central location, irrespective ofwho is analysing, processing orauditing it, seem to offersignificant advantages over thetraditional approach of extractingdata separately each time whenneeded for any particular purpose.Traditionally such data has beenused mainly for post-event taxcompliance purposes. Howeverwhen combined with the righttools, such an approach nowmakes it easier to ‘cut and slice’data needed for managing thefuture tax charge, all within a shorttimescale. The data warehouseapproach also sits comfortablywith the growing use of ‘datamining’ tools (for exampleautomated searches of expense

narratives to detect occurrences of‘tax sensitive’ words and phrases).

• ‘Collaborative e-space’ or ‘e-workrooms’ allowing teams,whether in a single organisation oracross multiple organisations, towork together over the web.

• The sourcing of technical adviceand ideas on-line is growing at arapid rate. There are potentiallysignificant cost savings and qualityimprovements here for bothbuyers and sellers of advice, andwe therefore expect this to be asignificant growth area.

• A little further in the future,emerging Internet standards willlead to growth in an area that iscurrently being termed ‘webservices’. In effect, you will be able to create relatively complexsystems by ‘renting’ individualservices from particular suppliers,perhaps a calculator from one and a review tool from another,and joining them together usingthe Internet.

Summary

Technology offers great opportunitiesfor tax functions to work moreeffectively. It also offers similaropportunities for tax authorities. It isbecoming an increasingly connectedworld and the possibilities offered bytechnology will continue to grow.Clearly tax functions need to keep IT issues high on the agenda.However care also needs to be takenwhen planning technology solutionsto ensure the costs and risks areproperly managed.

51

The question should not be “What can we dowith technology?” but rather “How can we usetechnology effectively?”

12Use of external advisers and service providers

Our experience of large companies’approaches to the use of externaladvisers and service providers spansthe whole spectrum from those whoconsider advisers to be an over-priced resource, to be used only inthe last resort, to those whose onlyin-house tax resource is a single in-house tax manager whose role is tooperate primarily as a buyer andcontroller of external inputs. Clearlyas a partner and senior manager inPricewaterhouseCoopers we mustdeclare an interest in how businessesuse external tax advisers, but wehope our thoughts and observationsbelow remain balanced and objective.

In-house or externalresource? Some keypointers

If we assume that most tax functionswill choose to keep some workin-house and to contract/outsourcesome work to external advisers andservice providers, Diagram 16 mightprovide useful pointers as to whatwork is best allocated to whom.

Why use external advisersor service providers?

Tax work is almost never going to be ‘core business’ for a company,whereas it is exactly that for a taxadviser or service provider. On theback of this, the reasons we hear for using advisers/service providers include:

• to access ideas, skills, knowledge,specialist experience, processesor technology – where the externaladviser can add value which is notavailable in-house;

• to avoid having to make theinvestment in such areas;

• to provide ‘on-tap’ resource whichcan be turned on and off at will;

• to compensate for lack of resourcein-house – and in particular tomanage peaks and troughs;

• to reduce cost (and sometimesheadcount) by benefiting fromadvisers’ efficiencies and/oreconomies of scale, particularly in the area of compliance;

• to ‘skills match’ using staff with alevel of experience (whether morejunior or senior) not available in-house;

• to gain a ‘second opinion’;

• to gain the benefit of an externalperspective from someone whodeals with a large number of othercompanies; or

• to reduce and/or externalise risk.

However where external advisers arebeing used they need to work closelyin partnership with the internal taxdepartment. They need to understandthe tax strategy of the business andhow they fit into this. Regular reviewand feedback of their activities isimportant to the successful workingof this partnership.

Common concerns

We encounter a number of reasonswhy work should be kept in-houserather than dealt with by an externaladviser. However by sharing theseconcerns up front with theprofessional adviser a solution canusually be found which is acceptableto all parties. These concerns include:

• new experience which wouldotherwise be gained in-house is lost;

• time may be required to managethe advisers and/or to translatetheir opinions into moremeaningful action points;

• some advisers’ aversion to riskmay lead to over-caveated orover-cautious opinions;

• advisers can be (or can beperceived as) weak atimplementation of planning andideas;

• ‘asking for help’ may be perceivedas a sign of weakness; or

• cost.

