The hidden compliance risks of Canada’s tax changes

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6 minute read

Changing how you see risk and tax compliance lets you thrive amid rule changes

Canadian companies are confronting an onslaught of tax changes, which include mandatory disclosure rules, Pillar Two and interest limitation measures, among others. Many organizations lack the internal infrastructure to understand fully how the changes apply to their business and how to meet their new compliance obligations.

But these tax changes are only a few pieces of a much bigger—and often overlooked—puzzle. Enhanced regulatory updates and more proactive regulatory reviews are creating new business challenges and compliance risks that can lead to significant financial penalties and reputational damage.

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Part of the solution lies in tax collaborating more with other parts of the business, including compliance. But many organizations have insufficient protocols to internally communicate new reporting requirements affecting different business functions and flag risks that stem from this tidal wave of tax changes.

These governance gaps can have significant consequences. For example, tax may be unaware of refinancing arrangements entered into by corporate treasury with an intermediary that can create a new disclosure requirement. In other cases, tax may not know when members of the business are considered advisors, which can trigger a reporting obligation for their own company.

Now, more than ever, organizations must harness the power of technology, enhance their modelling capabilities and build capacity to quickly adapt to regulatory changes. Otherwise, they risk falling further behind, especially with more changes on the horizon.

How to improve tax compliance and thrive in an evolving regulatory environment

It’s crucial, of course, to have processes that let your organization comply with these rules. But what’s often less appreciated are the opportunities to create value in a rapidly evolving regulatory environment.

Organizations that successfully factor new tax requirements into their regulatory compliance management program gain a more robust perspective of the tax risks of different business activities.

These organizations can streamline their reporting in ways that reduce compliance costs and let tax professionals focus on higher-value tasks. This can create tangible financial benefits.

Take the example of a Canadian multinational company that borrows to purchase another entity. The acquiring company can increase its return on investment and better understand its cost of capital by addressing the impact of excessive interest and financing expense rules (EIFEL) prior to the transaction closing. Similarly, buyers that integrate Pillar Two into deal modelling can better understand the implications of the global minimum tax regime on the post-transaction group. In both cases, the tax function will also be able to better focus on what matters most to the success of the newly expanded group.

Our Global Risk Survey found many Canadian companies are passing over this possibility: just 40% say they see regulatory changes as an opportunity for their organization. Businesses that move quickly and think differently about tax and regulatory risk will gain a competitive advantage over their peers.

Closing the gap between tax and risk

Our 27th annual CEO Survey underscores the growing importance of protecting business value by mitigating and managing tax and regulatory risks more effectively. More than a third (36%) of Canadian respondents say government regulation changed the way in which their company creates, captures and delivers value in the last five years. But that jumps to 44% when CEOs are asked to think ahead to the impact of regulations in the next three years.

Companies can better create and deliver this value by making tax an even more strategic role within their organization. This includes providing the tax function visibility into parts of the business that it’s never previously needed to understand. This helps tax gather the data needed to comply with Pillar Two and other tax changes. It also helps the compliance function understand these tax requirements and provide the necessary support.

By connecting tax even closer to corporate functions, organizations can better spot tax risks and opportunities early on—providing insights into strategy and the related tax implications.

A human-led, tech-powered approach to managing new tax risks

With tax even more integrated within a company’s larger organizational structure, businesses can better create a robust centralized methodology for managing tax and regulatory changes through the following measures:

We often see companies spend a disproportionate amount of time gathering, validating and manipulating data, leaving little time to apply the technical aspects of new tax legislation and review the computational output. This imbalance creates added compliance risks, as low-quality data inputs can adversely affect a company’s disclosures.

In contrast, organizations that use governance, risk and compliance (GRC) technologies to capture tax requirements in their universe of regulatory requirements can flag tax updates and changes for the right internal stakeholders. The GRC tool helps route the key requirements to the right stakeholders (in some cases, multiple stakeholders for cross-functional requirements) to assess the inherent risk and assign a risk rating based on the likelihood and impact of the regulation.

When the risk rating has been assessed, the relevant stakeholders can implement controls to mitigate risk within the defined parameters of the organization. It’s important to conduct ongoing monitoring based on the risk rating of the regulation and reporting to the appropriate internal governance stakeholders, such as the senior management risk committee.

In the earlier example of debt refinancing by corporate treasury with an intermediary, the GRC tool would flag tax and treasury as key stakeholders of the new mandatory disclosure rules. It would also provide an inherent risk rating of “high” on corporate treasury activities within the organization based on the organization’s risk methodology. Tax and treasury would then be required to implement the control of ensuring corporate treasury informs tax of any refinancing activity before changes are made. This control should be regularly monitored to evaluate its design and make sure it operates effectively, with overarching reports provided to relevant stakeholders.

Much of the data needed to perform predictive modelling sits within an organization’s enterprise resource planning (ERP) system. But it often doesn’t exist in the required form, such as on a legal entity basis. In these cases, creating a common data model or data lake to standardize, organize and enrich your data can help you avoid time-consuming manual adjustments. This also makes it easier to better understand this data so it can be used to better inform wider finance and tax decisions.

Organizations will want to work toward creating systems that automatically incorporate this information into their tax provisioning processes and models. This includes rethinking how ERP systems can be designed with tax in mind.

Managing the risks and compliance obligations of these tax changes is part of a larger set of challenges facing the tax function. The growing compliance burden is exposing capacity constraints and the need to modernize outdated processes and technologies.

We’re seeing leading organizations reimagine their tax and risk functions with better operating models, processes and digital solutions through managed services. Engaging a managed service provider that becomes an extension of your internal team and connected across your business can accelerate your strategic outcomes by helping you:

gain access to top talent and technology
create capacity and close capability gaps
streamline and digitize processes to increase efficiencies
get ahead of emerging issues across the tax and compliance landscape
strengthen governance strategy to improve quality control and compliance

Turning tax risks into strategic opportunities

Companies that apply risk and compliance technology, data-powered modelling and new capabilities to understand their evolving tax requirements do more than create efficient and robust reporting processes that reduce the risk of non-compliance. They improve their visibility into the risks of various business activities.

This helps organizations assess whether a particular business segment matches their risk appetite. It also lets them make more informed decisions when structuring M&A deals and better align internal tax planning with their public disclosures.

This can give your company a competitive advantage over its peers while strengthening your ability to deliver the sustained outcomes that matter most to your business.

Clearly, the time to act is now. And, at PwC Canada, we’re ready to help you change the way you see risk. Contact us to learn how we can accelerate your journey.

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