La presente disamina si prefigge di sottolineare l’importanza della governance aziendale in relazione alle questioni fiscali internazionali caratterizzanti l’ultimo periodo e pertanto include sia il progetto dell’OCSE/G20 denominato “BEPS” (i.e. “Base Erosion and Profit Shifting”) sia l’analisi degli impatti in ambito fiscale internazionale legati alla recessione economica da “COVID-19”. In questo contesto, sia il progetto BEPS che la crisi economica associata alla pandemia hanno influenzato ed influenzeranno ancora nel prossimo futuro la gestione operativa di molte imprese multinazionali facendoci assistere ad un cambio repentino di prospettive, di tendenze e di relative misure in ambito di “Corporate Governance”. Con il coinvolgimento di molteplici ‘attori’, i relativi rischi dovrebbero essere identificati e risolti attraverso mezzi e le soluzioni più semplici ed efficaci, ma sempre conformi al trend globale, come ad esempio è già accaduto nel caso della disciplina dei c.dd. “Prezzi di Trasferimento” (i.e. “Transfer Pricing”) che ha diffuso una particolare sensibilità al comportamento fiscale strategico, con particolare riferimento alla c.d. “Pianificazione Fiscale Aggressiva” (i.e. “Aggressive Tax Planning”). Talune “procedure” per l’identificazione ed il controllo dei rischi sono anche trattate in questa disamina quali meccanismi che potrebbero essere utilizzati dalle imprese in linea con la continua evoluzione degli scenari fiscali internazionali. Queste procedure, che rappresentano certamente un mezzo fondamentale per l’identificazione ed il controllo dei ‘rischi’, non possono però essere ritenute applicabili “Tel Quel”, e necessitano pertanto sempre di opportuni aggiustamenti in base al tipo di business, ad alcuni indicatori economici, al rischio di mercato ed ad altre variabili. Inoltre, la presente analisi abbraccia anche l’effetto della tecnologia applicata alla “Corporate Governance” in ambito tributario, semplificando la comunicazione efficace, la trasparenza e di conseguenza, il “governo societario”. Infine, il presente lavoro accenna anche ai probabili effetti positivi legati alle recenti iniziative ricadenti sotto la denominazione di “Pillar One” e “Pillar Two” promosse dall’OCSE/G20 nella gestione, in particolare, del “rischio fiscale” internazionale per gli anni a venire.

SOMMARIO:

1. Brief Introduction on “corporate governance” and its relation to International Tax - 2. Recent development of “corporate governance” in relation to the Economic and Tax Outlook - 2.1. OECD/G20 Principles and Guidelines - 2.1.1. Ensuring the basis for an effective “corporate governance” framework - 2.1.2. The rights and equitable treatment of shareholders and key ownership functions - 2.1.3. Institutional investors, stock markets, and other intermediaries - 2.1.4. The role of stakeholders in “corporate governance” - 2.1.5. Disclosure and transparency - 2.1.6. The responsibilities of the board - 2.2. OECD/G20 BEPS and MLI - 2.3. Evolution of International Tax Law and Transfer Pricing as a result of OECD/G20 initiatives - 2.3.1. Master File - 2.3.2. Local File - 2.3.3. CBC Reporting - 3. Impacts of COVID-19 - 3.2. Impacts on Tax Authorities ‘approaches - 3.3. The OECD Guidance on the Transfer Pricing implications of the COVID-19 pandemic - 3.3.1. The aim of the “Guidance” - 3.3.2. The “Comparability Analysis” - 3.3.3. “Losses” and the allocation of COVID-19 specific costs - 3.3.4. “Government Assistance Programmes” - 3.3.5. “Advance Pricing Agreements” (APAs) - 3.3.6. “Corporate Governance’s agility” - 4. What does good “corporate governance” mean to Multinational Companies today? - 4.1. Risks of bad “Corporate Governance” - 4.1.2. Operational tax risk - 4.1.3. Tactical and integrated tax risk management - 4.1.4. Other possible tax management solutions - 4.2. Effects of strategic tax behavior on “corporate governance” [38] - 5. OECD/G20 “Pillar One” and “Pillar Two” and their impact on Multinationals’ “corporate governance” - 6. Final Comments and Further Recommendations [43]-[44] - NOTE