53

Typical in-house tax functionstrengths

Typical external adviser/service provider strengths

• Ability to manage relationshipswith the business

• Implementation and projectmanagement skills

• Knowledge of in-house systems,processes and controls

• Knowledge of the business

• Depth of specialism andknowledge

• Access to ideas

• Knowledge resources

• Investment in processes andtechnology

• Multi-territory coverage andco-ordination

Diagram 16

The key to working with advisers isclear terms of reference, goodcommunication and, as we haveheard many times, no surprises.

The trend

Tax advice and provision of taxservices is a growth market. (This wasa clear theme to emerge from the taxfunction research work we havecarried out in association withCranfield School of Management.) We believe there are four mainreasons for this.

• Partly due to increased fiscalcomplexity and increasinglycomplex (global) businessoperations, and partly due to anincreasing recognition of tax as amanageable cost, the demand fortax advice is increasing.

• Increased fiscal complexity isleading to demand for deeper,narrower technical specialism andexperience which can only beprovided by companies that arelarge enough to support suchspecialists and/or have made theappropriate investment.

• Companies are increasinglyfocusing in-house resource oncore business activities, andindeed reflecting this in headcountreduction exercises. Activities that are non-core are frequentlyoutsourced.

• In certain areas, external advisersand service providers are offeringimproved value for money.

We see no foreseeable reversal in any of these drivers and therefore weexpect that in-house tax functions’use of external advisers will continueto grow.

Outsourcing

Companies have always farmed outtax work to external advisers, butnormally on a relatively short-termbasis as and when required. Howeverin recent years more formaloutsourcing arrangements havestarted to be put in place. As withother business process outsourcingarrangements, this normally involvesmulti-year contracts, agreed servicelevels, contractual commitment toprocess improvement and (often)fixed fees.

There has been particularly notablegrowth in outsourcing of tax returnprocessing work, as advisers’investment in process and technologyhas made it much more cost-effectiveto outsource this work than was the case in the past. However wehave seen some groups goconsiderably further than justcompliance outsourcing, in somecases outsourcing the whole taxfunction – usually leaving a oneperson tax function whose role is to act as a co-ordination and liaisonperson between the group and theservice provider.

54

13Performance metrics

The challenge, we believe, is to haveperformance metrics which tie in withthe overall tax strategy and that KPIs(key performance indicators) used bythe tax function reflect key strategicgoals. Only when this is happeningwill the tax function genuinely be ableto show the value they are adding tothe business – and be in a position tojustify better the extra resourcesmany functions say they need.

As this is a difficult area, some taxfunctions have argued that time spentmeasuring performance is time thatcould otherwise be spent managingperformance. We do not agree.Provided the right measures can befound, movements in the measureswill reflect the impact the tax functionis having on performance, andmeasuring is therefore a keymanagement discipline. The keyquestion is therefore “what are theright measures for a tax function?”

What should/could a taxfunction be measuring?

In our opinion the KPIs for the taxfunction should be the starting point.If these are properly spelt out in thestrategy discussions then theyprovide a framework for measuringthe success of the tax function.However the KPIs are normally at afairly high level and it is necessary totake these down to specificmeasurable objectives for the wholefunction and hence down to specificactions at the individual level. Weaccept that tax is a complex subjectand building a model that serves asan effective measure of performance,in the face of a wide range ofcircumstances and influences, will be no simple task.

Some examples of the measures wedo see in use in tax functions mightbe helpful. These include:

• effective tax rate basedassessment;

• analysis of the structural/naturalrate analysis (essentially the longterm tax rates which would beexpected to apply, eliminatingshort term fluctuations);

• competitor comparison – looking at the tax rate of direct competitors;

• ‘customer’ satisfaction is seen as important, and although weencounter relatively little formalmeasurement of this, we haveseen some plans to survey the taxfunction’s customers; and

• tax return production orcompliance deadline measures,though these often create a real risk of focus on deadlinesrather than quality and often divert attention from higher value-adding work.

