Building Dimension I of your tax governance framework: tax strategy and leadership

Why do you need a tax strategy? What are the benefits?

Sustainability considerations are becoming more and more important to organisations across the industries and geographies. As we saw in our last post, tax is part of this. A tax strategy is crucial because it ensures that the strategic goals of your enterprise are also addressed from the tax perspective. You need a credible tax narrative to anticipate and respond to a growing number of stakeholders with disparate needs and expectations.

This narrative has to be consistent and it has to be embraced by the entire organisation. Firstly, this raises awareness of the tax strategy. Having a solid tax strategy in place also ensures that the strategy is applied and is actually executed, not only by the tax function itself, but also by other functions within the group. This in turn avoids the risk of omitting tax matters that may have significant implications for many different areas of your business ‒ and conversely of ignoring the impact of decisions in different parts of the business on tax. In other words, it’s important to align your tax strategy within the enterprise. This includes making sure that the “3 Cs” approach – Cooperation, Coordination and Communication – is applied in terms of dealings between your tax function and other functions within the group when it comes to matters with potential tax impact.

A tax strategy will also give you a clear view of where your tax function is headed. As we’ve discussed in other papers and publications, a new era of tax and tax transparency is under way. Formulating a tax strategy is a great place to state how you intend your tax function to evolve not just to minimise the risks and but also to capitalise on the opportunities this new era brings.

What does a tax strategy do?

As a head of tax you define and agree a vision for your tax function with the relevant governance bodies within your organisation. But you can’t achieve this vision without a long-term strategy. An effective tax strategy is a combination of different elements with varying time horizons that maps out the journey from your vision all the way to your short-term (annual) objectives. It should give a clear overview of the steps that will have to be taken to achieve the strategic goals you’ve defined.

What are the different elements of a tax strategy?

As already mentioned, it’s a good idea to start with a clearly defined vision of where your tax function is headed. This can take the form of one sentence expressing the general aspiration. 

The next step is to create a long-term strategy consisting of a number of strategic priorities (or strategic tax principles) that will enable you to achieve your vision. The strategy should also include a definition of the mandate of the tax function showing clearly what the function is accountable and responsible for. 

Since your strategic tax principles are defined for the long term and won’t be changed from year to year (unless extraordinary curcumstances emerge), to bring them to life you need more operational medium to short-term plans that are aligned with the strategic tax principles. The plans are tangible and can be tracked over a specific period of time. Your medium-term plan, generally spanning 3 to 5 years (the choice of period can vary), contains actions and milestones and is basically an aggregation of your annual (short-term) objectives over the relevant planning period. 

Your short-term plan consists of actions for the present year. If, for example, your long-term strategy contains five strategic tax principles, your short-term plan will contain a small number of concrete objectives for each of the strategic tax principles. 

What challenges can you expect to face?

You should formulate strategic tax principles on the basis of the tax strategy you apply. While it’s easy for the tax function to formulate these strategic tax principles, in a rapidly changing environment heads of tax often struggle to shape the mid-term plan.

Your long-term strategy should, in principle, remain unchanged, but your mid-term plan may be changed and amended to the current circumstances. To keep track of developments it’s crucial to measure performance using smart Key Performance Indicators (KPIs).

What about leadership and governance? 

It’s essential to have a governance body, for example the Board of Directors (BoD), as well as your C-suite, involved in shaping your tax strategy. Firstly, this backing will give you as the head of tax the power and authority to operate. And secondly, it will give to the tax function the power and authority to actively manage taxes.

Leadership is different from governance, but both are relevant. Governance is the instrument that steers leadership: leadership accompanies the job of the head of tax who has the mandate from the BoD. 

Tax leadership requires a specific set of skills and abilities, to name some of them: 

• Actively developing and promoting tax strategy internally: making the business aware of tax and helping them execute your tax strategy.
• Communicating with other internal corporate bodies: doing not just what you have to, but actively participating in running and supporting the business.
• Engaging other functions (business units, other support functions like HR, Finance, Legal etc.) underlying the interactions: cooperating to make faster, better and more appropriate progress.
• Making changes and setting the pace of change: saying what changes need to happen and managing them.
• Managing the tax function and its resources: managing the workforce well and striving to develop, managing people and projects.
• The ability to negotiate and foster a good relationship with the public authorities and other external stakeholders. 

I have an approved tax strategy. What is next?

Establishing a tax strategy is a first big step in building a solid tax governance framework. It is essential as it constitutes the fundamentals for developing and enhancing further dimensions of a solid tax governance framework. In the next blogpost ‘Dimension II: tax operations’ we present how to efficiently and effectively run tax function.