1. Brief Introduction on “corporate governance” and its relation to International Tax

As per the OECD [3], the purpose of “corporate governance” is to “help build an environment of trust, transparency, and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stron­ger growth and more inclusive societies” [4]. Simply put, “corporate governance” is the set of rules, regulations and policies, practices and processes, which administer an entity. “Corporate governance” is used by entities in order to manage and ba­lance the interests of their many stakeholders, such as shareholders, management, government, banks and many more, while entailing how an entity deals with matters such as “risk management” and “corporate strategy” [5]. Without good “corporate governance”, an entity may lose a substantial amount of trust and consequently profitability. Now and as highlighted by the OECD, the burden of providing “corporate go­vernance” falls purely on the Board of Directors (“BoD”), which should divide responsibilities among different authorities with a clear aim to serve the public inte­rest. That being said, “corporate governance” is often influenced by a wide variety of legal fields, which include, but are not limited to, company laws, accounting and auditing structure and, more importantly for the aims of this specific contribution, “tax laws”. Therefore, it is important for the BoD to oversee risk management sy­stems, and implement them to ensure that the entity is in line with applicable laws i.e. tax, competition, etc. More recently, it has been seen that the role of the BoD has also entailed the oversight of finance, tax planning strategies and management. This discourages practices such as aggressive tax avoidance and evasion on all spectrums, eventually leading to serious legal and reputational risks [6]. The current international trend is the integration of tax risk management [7] within the responsibilities of the BoD. The latter must; therefore, under this new approach, develop the general guidance for tax strategies and tax policies, as well as defining the good governance framework for the tax processes. Such processes include tax risk management and control, compliance, supervision, transparency mechanisms, etc. This new trend has two main aims: (1) “enhancing tax compliance with [continua ..]

2. Recent development of “corporate governance” in relation to the Economic and Tax Outlook

The perception of taxation has changed; whereby, paying taxes is no longer seen as a mere cost to be incurred, instead, it is seen to have an important strategic notion on a corporate level whereby it allows companies to fulfil their “social responsibi­lity” duties. Following the principle of the “tragedy of the commons” [10], it could be said that the new tax climate affects the role of companies and their share of tax contribution. That said, the maximization of a company’s profits and value for shareholders is harmonious and consistent with the company’s responsibility with respect to its multiple stakeholders and society in general. In many cases, the payment of taxes due is now represented as contributions by the company to develop society and provide public goods that benefit societies, citizens and consumers through the provision of infrastructure and services. The aforementioned, of course, does encourage discarding aggressive tax minimization strategies (legal tax planning included) or strategic tax behaviors that are profit-centric. It should be noted that there are multiple factors that still cause a dilemma for companies to optimize their taxes, such as maximizing profits and shareholders’ va­lues and safeguarding the company’s competitiveness. This creates a valid econo­mic reason, motive or objective for companies to use more efficient tax formulas when designing business transactions. The challenge becomes implementing a consistent set of guidance, rules and/or regulations for modern companies to balance the goal of targeting a fair “Effective Tax Rate” (“ETR”) at a group level with the other important goal in the field of ‘social responsibility’. The following sub-sections aim to highlight the initiatives of the OECD/G20 in terms of (1) principles and guidance dedicated to “corporate governance”; (2) the BEPS’ project and the so-called “MLI” [11]; and (3) the evolution of International Tax Law and Transfer Pricing as a result of OECD/G20 initiatives.

2.1. OECD/G20 Principles and Guidelines

The OECD first published its Principles of “corporate governance” in 1999 and since its publication, it has become a benchmark for multiple stakeholders worldwide, such as policy makers, investors, and many more. After its initial publication, it was reviewed twice. Firstly in 2004, this review highlighted the importance of transparency, accountability, BoD’s oversight and respect of shareholder’s rights, as well as the key role of stakeholders to set the core values to maintain a well-func­tioning foundation for “corporate governance”. Secondly, the OECD published its most recent review in 2015, which focused primarily on six main principles of the “corporate governance” framework: i)    ensuring the basis for an effective “corporate governance” framework; ii)   the rights and equitable treatment of shareholders and key ownership functions; iii) institutional investors, stock markets, and other intermediaries; iv) the role of stakeholders in “corporate governance”; v)   disclosure and transparency; and vi) the responsibility of the board. Each principle of the “corporate governance” framework is further examined below.

2.1.1. Ensuring the basis for an effective “corporate governance” framework

The OECD stated in its 2015 report that “The ‘corporate governance’ framework should promote transparent and fair markets, and the effective allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement”. In other words, an effective “corporate governance” framework should clearly articulate the division of responsibilities between different authorities – such as supervisory, regulatory and enforcement authorities – and market players. Therefore, sound legal, regulatory, and institutional framework that comprises of legislation and regulation, self-regulation and business practices are needed to match with this new framework. The OECD 2015 Report also highlighted that this is not a one-fits-all solution, rather that this should be tailored to a country-specific framework, which allows some flexibility to certain corporations or indivi­duals. Under this principle, the OECD highlighted certain points to be followed as below: “A. The ‘corporate governance’ framework should be developed with a view to its impact on overall economic performance, market integrity and the incentives it creates for market participants and the promotion of transparent and well-func­tioning markets. B. The legal and regulatory requirements that affect ‘corporate governance’ prac­tices should be consistent with the rule of law, transparent and enforceable. C. The division of responsibilities among different authorities should be clearly articulated and designed to serve the public interest. D. Stock market regulation should support effective ‘corporate governance’. E. Supervisory, regulatory and enforcement authorities should have the authority, integrity and resources to fulfil their duties in a professional and objective manner. Moreover, their rulings should be timely, transparent and fully explained. Cross-border co-operation should be enhanced, including through bilateral and multilateral arrangements for exchange of information”.