57

“WYMIWYG – What You Measure Is What You Get”

It is a long established management doctrine that measuresand targets influence performance. Whilst the position isbeginning to change, our experience is that relatively fewtax functions have formal targets or metrics – and wherethey do, they often revolve around the things which, asnoted earlier, are both easily measurable and are relativelyeasy to achieve, such as submitting all the returns by thestatutory filing date.

We have already commented on theimportance of the cash tax rate indetermining shareholder value and weexpect that there will be an increasingfocus on cash tax rates at theexpense of the effective rate in theaccounts.

Some groups are also looking at‘Balanced Scorecard’ metrics for thetax function (see ‘The BalancedScorecard’ – Robert S Kaplan andDavid P Norton). Two key themes wewould briefly highlight here are:

• that a balanced scorecard needsto balance financial measures withnon-financial measures. As well asthe more traditional measuresrelating to financial performanceand internal processes, thereneeds to be a focus on both‘customers’ and ‘learning andgrowth’, in effect taking intoaccount likely impact on futurefinancial performance. Someillustrations of how this may bereflected in tax function measuresare included opposite; and

• that as well as including ‘lagging’outcome measures that reflectpast performance, scorecardsshould focus on ‘leading’performance drivers which willinfluence future results.

Do tax functions reallyneed formal performancemetrics?

Certainly tax functions shouldmeasure performance againstobjectives and report on progressagainst strategy. However we believethe jury is still out in the case fornumerical performance measures. Weknow of relatively few tax functionsthat currently operate formalmeasurement processes for thefunction as a whole. What oftenproves useful however is thediscussion that surrounds thepossibility of using measures, as thisoften throws up issues andchallenges. It may not be clearwhether a formal system of metricswill be right for a tax function, but webelieve the debate should at leasttake place on a regular basis.

58

The case for tax metrics

• Measures help focusperformance.

• Measures helpdemonstrate value added.

The case against

• Tax management is a verycomplex subject, not easilyrepresented by numericalmodels.

• Tax charge, risk andmanagement costs aresubject to a number ofuncontrollable externalinfluences (in particular,changes in statute andprecedent).

Balanced scorecarding best practices for tax

For the customer perspective:

• consult tax function customers (as a part of strategy setting);

• establish service level agreements, and monitor performance;

• conduct customer satisfaction surveys; and

• measure tax resource allocation against customer requirements.

For ‘learning and growth’:

• attach importance to communication and knowledge sharing(especially outside normal contacts);

• measure staff ‘feelgood factor’;

• address information system capabilities; and

• ensure staff development objectives are on the scorecard.

“However beautiful the strategy, you should occasionally look at the results.” Winston Churchill

14Effective global tax management

Complicate this by involving differentfiscal regimes, languages, time zonesand business cultures and the resultcan be a management nightmare.Simply tracking who the variouscontacts are in each territory can bean uphill struggle.

As well as being a potentially majordrain on head office tax resource thisscenario often means that the globaltax charge and risks are not managedas effectively as they could be. Evenwhere a group does have a basicdegree of control over the global taxposition, most heads of tax we knoware forced to focus only on the largesttransactions and profit flows and onthe major trading territories. Theysimply do not have the resource to‘dig deeper’, even though there couldbe significant untapped opportunitiesor uncontrolled risk elsewhere.

What needs to bemanaged?

Once again, this will depend on thegroup’s tax strategy and key taxdrivers, but examples of issues andinformation which groups seek tocontrol are shown in Diagram 17.

61

Managing the global tax position of a group of companiescan be very hard work indeed. Where a group hasoperations in more than a handful of territories, gatheringinformation and exercising control typically results in awhirlwind of emails, phone calls and indeed visits to localbusiness, finance functions, in-house tax teams and variousexternal advisers.

