The Effects Of Tax Management On Corporate Governance In Maltese Listed Companies


“Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.” (Arthur T Vanderbilt)

The recent appearances of Starbucks, Amazon and Google in the tabloids as multinational companies that are failing to pay sufficient amounts of tax in their countries of operation confirmed Vanderbilt’s rationale. In fact, in order to regain customer confidence, Starbucks decided to waive particular deductions and thus become liable to a total tax payment of £20 million in 2013-2014.

This article evaluates the results of a recent study about the impact tax management is having on corporate governance in Maltese listed companies. It explains the role of corporate governance in tax matters and how tax advisors may influence certain decisions. It also highlights whether further regulation should be implemented and proposes ways of enhancing corporate governance within the tax arena. The analysis is based on semi-structured interviews with fifteen Chief Financial Officers (CFOs) of local listed companies and ten tax practitioners from various local accountancy and law firms.

The Relevance Of Corporate Governance

In Taxation Corporate Governance And Its Importance

According to Gregory (2001), “effective corporate governance promotes the efficient use of resources both within the company and the larger economy; helps ensure that the company is in compliance with the laws, regulations, and expectations of society; provides managers with oversight of their use of corporate assets; supports efforts to reduce corruption in business dealings; and assists companies (and economies) in attracting lower-cost investment capital by improving both domestic and international investor confidence that assets will be used as agreed.” However, almost half of the interviewed listed companies restricted the meaning of corporate governance simply to compliance with the local Corporate Governance Code. Only one CFO believed this to be short-sighted and emphasised that corporate governance should be a culture enshrined in the firm’s ethos. Though undeniable importance was given to corporate governance, the majority of local listed companies do not fully comply with the Corporate Governance Code, as identified in Chapter 5 of the MFSA Listing Rules, in a range of three to five principles . CFOs also highlighted that institutional shareholders show increased interest in corporate governance issues, while individual shareholders tend to rely on the opinions of auditors and non-executive directors.

Tax Management And Its Role In Maltese Listed Companies

Tax management refers to the activities undertaken by taxpayers in order to effectively handle their tax affairs and reduce their tax bill. Such activities range from tax evasion, to both aggressive and less aggressive tax avoidance, to the design of commercial transactions from a tax perspective, and finally to the use of reliefs and credits specifically allowed by the law (Williams, 2007b).

Tax avoidance is interpreted differently by various people, depending on the aggressiveness and artificiality involved. It is seen as the outcome of tax planning, and thus, a legal way of reducing the tax due ((Bugeja, 2007) and (Ellul, 2007)). Acceptable tax avoidance consists of two elements: first that it must relate to a business transaction and, second, that it is carried out commercially (Self, 2008).

Tax planning is the arrangement of genuine commercial transactions to obtain a reasonable tax bill. Lord Tomlin has secured the legitimacy of tax planning in his judgement of the appeal of IRC v. Duke of Westminster (1935).

As outlined by the CFOs themselves, the tax role in local listed companies does not entirely consist of tax compliance. However, the extent of other tax-related work varies from one company to another, also depending on its industry, its structure and the extent of international operations.

Tax management is not necessarily approved by shareholders if it results in the reduction of firm value (Wahab & Holland, 2012). In this respect, companies do not seem to communicate sufficient information to their shareholders. Thus, the question of whether further regulation is required so as to gauge corporate governance in tax management decisions arises.

Enhancing Regulations Relevant To Tax Management

Corporate Governance Regulations

Ninety-one countries have published some form of corporate governance code, but none of these are enforced by law since their purpose is to serve as a guideline (Solomon & Solomon, 2004). Despite updates to legislations such as the 4th and 7th Company Law Directives, IASs and the EU Transparency Directive, it must be pointed out that no code, published during the period from 2009 to 2012, makes any direct reference to the issues of corporate governance in relation to tax. In fact, the majority of the interviewees disagreed with such a direct reference, emphasising that corporate governance codes aim to regulate company management structures and to ensure appropriate overall decision-making. Thus, making references to tax-related decisions would require the code to also refer to other operational and investment decisions. Other comments included that the audit should be sufficient to detect inconsistencies in tax management and that tax management should not be solely regulated by corporate governance. One must also note that the importance of tax decisions at board level has been recognised only recently, since previously tax was believed to be more of a technical matter (Bruce, 2005). In fact, an increase of corporate governance in tax-related issues was noted in the last few years due to the significant financial effects and reputational risks involved in tax planning (Ernst & Young, 2011).