2.1.2. The rights and equitable treatment of shareholders and key ownership functions

The OECD 2015 Report stipulates that “The ‘corporate governance’ framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights”. This principle in an effective “corporate governance” framework ensures that BODs, management, and majority shareholders do not act in their best interest at the expense of minority or non-controlling shareholders.

2.1.3. Institutional investors, stock markets, and other intermediaries

“The ‘corporate governance’ framework should provide incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good ‘corporate governance’ ”, as stated in the OECD 2015 Report, is the third principle for good governance. Along with the aforementioned two principles, this ensures the creation of incentive investment opportunities that are in line with the economic reality in which the framework exists. An example of the annotations provided is that the stock market prices should be fair and efficient in order to encourage efficient “corporate governance”.

2.1.4. The role of stakeholders in “corporate governance”

Following “the tragedy of the commons” principle mentioned earlier, enterprises should create sound financial sustainability, ensure active co-operation between enterprises and their different stakeholders and grant clear articulation of each stakeholder’s rights through laws and regulations, as well as mutual agreements. The OECD highlights that this stems from the importance of stakeholders’ roles, as a valuable resource, in terms of competitiveness and profitability of the enterprise. Stakeholders may be investors, employees, banks or other credit facilities, suppliers and customers, governmental authorities and regulators. Therefore, an efficient “corporate gover­nance” framework should also include the recognition of different stakeholders’ interest and contribution to foster long-term success through enhanced competitive­ness and sustainability.

2.1.5. Disclosure and transparency

Another important principle highlighted by the OECD is disclosure and transparency. The OECD 2015 Report highlights that an efficient “corporate gover­nance” framework “should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company”. It has become a worldwide trend to implement transparency standards as a mechanism to influence the behavior of companies and protect investors, as well as ensure principles two and four of an efficient “corporate governance” framework. This also greatly impacts business tax strategies since there is greater transparency in matters of incompliance with tax obligations. In many cases, a certain level of disclosure on tax matters is required by enterprises, whether individually or on a group basis and geographically, and with explanations regarding tax incentives, tax allo-wances, and business and economic reasoning.

2.1.6. The responsibilities of the board

Within this principle, the OECD aimed to “ensure the strategic guidance of the company, the effective monitoring of the management by the board, and the board’s accountability to the company and the shareholders”. While noting that the responsibilities of the board differ from country to country and even within one country greatly, the OECD’s recommendation is to ensure that the board structure is responsible for the governing and monitoring management functions. Furthermore, the OECD guidance is not limited to legal entities’ behaviors in the realm of tax, it also draws up guidance for revenue bodies, which set out different approaches to assess the level of compliance mainly aimed towards tax control and management activities by tax authorities globally [12]. This guidance points out various approaches to risk profiling and determining the level of tax compliance by various taxpayers; and therefore, highlighting the importance of the implementation of the Tax Control Frameworks (“TCF”) [13] by legal entities. Given the OECD’s guidance, some tax authorities have drawn up “corporate governance” checklists and guidance for the board of directors. The following tables illustrate some of the users of “corporate go­vernance” “scorecards” (explained further below) and what they help to achieve, as well as some countries implementation of “corporate governance” rules. Table 1. – Use of “Scorecards” and their achievements [14] As defined by the “International Finance Corporation” (“IFC”), scorecards are seen as assessment tools for “corporate governance” practices. They measure the “corporate gover­nance” code’s compliance and encourage better governance practices without the implementation of intrusive legislation. Table 2. – Examples of Countries ‘national “corporate governance” codes and principles [15]-[16] The following table highlights some examples of measures implemented by countries to impose a national “corporate governance” code or principle:   As Jose M. Calderón [18]-[19] mentioned, “the emergence of corporate responsible tax principles entails that tax policy in the sense of the company’s most important decisions and tax strategy become the responsibility of the board of [continua ..]