Strategy andplanning

(albeit some of thisinformation will alsobe required forcompliancepurposes)

• Dissemination of group tax strategy, policy,procedures and responsibilities

• Transfer pricing information and policy

• Dividend, interest and royalty flows

• Other key ‘value flows’ (activity mapping), holdingand financing structures

• Withholding taxes and tax credits

• Underlying local territory tax rates

• Tax losses and other local tax assets

• Other international structuring issues

• Key transactions with potential taxation implications

• Financial information having tax implications

• Planning ideas and activity (both to monitor activityand to encourage it to take place)

Compliance andreporting

• Tax reporting requirements and timetables

• Information required for head office tax accounting

• Information for head office territory compliancepurposes

• Tax enquiries, audits and risk issues

Administration • Details of local contacts (in-house and external, taxand non-tax)

• Details of local entities, branches and permanentestablishments

• Local tax histories

• Resourcing, costs, fees and use of advisers

Diagram 17

There are no doubt other items thatare missing from the above list.However as well as ensuring that keyitems are tracked and managed,groups will also need to ensure thatthey are not devoting resource totracking items where the potentialbenefits do not justify the costs ofdoing so. The tax function needs tosort out the wood from the trees so itcan focus on what really matters.

Basic discipline

Easing the gathering of the aboveinformation requires investment inscoping out responsibilities andensuring all concerned take themseriously. If contacts are given clearguidance as to the informationrequired, the format in which it issupplied, the timetable for provisionand the reasons why the informationis needed, they are more likely toprovide what is needed withoutfurther chasing.

In large organisations, this disciplinewill need to be continually reinforcedas the group structure and the taxfunction’s contacts change. Inevitablynot all information needed will beprovided to timetable, but if therequirements and timetable areproperly defined and documentedthen a junior (administrative) memberof staff can be charged with followingup missing information, rather thanhaving to have experienced tax staffspend time chasing it up.

Use of technology

Database and web technology lendsitself very well to managinginformation across disparatelocations. A good technology tool willhelp communicate what information isrequired (and when), standardiseinformation formats, provide therepository for storing and sharinginformation and (potentially) highlightand/or chase for missing information.

One caution – our experience is thatprovision of a good technology tool isunlikely to bring about any significantimprovement in itself. It will onlydeliver results if the disciplinesurrounding its use can beinstilled/enforced. It is the informationcontent that ultimately matters, notthe technology that is used tomanage it.

Use of external serviceproviders

We are suggesting that to improve theeffectiveness of global taxmanagement it is necessary to instillthe appropriate discipline into one’steam in other territories. Thisinvestment does not necessarily needto be made in-house.

An outsourcing service provider willprobably already have put similarsolutions in place for other clients andwill be used to liaising with localterritory contacts to ensure the rightinformation is gathered at theappropriate time. Why not leverageoff a service provider’s investment inpeople, processes and technologyrather than try and secure internalinvestment in something which isnon-core to that business? There mayalso be economies of scale andcommercial advantage in negotiatinga central agreement with a singleservice provider rather than engaginga miscellany of local advisers. Serviceproviders will also have ‘critical mass’in territories where group operationsmay be too small to merit in-housetax resource.

Going wider than tax

Whilst we are speaking here aboutglobal tax management, otherdepartments may be facing similarinvestment and outsourcing decisions(for example regarding companysecretarial work, treasury work, legalaffairs etc). It may therefore be worth

considering some joint investment oroutsourcing approach in conjunctionwith these other functions.

Summary

The increasingly global economymeans that managing the global taxposition is taking on greaterimportance for group tax directors.Planning around structures, financingand different business models are allvitally important. However withoutproper information andcommunication it will be very difficultboth to make the right decisions andto ensure that these decisions arebeing implemented and monitored.

62

15In conclusion

In our opinion the winning taxfunction of the future will:

• lead, not react;

• pursue a clear strategy;

• ‘genetically engineer’ their ownflexibility; and

• sit at top table.

This increased pressure is of coursenot all bad news. It may be a tougherworld with higher stakes, but thosewho can play at a higher level havethe potential for better careers andgreater reward. Enjoy the challenge!

