Best Practices in Tax Planning

Corporate scandals and proposed regulations place CFOs at the forefront of tax planning strategies.

The uneven recovery is placing pressure on companies to continue cutting costs, including spending on taxes. This imperative coincides, however, with greatly increased scrutiny of tax filings at every level of government. Identifying tax-reduction opportunities without jeopardizing a company's legal status and reputation is more difficult today than ever before. And it's even more complex for the increasing number of companies that rely on revenues pulled from operations abroad.

In the context of recent corporate scandals, the notion of "tax planning" has taken on dark overtones. "But tax planning is not, per se, a bad thing," says David W. Zimmerman, a partner with PricewaterhouseCoopers in New York City. "To the extent there are supportable positions to reduce taxes, and after considering any perceived adverse impact from implementing such strategy, the development and implementation of prudent tax planning strategies could, in fact, be considered good governance."

To ensure that cost savings measures won't result in problems for the business, tax managers must fully vet tax-planning strategies across the entire management team. This need has generated one of the most visible changes in tax planning in recent years: the substantial expansion of the number of individuals involved in the process. "The principles of good governance over a company's tax planning function currently extend to the entire 'C suite' -- to include not only the CFO, but also the COO; general counsel; and, in many cases, the CEO," says Zimmerman. Tax oversight also extends to the audit committee.

All levels of the enterprise need to commit to taking the steps necessary to guarantee complete and accurate tax compliance and reporting. "For some organizations, those steps might be major initiatives, such as introducing or expanding the use of automation within tax departments to smooth the reporting process for internal controls," explains Steven K. Rainey, partner in the federal tax practice for KPMG LLP in Tysons Corner, Va. "For others, it could be something as simple as addressing the tax elements of a new business venture, new location or new product from the very beginning of the process."

According to Zimmerman, the most critical best practice in tax planning is ensuring that the "tax tail does not wag the dog." He explains, "More sim-ply stated, the financial or operational strengths of a business transaction must stand on their own, aside from the tax benefits that may be derived from them." In addition to evaluating the legality and appropriateness of proposed tax strategies, the CFO must make certain that the audit committee and other members of senior management have the opportunity to address the potential business implications of those strategies, Zimmerman notes.