In today’s dynamic financial landscape, tax compliance has emerged as a key concern for financial professionals. With the scrutiny of the tax and regulatory authorities intensifying and the complexity of tax laws increasing, asset managers, but also bankers, and insurers must prioritise tax compliance as a fundamental component of their operations. This change underscores the necessity for financial institutions to establish robust tax governance frameworks that ensure adherence to local and international tax regulations.
In a world where investors and stakeholders are increasingly demanding transparency, effective tax governance can enhance a firm’s credibility and trustworthiness. Financial institutions that prioritise tax compliance as part of their strategic framework position themselves favourably in a competitive market, ensuring long-term sustainability and success.
Moreover, strong tax governance not only addresses compliance concerns but also fosters transparency and accountability within organisations. Financial professionals must ensure that tax considerations are embedded in their overall financial strategies, thereby reinforcing the organisation’s commitment to ethical practices.
In this respect, the intersection of tax compliance and Environmental, Social, and Governance (ESG) criteria has become increasingly important. Stakeholders are now looking for companies that demonstrate a commitment not only to regulatory compliance but also to ethical behaviour in all aspects of their operations, including taxation.
Tax governance as part of ESG: A must for asset managers
A strong tax governance framework has emerged as a critical component of Environmental, Social, and Governance (ESG) criteria. Tax practices now fall under the scrutiny of investors and regulators alike, who seek assurance that asset managers are managing their tax obligations ethically and transparently. The governance pillar of ESG emphasises responsible corporate behaviour, which includes how companies approach taxation.
Today, stakeholders expect asset managers to uphold high ethical standards, and tax governance is a significant aspect of this accountability. Poor tax practices, particularly aggressive tax avoidance, are increasingly viewed as detrimental to a company’s reputation and ethical standing. Companies that engage in such practices may face backlash from investors and regulatory bodies, potentially leading to reputational damage and financial penalties.
Global initiatives like the OECD’s Base Erosion and Profit Shifting (BEPS) project and the Foreign Account Tax Compliance Act (FATCA) already reinforced the push for tax transparency. These frameworks aim to ensure that companies pay taxes where their economic activities occur and that they report their tax positions in a clear and understandable manner. By aligning tax governance with ESG principles, asset managers can demonstrate their commitment to ethical practices, thereby enhancing their organisations' credibility and appeal to socially responsible investors.
Tax risk management and reputational risks
In today’s complex regulatory environment, tax is not just a compliance matter; it is a significant risk that asset managers must manage proactively. The landscape of tax risk has expanded, and institutions need to recognize and address the various dimensions of tax-related risks to safeguard their reputations and operational integrity.
Asset managers must adopt a comprehensive approach to tax risk management, incorporating both compliance and strategic oversight. This includes understanding the implications of evolving tax regulations, anticipating changes, and implementing systems run by aware and responsible people that ensure adherence to both local and international tax laws. Failure to manage tax risks can lead to severe consequences, including financial penalties, legal repercussions, and loss of investor confidence. Demonstrating a commitment to responsible tax practices is indeed essential for building trust and maintaining strong relationships with investors and clients alike.
A crucial aspect of effective tax risk management is the involvement of the board of directors, at management company and/or funds levels. Board members must ensure that tax considerations are firmly placed on their agenda. This requires a commitment to understanding the implications of tax regulations and their potential impact on the organisation’s financial health and reputation. By prioritising tax governance, boards can foster a culture of accountability and transparency that permeates throughout the organisation.
Moreover, having board members with a solid understanding of tax issues is essential for informed decision-making. Expertise in tax matters enables directors to engage meaningfully with tax professionals and assess the organisation’s tax strategies critically. This knowledge is vital in evaluating risks, identifying opportunities, and ensuring that the company’s tax practices align with its overall business strategy.
Strengthening tax governance to keep pace with tax complexity
Staying up-to-date with global tax developments presents a challenge for asset managers. The sheer volume and complexity of tax changes mean that tax governance is no longer optional—it is essential. As said, strong tax governance frameworks enable asset managers to effectively manage these complexities, uphold compliance and get some tax efficiency when possible.
The PwC Manco Tax Barometer underscores that asset managers in Luxembourg face ongoing challenges in meeting evolving tax and compliance requirements, driven by both local and international regulatory pressures and is designed to ensure that each and any tax hot topic is considered at least, discussed during the Boards, and analysed.
At PwC, we believe that the followings tax updates (amongst many others) should be understood and embedded in Boards’ agendas and tax policy:
- New Tax Legislation Draft in Luxembourg: A draft bill (n° 8414), currently under review, proposes changes such as lowering the corporate income tax rate from 17% to 16%. The bill also expands certain exemptions, including a subscription tax exemption for UCITS ETFs. These developments directly impact the asset management sector, requiring immediate adjustments to tax compliance strategies. It also brings important modifications when it comes to impatriate tax regime and profit-sharing premiums scheme.
- Pillar II Implementation: Part of the OECD’s global tax reform, Pillar II introduces a 15% global minimum tax rate for multinational enterprises. This measure adds layers of complexity for Luxembourg-based institutions, necessitating compliance assessments and updates to cross-border tax strategies for multinational portfolios. This very complex tax framework is fully applicable to asset managers and could be applicable at Funds level as well. In deep impact analysis should urgently be carried out if not already done.
- Subscription Tax Compliance and Audits: The Luxembourg subscription tax has grown more intricate, with stricter compliance standards and increased tax authorities’ audit activities. Recent tax laws have introduced conditional reduction or exemptions, which we fully welcome but posing a higher risk of non-compliance. Asset managers must review their products and their corresponding subscription tax rates and maintain detailed documentation to meet these evolving requirements and avoid potential penalties.
- New Investment Tax Credit: The Investment Tax Credit provides a financial incentive for companies investing in digital or ecological transformations, offering an 18% tax credit computed on eligible investments and expenses. However, firms must stay informed of specific eligibility criteria to leverage this opportunity effectively within their broader tax strategies.
- Retailisation of investment funds: As more retail investors gain access to alternative investment funds, asset managers must adapt to increased transparency and tax reporting expectations. The demand for clear reporting aligns with global tax and investor protection standards, emphasizing the need for adaptable and resilient governance frameworks. Conversely, as more traditional asset managers widen their strategies to Alternatives ones, related tax legislations and structuring must be fully understood and embedded into the tax policies.
In sum, these examples underscore that staying abreast of global tax regulations is no small feat. Strong tax governance structures enable asset managers to navigate these challenges confidently, aligning with both compliance obligations and the ethical standards investors increasingly expect.
Conclusion
As the financial landscape evolves, the importance of tax governance in financial strategy cannot be overstated. Tax considerations have become central to the operational frameworks of asset managers intertwining with the principles of ESG. Strong tax governance frameworks are essential for ensuring compliance, efficiency, managing risks, and aligning with investors' ethical expectations.
In a world where transparency and accountability are paramount, asset managers must prioritize responsible tax practices to build trust and integrity. By embedding tax governance within the broader ESG agenda, firms can demonstrate their commitment to ethical behaviour, enhancing their reputations and attracting socially responsible investors.
As the regulatory environment continues to change, the call for robust tax governance will only grow stronger. asset managers that proactively manage their tax strategies will not only safeguard their reputations but also position themselves for long-term success in an increasingly competitive market.
