Release date: November 27, 2012
Guest: Brandi Scales
Running time: 11:21 minutes
In the third episode of our “Frequent Business Traveller” series, Brandi Scales explores the risks companies and individuals face through cross-border travel and what can be done to reduce them.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Hi, it’s Sharon Mitchell. Welcome to the third installment in our PwC four part podcast series on frequent business travellers. With us today is Brandi Scales, a senior manager with PwC who focuses on Human Resource issues and opportunities.
Brandi: Thank you Sharon
Sharon: Brandi, from the previous podcasts in our Business Traveller Series, we know that cross border travellers have become a hot topic and is now one of the top priorities for many companies and their Boards of Directors. For our session today on regulatory and governance issues, can you start us off with a brief overview on why companies should be concerned by the activities of their business travelling population?
Brandi: Sure, Sharon. From a corporate governance perspective, companies simply cannot afford NOT to pay attention to their business travellers. Over the last decade the landscape has changed significantly; and what I mean by that is, today companies face a lot more scrutiny than they did ten years ago. Decreasing revenue bases, along with technological improvements have created enhanced capabilities and more aggressive behaviour by the tax regulators worldwide. We are seeing more audit activity, which is resulting in stricter enforcement of the legislation and less leniency when it comes to the negotiation of settlements or the assessment of penalties. Also, companies have come to realize that the media is now playing a significant role in their ability to compete successfully in our new economic environment. Consequently, there is a real concern amongst Boards of Directors about the reputational risk that non-compliance creates.
Sharon: Okay, so you’ve got my attention but why are Business Travellers such a hot topic now?
Brandi: Very good question Sharon. You know, it really comes down to governance. We all realize that management’s accountability and their governance practices have changed significantly in the last ten years. Business travellers are no exception to that. Management’s risk tolerance and what constitutes “acceptable risk” has also changed and if it hasn’t it certainly should have. Companies need to be fully aware of the regulatory obligations and the potential tax risks their employees create when they travel internationally. This doesn’t mean our employees shouldn’t travel, it just means we need to ensure we have the proper policy and procedures in place to help us monitor these activities and consequently, minimize the risks. It just doesn’t make business sense in today’s environment to take these uncontrolled risks anymore. Companies need to work with their stakeholders to ensure they understand the rules and are able to mitigate the risks their business travellers may create.
Sharon: You mentioned we need to work with the “stakeholders” - who really are the key stakeholders?
Brandi: You know the key stakeholders can vary but for most companies they would include: the various lines of business, corporate and transfer pricing groups, HR, payroll, finance, the tax compliance, relocation and immigration services providers and of course, the business travellers themselves.
Sharon: And we keep mentioning these “risks” – what are the risks?
Brandi: Well, there are a number of risks but if I were to identify the top three I’d say: well first, corporate tax and non-compliance risk to the company. These would include things like - unintended creation of a Permanent Establishment (PE) in a foreign country. Unfortunately Permanent Establishment issues can easily lead to more extensive audits at the corporate level resulting in substantial tax liabilities, interest and penalty charges for non-compliance. Of course there’s employer tax and payroll compliance, that’s another high risk area. And with more and more cross-border activities going on, the tax regulators are now paying a lot more attention to the transfer pricing issues and conducting a lot more transfer pricing audits.
Secondly, there are the personal tax and non-compliance risks to the business traveller. Simply put, business travellers often create a personal filing requirement for themselves in the foreign jurisdiction. Non-compliance with these requirements can again lead to substantial unpaid taxes and related penalties and interest charges that will get levied for failure to comply in that foreign jurisdiction. Finally, as I previously mentioned, there’s always that reputational risk. The fact is these issues can become matters of public record resulting in any number of negative implications.
Sharon: Do you have some suggestions Brandi on how companies can reduce these risks?
Brandi: Sure. You know, practically speaking, management is responsible for setting out the corporate governance, but before they can do this really need to understand what the rules are with respect to payroll, immigration, legal, transfer pricing, as well as the personal and corporate tax reporting. All of these rules need to be carefully reviewed in all of the jurisdictions in which the company’s business travellers travel to. We need to make sure that the corporate governance practices are in line with the regulatory requirements. Now, by taking ownership and control, management will then be able to focus on establishing the roles and the responsibilities for each of the stakeholders. This, in and of itself, will start to reduce the risk and then, from there the corporate governance will then be incorporated into the company’s policy, management will have the ability to now break this down into manageable pieces and develop the required policies and procedures to manage the process. Guidelines will be established which will assist them in gathering the necessary data, breaking up the population according to the extent and nature of each cross-border travel. Next, they’ll be able to assess the various compliance requirements in accordance with the company’s de minimis thresholds which they will establish, which will lead to the acceptable amount of risk that they’re willing to accept, and define things like who’s a high risk traveller versus a low risk traveller. This is when management will really need to work closely with their stakeholders to ensure they really understand what the risks are involved.
Sharon: That’s great, Brandi. Now, you mentioned this concept of “acceptable risk.” What is “acceptable risk?”
Brandi: Well, it really depends but overall, the key message here is companies need to ensure that they understand the magnitude of the risks involved. For example, the tax levies and the potential interest and penalty charges involved that they would face from both the corporate and personal standpoint. Once companies understand these risks, they can then begin to determine what is their level of “acceptable risk” in each jurisdiction. There is really no set standard on what constitutes an appropriate level of acceptable risk. It is essentially the company’s owners and the Board of Directors’ discretion on what extent of risk they are willing to accept, say in a worst case scenario. The reality is it really will vary from one company to another, and in one jurisdiction versus another.
Sharon: OK, when it comes to business travellers what are the key questions companies should be asking themselves?
Brandi: First, management really needs to understand who’s travelling, how often, and where to. And often, unfortunately, this is the most difficult question for companies to answer. PwC has a number of tools which can help companies mine this data so that it doesn’t seem like such an overwhelming task from the onset. Then once you have this information, we can start to analyze the data to determine what are the risks involved, how significant they are in each and every jurisdiction, and compare this to the level of acceptable risk the company is willing to live with. Once these questions have been fully considered, companies will then be in a better position to start developing the policies and the procedures to help them monitor and manage their business traveller population, which in turn will significantly reduce their risks overall.
Sharon: Alright, this gives me a pretty good understanding of the governance requirements around cross border business travellers. My last question to you Brandi is - how do companies go about monitoring and manage the ongoing exposure?
Brandi: That’s another great question and you’re right, it’s important to keep in mind that it is not just the current or the one-time problem that needs to be fixed. When it comes to commuters there is an ongoing exposure that needs to be managed. Companies must ensure that as part of their implementation process, they include a communication plan that is designed to educate all of their commuters and stakeholders alike. As part of an ongoing oversight process, they should take these communications that were used in the implementation process and include them as part of the annual governance process. This will allow all the parties involved to receive up-to-date information and remain fully compliant with the current laws on a go forward basis.
Sharon: What about historically Brandi? What if a company knowingly or unknowingly has been noncompliant in past years?
Brandi: It’s a great question and companies often ask us what to do about the past years where they might not have been as compliant as they could have been. Well the good news is our next and final podcast in the frequent business traveller series is on voluntary disclosure and it will answer all of those questions so please stay tuned!
Sharon: Point taken Brandi. Thank you for sharing your insights with us today.
Brandi: My pleasure Sharon
Sharon: For additional information on business traveller issues visit us at www.pwc.com/ca/hrs.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.