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.
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.
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.
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.
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:
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.
Director, FS Regulatory Compliance, Third Party Risk Management Lead, PwC Canada
Tel: +1 647 286 1972