2.2. OECD/G20 BEPS and MLI

From 2013 till today, the OECD has set out a path in order to develop tax policies that help tax administrations decrease the rates of base erosion and profit-shifting (“BEPS”) under the OECD/G20 BEPS Project. Under this project, as anti­cipated before, many tax administrations have agreed to support the implementation of ‘minimum standards ‘restrictions through the so-called “Multilateral Instrument” (“MLI”) [22]. It has to be reported that although the OECD/G20 have initially announced the MLI [23] to be a “swift” instrument to modify tax treaties worldwide, it ended-up facing similar problems linked to a “need-for-alignment” typical in tax treaty re-negotiations. Hence, some countries have actually decided to re-negotiate their most strategic tax treaties to have a full alignment with all the restrictions introduced by the “BEPS” and then rely, for interpretation purposes, on a much extensive and effective document represented by the OECD Commentary 2017 (composed of 654 pages in its “condensed version” and of 2624 pages in its “Full Version”), instead of relying on the 48 pages of the MLI and the 85 pages of its “Explanatory Statement”. This might have been driven, among others, by the intention to minimize tax di­sputes and thus reduce costs upon tax administrations leveraging indeed on the use of the wide OECD Commentary 2017. It should be noted that the crystallization of the “substantialist interpretation” that forms part of the post-BEPS tax paradigm shift, to a certain extent, constitutes an undercover mechanism for reinforcing the administrative interpretation of complex tax regulations and minimizes “grey-zone tax-planning schemes”. Under the BEPS project, there are four minimum standards that the signatory countries must adhere to. These minimum standards include: Action 5: countering harmful tax practices; Action 6: countering tax treaty abuse; Action 13: transfer pric­ing documentation and country-by-country (“CbC”) reporting; and Action 14: improving dispute resolution mechanisms. Further analysis on Action 13 will be presented in the following section.

2.3. Evolution of International Tax Law and Transfer Pricing as a result of OECD/G20 initiatives

The BEPS Project brought along a wave of domestic requirements to produce transfer pricing documentation, most of which are broadly based on the three-tiered documentation approach (i.e. “Master File”, “Local File” and “CbC” reporting). This is primarily highlighted in Action 13: Transfer Pricing Documentation and CbC Reporting. As defined on the OECD’s website, “Under BEPS Action 13, all large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, pro­fit, taxes paid and economic activity among tax jurisdictions in which it operates. This CbC report is shared with tax administrations in these jurisdictions, for use in high level transfer pricing and BEPS risk assessments”. One significant consequence of extensive transfer pricing documentation requirements is an increased focus on mobile production factors, such as intangibles and capital, which can easily be shifted to low-tax jurisdictions as patents and/or cash and to high-tax jurisdictions as a form of debt in order to lower effective tax rates. Tax authorities, not only, expect reasonable support for the use of such assets to allocate income, but also share information through extensive reporting among them. Each of the documentation requirements has a different story to tell and different objectives. In their Master File, taxpayers can explain some of the facts and reasoning behind the allocation of income between intra-group entities and the consolida­ted tax position as presented in the CbC report. The Local File requires consideration to the transfer pricing and market aspects of solely a local tax position, rather than only providing a snapshot of the financial performance and tax liability in a certain fiscal year, such as financial statements, tax returns, which CbC reports often do. The Master File and Local File can better present any developments in the organization due to business restructurings or new intercompany transactions, i.e. how changes to an entity’s or the group’s functions, assets and risks are reflected in its tax position. Therefore, it should be a crucial part of tax risk management to ensure that these reporting items support any relevant tax positions and create and capture a coherent and concise image over several years in line with factual deve­lopments in the multinational enterprises’ [continua ..]

2.3.1. Master File

The purpose of a Master File is to provide an overview of the global business operations, transfer pricing policies, the allocation of income, and economic activity. The “Master File” generally presents important intercompany transactions, agree­ments and intangibles.

2.3.2. Local File

A Local File, unlike the Master File, must provide more detailed information relating to specific intercompany transactions of a single local entity. The aforementioned should be subject to an annual filing requirement, or provided upon request from the tax authorities, depending on the relevant jurisdiction’s regulations.

2.3.3. CBC Reporting

CbC reporting has had increased focus in more recent years due to its adoption within the original 2013 BEPS report and can be considered as one of the most significant and impactful disclosure requirements from a tax perspective. Under Action 13 “CbC” Reporting of the OECD/G20 BEPS Project, large multinational enterprises are now required to prepare CbC reports that include aggregated data on the global allocation of income, profit, taxes paid and economic activity among all of its tax jurisdictions, which are subsequently exchanged between tax authorities. Disclosure and transparency are one of the key drivers for “corporate governance” and CBC reporting is seen as the most impactful mean of TP documentation to satisfy better “corporate governance”. The purpose of CbC information exchange is to facilitate high-level risk assessments about tax and transfer pricing by providing insights on corporations’ tax behavior, especially strategic and damaging behaviors, for tax authorities. These reports enable authorities to identify in an early stage the areas in which the risk for base erosion could be substantial. Such identification may lead to responses on both the taxpayer level, through audits, and on the country level, by changing legislation. Around ninety countries worldwide now have introduced the filing obligations for CbC reporting. The implementation of CbC reporting has added another dimension to tax risk management considerations, given the fact that tax authorities previously had limi­ted access to data on revenues and taxes of group entities in other tax jurisdictions. The exchange of CbC reports provides an overview of the operations, financial statements, and tax positions of multinational enterprises in all of their respective locations that they may have activity within. This forms a “consolidated tax position” of sorts that needs to be considered and defended on a group basis, in addition to the local tax positions held. Therefore, and given the developments, taxpayers should methodically consider tax risk management not only from a local entity perspective, but also on a greater level and extent from a group perspective.