Disclosure In Financial Statements

Shareholders typically only have access to information disclosed in the financial statements, and usually management are reluctant to divulge any other information so as not to provoke the attention of tax authorities or competitors (Henderson Global Investors, 2005). Since it was concluded that it is hard to deduce anything reliable from financial statements (Hanlon, 2003), it is confirmed that shareholders do not have the necessary material to be knowledgeable about the tax decisions taken in the company. Thus, tax disclosures are criticised by financial statement users as being inadequate and inconsistent. Furthermore, financial statements fail to provide information for assessing management stewardship in relation to tax (EFRAG, 2011). Effectively, the majority of listed companies explained that no additional information regarding tax management, apart from that disclosed in the financial statements, is usually given to shareholders. This is especially because CFOs believe that such information does not provide added value to the shareholders, particularly the non-corporate ones. Thus, almost all listed companies and tax advisors believed that tax-related disclosures in the financial statements are adequate, predominantly because further detailed information would make financial statements unpractical for use. It was also pointed out that increased disclosure about tax-related matters would instigate more information about other areas, such as investment, pricing or marketing strategies. Despite this, all CFOs displayed willingness in providing further information if shareholders specifically asked for it.

EFRAG (2011) also highlights that financial statement users believe that the disclosure of the company’s tax strategy is necessary to put the other disclosures into context and to estimate its impact on the overall business strategy. This will also bring to the users’ attention the approach to managing tax exposure and the strategies related to tax planning. However, Maltese Listed Companies (MLCs) had mixed feelings about disclosing the tax strategy and management of tax exposure. The majority believed that such information is confidential, commercially sensitive and it would provide competitive advantage to other firms in the industry if it were disclosed. It also wouldn’t enhance shareholder value because it is impossible to explain strategy in a simple note. However, it was made clear by all companies that they would definitely abide by such a requirement if it came into effect. The issue of competitive advantage was contradicted by the disagreeing MLCs because, in business, a firm cannot refrain from providing information shareholders are entitled to, simply to impede competitors from copying it.

Convergence Of Tax And Accounting Regulations

Tax and accounting rules currently contrast each other and serve differing stakeholders. It is argued that management try to inflate accounting profits to attract investors, while decreasing taxable profits to reduce the tax bill. Both cases result in manipulating the accounts so as not to show a genuine view. Thus, having common tax and accounting rules will balance these two objectives out, since management will no longer be able to provide two different sets of accounts ((Friese, et al., 2008), (Desai, 2008) and (Owens, 2008)). Thus, convergence will result in increased corporate governance and transparency, simplified matters and reduced compliance costs (Freedman, 2004a).

Having said this, using the prudent accounting approach to calculate the tax due may result in robbing the government from its share of taxes (Owens, 2008), and using the tax rules for accounting purposes may result in reduced transparency (Friese, et al., 2008). These two sets of rules have diverse objectives: accounting rules aim to provide investors with reliable information on the substance of business transactions being carried out, while tax rules are concerned with the profit or loss made in one period in order to raise revenue fairly and proficiently ((Freedman, 2004a) and Thor Power Tool Co v. Commissioner, 1979, in (Desai, 2008)).

The majority of CFOs agreed that tax and accounting rules should be converged for simplification purposes. They emphasised that the audit should offer sufficient assurance that applied accounting policies are appropriate, and so a different set of rules is unnecessary.