Finally, we hope you will have founduseful, thought-provoking material inthis guide. The content is of coursebased on our own observations,views and experiences. We are keento hear yours and would very muchwelcome any observations you wouldcare to make.

65

Tax functions are operating in a rapidly changing world. The last few years have seen significant increases in thedemands of and pressures on the tax function and as aresult we are witnessing significant changes in the nature of in-house tax departments. Old style ‘back room’,compliance focused departments are in decline, with aclear trend towards higher profile ‘value-driven’ tax functions.

Tony Elgood

anthony.b.elgood@uk.pwc.com

Damian De Backer

damian.de.backer@uk.pwc.com

67

Appendix ITax function best practiceA quick ‘though provoker’

For each question below, select theanswer you believe is closest to yourcurrent position.

Is your senior management (the Board?)aware of key tax issues, risks andopportunities?

Do you have a tax strategy?

Are tax issues addressed when businessdecisions are made?

Do tax or accounting staff spend significantamounts of time in gathering and analysinginformation for tax compliance purposes?

Do you believe that your tax function’sdevelopment objectives reflect the needs of a leading tax function?

Any ticks other than in column D suggest potential for improvingeffectiveness of tax management.

Company name

A B C D

Often not – There is anobvious need for improvedtax/business liaison

Normally – Though thereare sometimes instances oftax being left ‘out of theloop’

Yes – Tax is alwaysalerted to ‘big ticket’transactions, and has somecontact with businessmanagers on day to dayissues

Always – There is astrong ‘tax culture’, with taxwell informed of businessdevelopments, and vice-versa

Yes – Data gathering iswholly manual

Yes – Though some verybasic automated datagathering is used

Yes – Though someautomated data gathering isused, and more is planned

No – Data gathering ishighly automated

No – Tax functionobjectives are either not set,or are task focused

To a degree – Howevertax objectives still focusprimarily on technical issuesand on complianceobjectives

Yes – Objectivesrecognise provision ofeffective tax support to thebusiness as key role.

Yes – ‘Higher’ skills suchas management,communication and changeskills are seen as key indevelopment plans.Compliance/ technical skillsare seen as a basiccompetence

No Yes – Strategy discussedwithin the tax department,though not recorded inwriting

Yes – Written andcirculated within the taxdepartment

Yes – Written, agreedwith the board, periodicallyreviewed and communicatedoutside the tax department

Largely not – Seniormanagement shows littleinterest in tax issues (otherthan if major problems arise)

Partly – Key tax issuesare discussed with seniormanagement at (forexample) audit clearancetime

Yes – Key members ofsenior management areregularly briefed on taxissues

Yes – Seniormanagement is well awareof (world-wide) key taxdrivers in the group, andactively encourage businessstaff to manage them

68

Appendix IITax function activity analysis - guidance notes

The table on page 69 is designed asan aid to help in-house tax functions,or individual tax function staff, whoare analysing how they might makemore effective use of their time andfocus more time and resource onhigher value adding activity.

The table highlights four key areas of a tax function’s role, from highvalue tax strategy/leadership work,through business support, tocompliance work, with tax teammanagement being included as animportant element of most taxfunctions’ activity. For each level ofwork, various examples of typicalactivities are included. You may alsoneed to add other types of activity.

The table assumes that the taxfunction will be trying to refocusresource from low value, complianceand ‘scorekeeping’ activities, tohigher value adding activities thathave a positive impact on the grouptax charge and risk. Broadlyspeaking, higher value activities arenearer the top of the page, lowervalue activities toward the bottomwith tax team management being anexception to this, in that good teammanagement is likely to be a‘foundation’ to achieving effectivetax management.

To contrast the current and futurescenarios, use the left hand columnto analyse estimated amounts of timecurrently spent on various activitiesand then the right hand column to setout the time as you would wish it tobe in the future. The units of time areunimportant; hours, man-days orpercentage split can all be used.Equally, whether or not ‘non-productive’ time (such as holidays,sickness etc) is included isunimportant, provided a commonbasis is used for any group ofindividuals analysing their time.