3. Impacts of COVID-19

3.1. Impacts on Multinational Companies More specifically for companies, the outbreak of COVID-19 has led to the rise of new aspects of tax risk management to be considered from a “corporate gover­nance” standpoint. Some examples include the permanent establishment when staff is assigned remote work or work from home, cash flow, debt accounting, loss, and relief packages due to the impact of COVID-19, which will be discussed further on. Due to the COVID-19 pandemic, many companies may report excessive losses, which may be justifiable given certain documentation; however, these losses may be seen as questionable by tax authorities, which poses a risk. Thus, “documentation” is pa­ramount in supporting each specific situation. Risks are much more significantly allocated towards transfer pricing. These risks include, among others, the pricing policy, comparability, and business restructurings. Liabilities lie within comparables used to support certain policies, comparability adjustment usage, supply chain distributions, allocation of costs, business restructuring, and intercompany pricing of newly found services as a result of the pandemic, and revisiting any transfer pricing documentation and “Advance Pricing Arrangements” (“APAs”). As a result of the pandemic, companies need to form tax positions that tackle these new issues arising when necessary and assess whether they will be acceptable to tax authorities or not. From a more general viewpoint, the pandemic may affect other risks, such as the reputational risk if, for example, allowing distribution of dividends and profits to shareholders whilst receiving tax relief support through tax authorities ‘relief packa­ges, or even operational risks due to unintended non-compliance and disruptions in operational management as impacted by new pandemic-related legislation. Of course, the risk for companies of being assessed, by the relevant tax authorities, of having ‘inflated’ tax losses to create a “carry forward” buffer for the forthcoming profitable years after the pandemic, can also have an impact from a reputational standpoint and thus impair “corporate governance”.

3.2. Impacts on Tax Authorities ‘approaches

As a result of the COVID-19 pandemic, tax administrations have adopted crisis-related responses and relief packages. This section revolves around the measures and responses used more commonly worldwide. Economic activity has taken a huge hit due to the pandemic, whereby both administrations and companies are adjusting to the new normal. Therefore, countries have had to impose unprecedented measures to limit the damage caused to productive potential and protect the vulnerable. Immediate responses also attempted to protect liquidity of companies in order to keep the productive capacities intact as much as possible. Each administration had its different responses and measures in order to contain the damages and possible risks, which in turn had an impact on “corporate governance”. Given the sovereign nature of all administrations in making their own decisions, the following are some suggestions [24] issued by the OECD in two different flyers [25]-[26]: Deadline Extensions and Payment Deferrals: one of the most important “responses” is the extension of deadlines. Taxpayers impacted by COVID-19 can be given additional time to file tax returns, and tax payment extension plans. Whilst, this may cause confusion and therefore non-compliance for some industries; this also ensures that companies do not have liquidity or cash flow issues to be able to sustain their economic activities. Many tax administrations around the world have also implemented a deferral of payments through instalment’s plans or deferral to other dates. Providing tax certainty: the pandemic caused issues such as lack of tax certainty, which creates a risk for most companies when assessing their taxes and tax risks. A suggestion by the OECD is to consider possible options to provide early tax certainty when appropriate. Quicker refunds and simplification of refund processes: when there is mo­ney owed to the taxpayers, suggestions include that processes for refund should be prioritized to ensure money is paid out as quickly as possible, as a measure to help with cash flow issues. Furthermore, simplifying procedures for taxes, more specifically VAT, should also be included as a measure of relief. Debt payment plans: this suggestion focuses on giving easier access to payment plans and extensions of plan durations that would otherwise not happen. Furthermore, this consideration should be coupled with interest-free periods, i.e., no penalties to be [continua ..]

3.3. The OECD Guidance on the Transfer Pricing implications of the COVID-19 pandemic

The OECD has issued on 18th December 2020 a specific “Guidance” on how to properly apply Transfer Pricing and its Guidelines in a distorted situation due to the COVID-19 pandemic. This document is the result of the discussions among 140 member-states of the “Inclusive Framework on BEPS” as of August 2021. The “Gui­dance” is aiming to support both taxpayers in reporting the financial periods af­fected by the pandemic as well as for tax authorities in evaluating the implementation of taxpayers ‘Transfer Pricing policies. In particular, the “Guidance” touches upon four main “pillars”: (1) “Comparability Analysis”; (2) “Losses” and the allocation of COVID-19 specific costs (3) “Government Assistance” programmes and (5) “Advance Pricing Agreements” (“APAs”).

3.3.1. The aim of the “Guidance”

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 (“OECD TPG”) represent a fundamental “support” for both taxpayers as well as tax authorities in finding mutually satisfactory solutions to transfer pricing cases. The “Guidance” issued by the OECD thanks to the work done, as mentioned abo­ve, by the “Inclusive Framework on BEPS” should be regarded neither as an ‘expansion’ nor as a ‘revision’ of the OECD TPG. The “Guidance” should be seen as an explanation of how to apply these in the unique economic conditions arising from COVID-19 pandemic.