The disagreeing ones alleged that the two sets of rules have different aims and could not be converged. The financial statements must demonstrate a true and fair view, which may not essentially be applicable to tax. It was also emphasised that in reality there aren’t two sets of rules, because the starting point of the taxable profit is the accounting profit, and one simply has to adjust it for tax purposes. These were also the opinions of the majority of tax advisors. One even hinted that if rules were converged, decisions would be based on tax, rather than business, considerations. A CFO confirmed this by indicating the increased complications if decision-making had to consider the implications on both profit and tax.

Only five listed companies and one advisor thought that convergence would positively affect corporate governance because there would be less chance of making mistakes. The remaining CFOs and advisors believed that it had no effect, because corporate governance is about the ability of directors to act suitably and it could still be practiced if both sets of rules were abided by. Thus, the interviewees’ opinions differ from those of Freedman (2004a).

A proposed alternative to convergence is to formulate a General Anti-Avoidance Principle (GANTIP). The aim of a GANTIP would be to change certain attitudes and provide legal support to morality in respect of tax (Freedman, 2004c). A GANTIP would not essentially increase certainty, but it could prove a valued founding principle (Freedman, 2008). In fact, the majority of listed companies agreed that a GANTIP would make more sense than total convergence, even though some of them may have preferred convergence. Two CFOs pointed out that the practicality of GANTIPs must be considered to ensure their proper usage. Another two emphasised that GANTIPs already exist in local law (Income Tax Act Chapter 123 s.51, 1948) and are adequate, meaning that convergence is superfluous. This was also the belief of the majority of tax advisors. Thus, such an alternative does not really seem suitable for Malta.

The Advisor’s Role In Tax Management

In Malta it is common for listed companies to have the same firm act both as a tax advisor and an auditor. This was the case in all the listed companies interviewed, except one. In 2005, the Public Company Accounting Oversight Board (PCAOB) established that the non-audit services that mostly threatened auditor independence were services related to aggressive tax positions and services for which contingent fees were paid, amongst others (Korb, 2008). This instils doubt on whether remuneration based on the amount of tax saved is in line with good corporate governance (Owens, 2008). Despite this, all interviewed advisors emphasised that ethical and independence requirements are taken very seriously. Advisors’ fees are typically time-based, taking into consideration the complexity of the work involved and the expertise required to carry out the work. However, some advisors explained that they consider the added value being passed on to the client as a basis for their fees. Two advisors contradicted this by explicitly highlighting that fees should not be based on the amount of tax saved, which could also be interpreted as value-added for the client. Nonetheless, using value-added as a basis for fees charged does not necessarily mean that advisors are biased towards aggressive measures so as to increase their remuneration. This can be confirmed by the advisors’ actions to mitigate the risk of giving bad advice, through internal consultation, research, similar case law and reference to the tax authorities for their opinion or for advanced revenue rulings . Advisors emphasised that they are very meticulous when giving advice and would not suggest anything they are unsure of.

Reputation is also exceptionally important for the listed companies. The majority emphasised that they wouldn’t risk their reputation for a lower tax burden. However, this does not stop them from evaluating such opportunities. Thus, they emphasised that the overriding principle in decision-making would always be the holistic business sense behind the transaction. Tax would be an obvious consideration, since a benefit could make a possibility more attractive or more feasible, but not the deciding factor.

Formulation Of Tax Advice

All advisors explained that their advice is tailor-made to the client’s specific needs. However, the majority hinted that where circumstances are similar, they would be able to borrow ideas from previously given advice and refine it accordingly. Refining would generally be unnecessary in tax compliance-related advice. One advisor commented that Malta does not have the market to sell tax packages, as may be the case abroad.

The majority of TAs commented that their job is not to evaluate the commercial sense behind the client’s proposals, but to give advice on the available options with respect to tax efficiency. It is then up to the client to choose the option that best suits its commercial objectives. This confirms Friese et al’s (2008) opinion that advisors sometimes assume the existence of a commercial purpose. If the client expresses certain requirements, the advisor would then be obliged to structure his advice within them. In fact, four advisors emphasised that the advice given could not be appropriate if it didn’t consider the client’s commercial needs because a company’s objectives are not revolved around tax and if a suggestion has no commercial basis, the advisor would be recommending disputable tax avoidance.