As a benchmark, the 1996 tax survey carried out by CranfieldSchool of Management on behalf ofPricewaterhouseCoopers1 indicatedthe following average time allocationfor UK FTSE 250 (respondent)companies (see Diagram 18).

NB.

• The survey was undertaken in1996. Anecdotal evidencesuggests that most tax functionshave since increased their focuson value added activity, such asplanning, projects and strategywork. Advances in tax technologyand compliance outsourcing arealso expected to have reduced theproportion of compliance time.

• The survey was a snapshot of the‘actual’ position at that time, notthe desirable position.

1 ‘Benchmarking Tax for Profit’ – 1996 –PricewaterhouseCoopers in conjunction with DrBrenda Porter and Cranfield School ofManagement. For further research on the role ofthe in-house tax function, see also ‘Tax Function2000 – Meeting the compliance demands of thefuture’ and ‘Tax Function 2001 – Supporting thestrategic and business demands of the future’(PricewaterhouseCoopers in conjunction with DrBrenda Porter and Cranfield School ofManagement).

Other/general advice 12%

Compliance 33%

Employertaxes 6%

Tax accounting 7%

Planning,projects andstrategy 26%

VAT/Indirect13%

Diagram 18

69

Examples

Setting and reviewing tax strategy. Briefing business leadership. Directing tax strategy acrossthe group. Understanding key tax drivers. Setting/reviewing objectives and plans to ensureimplementation of strategy. Managing tax communication with the Board.

Creative ‘what if’ thinking. Brainstorming sessions. Away days. Challenge meetings withexternal advisors.

Industry and professional groups and conferences. External networking. Lobbying ofgovernmental bodies.

Aligning global business strategy, operational structure and corporate structure with tax andfinancial strategy etc.

‘Face time’ with key business contacts (including CEO, CFO, business managers, legal, tax,domestic and overseas). Attending key meetings/conferences. Producing guidelines, businessbriefing material. Input to newsletters. Maintenance of tax intranet site.

Merger, acquisition and divestment work. Project support. Assisting business with taxsensitive transactions.

Reviewing tax planning suggestions from external advisors. Implementation, monitoring andongoing review of planning ideas. Post implementation evaluation.

Proactive identification of planning opportunities. Ensuring planning ideas are actioned.Overseeing implementation. Monitoring progress and outcome of planning initiatives.Negotiation with tax authorities.

Ensuring tax resources (internal and external) are aligned to business needs. Service qualitymeetings with businesses.

Capture and sharing of ideas. Tracking history of tax issues.

Forecasting the ongoing impact of tax on the businesses. Provision of information forbusiness reports and forecasts.

Identifying tax risks. Mapping and devising controls and ensuring they remain appropriate andare likely to viewed as adequate by the fiscal authorities. Testing the effectiveness of controls.Accounting systems work.

Maintaining and controlling group tax payments, accounts, claims and elections etc.

Liaison with overseas businesses, tax functions and tax advisors. Monitoring global taxprogress. Data gathering. Setting guidelines, procedures, protocols.

Managing relationship with fiscal authorities. Dealing with tax audits and enquiries. Provisionof information to support tax returns.

Planning, monitoring and carrying out compliance work (including review work).

Planning data gathering processes and liaison with compliance data providers. Gathering andchasing data. Reviewing data quality. Dealing with deficiencies in data received.

Year-end tax accounting work.

Fielding straightforward tax queries (e.g. employee tax and indirect tax issues).

Training and education time. Staff coaching. Performance and development reviews.

Team meetings. Team building events. Away-days etc.

Team objectives and action plans. Evaluation against strategy, objectives and workplans.

Financial management and planning, budgeting, financial reporting etc. Liaison withbusinesses regarding use of ‘shadow’ resource. Recruitment.

Selecting advisers and service providers. Contractual and engagement work. Agreeing servicelevels. Monitoring performance. Periodic service quality meetings.