3.3.2. The “Comparability Analysis”

As correctly underlined by the OECD, the unprecedented change in the econo­mic environment following the outbreak of COVID-19 creates unique challenges for performing “comparability analysis” and may reduce the reliance that can be placed on historical data when performing it. This may require considering practical approaches that can be adopted to address information deficiencies, such as “comparability adjustments”. To do so, any form of publicly available information regarding the effect of COVID-19 may be relevant in ascertaining the arms’ length nature of a Transfer Pricing policy implemented for FY 2020.

3.3.3. “Losses” and the allocation of COVID-19 specific costs

With respect to “Tax Losses” these should not be ‘automatically” justified as in the COVID-19 crisis it is important to avoid any unfair recording of these with the aim to create a ‘buffer’ to offset future taxable revenues once the impacts of COVID-19 have waned down.

3.3.4. “Government Assistance Programmes”

Any form of ‘support’ obtained by taxpayers should be duly kept into consideration. In fact, the comparability of open market transactions or enterprises may be influenced by the receipt of government assistance, affecting both how the parties establish their commercial or financial relations and how they price their transactions. Hence, when performing a “comparability analysis” it may be necessary to take into account the receipt of these when reviewing potential comparables.

3.3.5. “Advance Pricing Agreements” (APAs)

Some taxpayers may face challenges in applying existing APAs under the economic conditions resulting from the COVID-19 pandemic. In these situations, taxpayers should take a collaborative and transparent approach via raising these issues with the relevant tax authorities in a timely manner. Taxpayers should not seek to resolve them unilaterally without consulting first with the competent authorities.

3.3.6. “Corporate Governance’s agility”

The reputational risk has dramatically increased in the pandemic as taxpayers might attempt to emphasize in their favor the negative effect of the pandemic on their taxable revenues. Thus, a fair and consistent approach with the OECD TPGs is mandatory to make sure that any abnormal condition created by the pandemic is rightly considered but never utilized abusively.

4. What does good “corporate governance” mean to Multinational Companies today?

Apart from penalties and non-compliance, many multinational companies face possible scrutiny from tax authorities and administrations around the world, which leads to challenges and subsequently adjustments. However, these are not the only risks that multinationals face; whilst it may seem that tax authorities and administrations are the only focal point for tax risks and tax positions, there are multiple stakeholders – including, but not limited to, investors, media, financial institutions, and cu­stomers – that may raise scrutiny. Tax risks are generally correlated with several other risks within the operations and legal framework of a company’s business activities. The potential costs associated with the wider aspects and multiple stakeholders within tax risk management are often more difficult to assess. The upcoming sections will look at some key risk considerations, potential costs, and non-tax technical aspects of tax risk management importance as well as examine the effects of strategic tax behavior on “corporate governance”.

4.1. Risks of bad “Corporate Governance”

4.1.1. Reputational risk In more recent years, the power of the media has grown exponentially. Consider this example: A multinational company decides to engage in “tax avoidance” practices, what would be the short-term benefits and costs related to such practices? Firstly, the short-term effects are quite obvious, they improve the cash flow of the company and likely reduce the group’s effective tax rate; however, there is the risk of the possible use of General or Special Anti-Avoidance Rules [30] by tax admi­nistrations or authorities in order to limit or deny tax benefits of the tax structure. An underlying cost is also the cost of bad media; being correlated to tax avoidance within the media may result in consumers or investors diverging to other market players, which causes long lasting and incalculable effects. Bad media coverage can also lead to exclusion from public procurement processes, lack of investors willing to invest, and possibly higher interest rates and expenses imposed by financial institutions. Corporate reputation is now handed to multiple stakeholders and, thus, assessed by those stakeholders depending on their interests and responsibilities. Multinational companies, in specific, previously had a reputation of aggressive tax planning with tax authorities which may occasionally appear on newspapers. Having an aggressive tax planning reputation with tax authorities did not mean that the customers were made aware with its policies, rather they focused on the product or service quality and environmental policies. Nowadays, the story has changed with news outlets and headlines appearing or merely being available to all stakeholders involved, through social medias, leading to more information being widely available and assessments from several parties, ranging from authorities to financial institutions to customers. Bad press or reputational damage does not only affect customers perceptions, but instead all stakeholders, such as changes in suppliers, etc. From a tax perspective, the manner in which the tax authorities see a company should be managed carefully. Transactions need to be carefully examined in order not to be associated with tax avoidance or evasion, resulting in the hindering of negotiation positions and bargaining powers for future transactions or positions. As an administrative tool, positions that follow a broadly accepted law interpretation, or use a more prudent approach towards laws and [continua ..]