Tax Risk Management

Tax risk management is about identifying the firm’s suitable tax risk profile, evaluating and classifying the risks, determining the necessary response and monitoring and recording the results ((Friese, et al., 2008) and (PwC, 2006)). Since tax risk is not omitted from the material risks which companies are obliged to disclose in the financial statements, a tax risk management system must be in place to establish the adequate disclosures (Schon, 2008). It is important to note that the purpose of tax risk management is not to eliminate the risks involved in tax management, but it concentrates on making the associated decisions transparent (Friese, et al., 2008). Thus, it improves corporate governance. A tax risk management system won’t only help a firm in determining its current tax decisions, but also aid in predicting future issues and be able to react efficiently to lessen the effects of disputes and conflicts (Ernst & Young, 2011).

An established system of tax risk management exists in only four local listed companies, where checks and reviews are carried out on a monthly, half-yearly or annual basis. In fact, tax advisors pointed out that tax risk should be considered by all companies, but the existence of an established system would depend on their size.

Having internal tax expertise is uncommon locally, and so the majority of advisors agreed that tax risk is managed by reference to advisors. This was confirmed by the remaining listed companies, indicating that involving knowledgeable people in decision-making, contacting the tax authorities and carrying out assessments by the audit committee and the internal audit department also improve tax risk management. Despite the majority of the listed companies not having an established tax risk management system, they emphasised that tax risk is monitored closely and transparently.

Almost half of the tax advisors agreed that tax risk management should be disclosed, the reason being that if a firm is actively dealing with its tax risk, then it should let its shareholders know about it to provide increased reassurance of good corporate governance. The remaining advisors argued that shareholders should not require such disclosures to obtain reassurance, but should be able to rely on the auditors and the bodies regulating listed companies. Such issues could be discussed at the AGM, but not put on the face of the financial statements.

All tax advisors disagreed that the extent of tax risk should be disclosed in the financial statements, unless it is significant or it qualifies as a contingent liability, because disclosure could unreasonably jeopardise the success of the transaction. This confirms Henderson Global Investors’ (2005) opinion that disclosure may provoke unnecessary attention.


Corporate governance is highly considered locally and though tax management may not fall directly within its realms, it is still carried out responsibly. Figure 1 above shows that though tax planning is an important part of the tax role, its inclusion in corporate governance regulations was deemed unnecessary.

Figure 1

Figure 2

Figure 3Figure 2 demonstrates that local individual shareholders seem disinterested in tax management strategies because of their lack of knowledge. Corporate shareholders, however, depict increased interest, but would usually be more involved in the day-to-day running of the firm. Thus, enhanced tax disclosures seem unnecessary either way.

The convergence of tax and accounting rules was largely rebutted, while GANTIPs don’t appear to offer a solution. Figure 3 also illustrates that local listed companies rely on external tax advice to differing extents due to the expertise required in tax management. The way tax advice is constructed and the precautions taken by the advisors seem to moderate tax risk, rather than increase it.

The research findings give the impression that most reservations about tax management existing abroad do not apply locally due to the cautious and responsible approach taken by both Maltese listed companies and their advisors. Despite this, we believe that more awareness is required among such companies and their shareholders to instil corporate governance as an enshrined culture within the firm. Though it seems impossible to simplify tax disclosures enough for the layman to understand, imposing an established tax risk management system would definitely improve corporate governance in tax management. Thus, rather than including tax management principles within corporate governance rules, we think it would be more effective to develop guidelines for the establishment of tax risk management systems within local listed companies. This would also serve as reassurance for the shareholders who are unable to understand tax-related disclosures. We also suggest that tax authorities should issue more published rulings or interpretations so as to eliminate the uncertainty existing within particular tax provisions. This would enhance corporate governance in tax management because it eliminates differing lawful opinions. Finally, it is important for all involved parties to understand that being tax efficient doesn’t mean acting illegally or unethically.

Article references are available upon request at the Department of Accountancy, University of Malta.

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