Activity

Group tax strategy

‘Blue sky thinking’

Political/industry bodies

Major tax drivenbusiness re-organisation

Tax aware culture/grouptax communication

Tax technical andtransaction advice

Tax scheme evaluationand implementation

Other tax planning work

Tax resourcemanagement

Tax data and knowledgemanagement

Tax forecasting

Tax risk management,controls and self-audit

Group tax compliancemanagement

Multi-territory taxcontrol

Liaison with taxauthorities

Entity tax compliancemanagement

Data collection

Tax accounting

Routine businessqueries

Personal and staffdevelopment

Team building

Team planning, projectmanagement &evaluation

Financial management/resource management

Management ofadvisers

Time spent now

Str

ateg

y/le

ader

ship

Target time allocation

Bus

ines

s su

pp

ort

Com

plia

nce

Tax

team

man

agem

ent

Tax function activity analysis – time analysis

Total time

We are seeing an increasingrealisation that a properlydocumented tax strategy is a mustunder corporate governance bestpractice. Additionally best practicedemands that the Board, or at veryleast the Audit Committee, hasagreed and signed off the taxstrategy. Whilst there is no rightanswer as to what a tax strategymight look like, there are some areasthat probably should be included inall written tax strategies.

The purpose of this appendix is toprovide a sample framework for acompany that wants to produce ordocument its tax strategy. It coverswhat we believe to be the key areasthat should be included in a taxstrategy document. The framework isequally applicable to companies thatdo not have an in-house tax function.

70

Appendix IIITax strategy document: a sample framework

Table of contents

I High level overview

1 The external environment2 Total tax contribution3 Attitude to tax planning and risk4 Tax strategy template5 What the Board are being asked to comment on

II Key areas of focus/risk

1 [Area of focus/risk 1]• What is the issue • Objective(s) for addressing the issue• Barriers to achieving the objectives – and how to overcome them• Action plan

2 [Area of focus/risk 2]• What is the issue • Objective(s) for addressing the issue• Barriers to achieving the objectives – and how to overcome them• Action plan

3 [Area of focus/risk 3]• What is the issue • Objective(s) for addressing the issue• Barriers to achieving the objectives – and how to overcome them• Action plan

4 [Area of focus/risk 4]• What is the issue • Objective(s) for addressing the issue• Barriers to achieving the objectives – and how to overcome them• Action plan

5 [Area of focus/risk 5]• What is the issue • Objective(s) for addressing the issue• Barriers to achieving the objectives – and how to overcome them• Action plan

71

III Role of the tax function

1 Structure of the tax function2 Role of ‘shadow tax function’3 Reporting lines4 Using external advisors5 Developing the team

IV Stakeholder engagement and communication

1 Who are the stakeholders in tax?2 The communication plan

V Performance metrics – the balanced scorecard

VI Summary

1 Overview2 Matters for Board/Audit Committee approval

Contacts

PricewaterhouseCoopers has a global network of tax management specialists. For details, contact:

The AmericasKarl MoodyPricewaterhouseCoopers LLP1201 Louisiana, Suite 2900Houston, Texas, 77002-5678United States of America

Tel: +1 713 356 6015E-mail: karl.moody@us.pwc.com

Europe, Middle East and AfricaAndy MorrisPricewaterhouseCoopers LLPCornwall Court19 Cornwall StreetBirmingham, B3 2DTUnited Kingdom

Tel: +44 (0) 121 232 2166E-mail: andy.morris@uk.pwc.com

Asia & Pacific Ian ParoissienPricewaterhouseCoopersLevel 7215 Spring StreetMelbourneVictoria 3000Australia

Tel: +61 3 8603 3467E-mail: ian.paroissien@au.pwc.com

72

This publication has been prepared for general guidance on matters of interest only, and does not constitute professionaladvice. You should not act upon the information contained in this publication without obtaining specific professionaladvice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the informationcontained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employeesand agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, orrefraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2006 PricewaterhouseCoopers LLP. All rights reserved. ‘PricewaterhouseCoopers’ refers to PricewaterhouseCoopersLLP (a limited liability partnership in the United Kingdom), or, as the context requires, other member firms ofPricewaterhouseCoopers International Limited each of which is a separate and independent legal entity.

www.pwc.com