4.1.2. Operational tax risk

As defined by the Basel Committee on Banking Supervision [32], operational risk is “The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk but excludes strategic and reputational risk”. However, the Basel Committee realizes that the aforementioned may have a variety of meanings; therefore, each entity is allowed for internal purposes to set its own definition of operational risk, so much as the minimum elements within the Committee’s definition are included [33]. Operational tax, according to the Basel Committee, is seen as a legal risk rather than a reputational risk and tax legal risks are usually managed by tax departments in separate processes from a tax risk management perspective. Examples of operational tax risks include, but are not limited to, delays in submission of tax returns, loss of tax appeal opportunities, not storing relevant information for tax assessments, and/or when Transfer Pricing’s mechanisms have not been implemented correctly. Operational tax risk management requires the tax manager or the CFO to be up to pace with what is happening within the market, as well as areas that other companies have been audited with and operational problems facing other companies within the same industry. Tax authorities usually focus and challenge weaker spots. Experiences from previous audits and weaknesses in the tax authorities’ reports and appeal reports (if any) should be taken into account in order to improve processes, increase efficiency and decrease this type of tax risk. Therefore, the operational tax risk can be methodically managed through identification of risks, repairing and reviewing prior tax audits, whether or not risk management strategies have been executed, as well as generally keeping up to date with the general practices and audits of other companies [34].

4.1.3. Tactical and integrated tax risk management

It is important to look at the human side of the tax risk management. In many aspects, the tax departments are seen as an extension of a finance or a legal department, and sometimes is seen as a role of the commercial department as well. Tactical management is crucial in order to understand the organizational structure and the intentions of the tax authorities. Therefore, it is also crucial to establish what both parties can trade, even though, in some countries or some cases, there is no room to negotiate with the tax authorities. Nonetheless, it is important to determine the positioning on a set of questions, including whether this is a one-time transaction or a continuous relationship with the tax authorities. In continuous cases, especially in the cases of tax audits, a good relationship with the authorities or the auditor is an additional measure to create an atmosphere of trust and help with facilitating and arriving to acceptable outcomes. Proper tax risk management should also include an integrated approach, which will involve a valuation of the tax position and the impact of any new transactions or future positions in order to limit any risks, alongside other types of tax such as reputational risk management. This approach is used to satisfy tax authorities, investors, clients, suppliers, as well as all other stakeholders. Further to the integrated approach, a review of the operational risks should be assessed for internal controls as a mean to manage other tax risks. Importance of good tax managers, as well as streamlining conversations and communication between departments, is integral for the profitability and tax risk management of a company.

4.1.4. Other possible tax management solutions

Reputational and operational tax risks are some of the examples in which a company may face; while the tactical and integrated tax risk management may be seen as one of many solutions in order to mitigate the risks arising within a company. There are other possible solutions or tax management controls to be looked at. It should be noted that the possible solutions drafted below are standardized procedures or solutions, which may not reflect the true depth; therefore, there is a trade-off of the level of detail required for each company just by using standardized procedures. On a more general basis, ‘Deloitte’ issued a very insightful “Tax Gover­nance” article, named “Tax Governance – Do you have the right processes?” [35]. This article aims to identify how “Tax Governance” helps, what it consists of and how to commence “Tax Governance” within companies. As iterated previously, good “Tax Governance” consists of multiple layers starting from assurance to Tax Go­vernance Policy. The following diagram summaries the essence of the article: To clarify further, the article defines both the “Tax Governance Policy” (“TGP”) and the “Tax Risk Management Control Framework” (“TRMC”). TGP is a policy that “aligns the strategy and objectives of the finance respectively the tax function with those of the overall organization and helps the tax function effectively identify and deliver value while continuing to comply with underlying legislative and regulatory requirements”. This policy is typically a formal document, approved by top management, and trickled down and communicated to all the stakeholders involved. This is also communicated with the bottom activities, to ensure their alignment. This approach is known as the “Top-Down” approach. TGPs are usually not a “one-size-fits-all” and should be assessed on a case-by-case basis and is typically diffe­rent between organization. Meanwhile, the TRMC “supports the finance or tax function in managing tax risks, identifying tax opportunities and integrating governance policies, internal controls and tax processes to achieve strong tax risk management that aligns with the established risk policy”. This control framework should include some key aspects, such as “identification and documentation of internal controls (…), [continua ..]

4.2. Effects of strategic tax behavior on “corporate governance” [38]

This section attempts to highlight how “corporate governance” rules are structured to affect the way a corporation fulfils its tax compliance and obligations. Furthermore, this section will also touch upon the ways in which tax designs, performed by the rules, regulations and laws, affect the tax strategies used by corporations. Tax laws, in general, influence the “corporate governance” dynamics both directly and indirectly. Tax laws have several objectives, which include increased re­venues for governmental functions, redistribution of wealth, and influence specific behaviors. Meanwhile, there could be indirect consequences on how the tax systems operate. As per the agency theory, tax systems can either mitigate or amplify “corporate governance” issues, and the inverse is true, the nature of the “corporate gover­nance” environment can influence the nature and consequences of the tax system. Tax laws are typically used rather than direct regulations, mostly throughout developing countries, as a means for the government to rely on an existing and esta­blished system and regulations. New direct regulations would require governments to create a new system for the implementation and supervision of new regulations, which would lead into increasing costs for both corporations and governments, and possible confusion and delay in the impact of “corporate governance”. However, it is important to understand the influence of “corporate governance” rules on “tax planning”, as previously highlighted. There are various reasons why stakeholders, specifically the governing bodies, would not like to engage in strategic behavior, which include – but not limited to – legal challenges and penalties, increase of investors’ interest in corporate social responsibility and growth of sustai­nability, as well as the Environmental, Social, and “corporate governance” (ESG) importance. Given the aforementioned, the aim of managers and risk owners should be to behave as risk-neutral persons in order to manage the corporation’s business. Strategic tax behaviors or aggressive tax planning strategies, such as tax evasion, tax avoidance and illicit savings of tax, are used by companies in the absence of regulations or the lack of clarity of regulations. In line with the previously mentioned “tragedy of the commons”, companies should take a [continua ..]

5. OECD/G20 “Pillar One” and “Pillar Two” and their impact on Multinationals’ “corporate governance”

After much anticipation and hard work over the past years, the OECD/G20 issued an “Official Statement” on 1st July 2021, to confirm that the Inclusive Framework on Base Erosion and Profit Shifting (i.e. “IF on BEPS”) has reached consensus on a “two-pillar” solution to address the tax challenges arising primarily from the digitalization of the economy. Further on 8th October 2021, the OECD/G20 have fixed the “Action Plan”, broken down into ‘steps’, for the “go live” worldwide from 2023. The new standard will be applicable to all multinationals meeting specific conditions and not just those with a focus on digital transactions. By changing the international tax sphere, the recent developments shall play an important role on “corporate governance”. Pillars One and Two aim to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, who are considered the winners of globalization. The two “Pillars” seek to put a floor on tax competition with respect to Corporate Income Tax by introducing, among other measures, a global minimum corporate tax with the aim of helping countries protect their tax bases and have their proper taxing rights alloca­ted to them. Through Pillar One, in particular, global income is allocated to the va­rious countries based on new principles that do not require a ‘fixed presence’ to trigger taxation (e.g. income allocation based on number of users). In this respect, the ‘residual profit’ to be re-allocated to market jurisdictions under Pillar One has been agreed during the October’s meeting to be 25%. Thus, taxing rights over 25% of the ‘residual profit’ of the largest and most profitable multinational enterprises would be re-allocated to the jurisdictions where their customers are located. In-scope multinationals for “Pillar One” are not many due to the condition of global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue) calculated with a specific mechanism. Please note that “Extractives” and “Regulated Financial Services” are excluded.   Pillar Two does not eliminate tax competition, but it does set multila­terally agreed limitations on it. As part of Pillar Two, a “Minimum Effective Corporate Income Tax Rate” is going to be introduced [continua ..]

6. Final Comments and Further Recommendations [43]-[44]

6.1. Recommendation on how to strategize tax behavior for Multinational Companies As a result of the full digitization of the world economy that resulted in the full transparency of the matters pertaining to multinationals, there are some recommendations given the aforementioned conclusions. Each is examined below. i) Communication The first means to improving “corporate governance” is communication bet­ween the different stakeholders and of course transparency. As seen above, transparency is one of the main objectives of the OECD in the past years. In many multinationals and companies throughout the world, one main issue comes to mind, which is the lack of communication and transparency within the organization and its stakeholders. The lack of thereof has created gap between the different departments and stakeholders in the sense that any risks to be assessed would not be known. Transparency and communication help eliminate not only the operational risk, as mentioned in the previous paragraph, but also help eliminate reputational risk. Multinationals may face litigation or court cases after disagreement with the competent tax authorities or for whatever other reason, which leads to a greater reputational risk. With transparency and communication, which may take place in many different forms such as requesting an advanced ruling or communicating with tax authorities on matters that may seem risky, both reputational and operational risks can decrease. ii) Documentation One of the greater trends due to COVID-19 is the economic downturn. Many multinationals suffer from greater losses and therefore, there is a need to justify these, as well as reflect the impact of COVID-19 on other multinationals. In order to allocate or attribute losses, documentation is required in order to justify these and make sure that the OECD guidelines have been followed, such as e.g. those in the field of “transfer pricing”. iii) Control through Digital transformation and Information Technology Technology – digital transformation and information technology – are now used to streamline good “corporate governance” and better data analysis and collection, which is heavily needed to facilitate communication, transparency, and better data management. This takes into consideration the different lines of defense. The above does not only apply to multinationals, but also tax authorities that could also utilize tax enabled [continua ..]

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