Communicating with the Board of Directors on taxes.

• Author: Larsen, Richard G.

This article was developed from a Chief Tax Officers Breakfast Forum hosted by Tax Executives Institute in Washington, D.C., during the Institute's 61st Midyear Conference. The April 5, 2011, discussion was facilitated by Richard G. Larsen, and featured comments by panelists Mitchell E. Salamon, Chief Tax Officer of American Airlines and a member of TEI's Executives Institute, and Lester D. Ezrati, Senior Vice President of Tax at Hewlett-Packard Co. and a former president of TEI, as well as by many of the nearly 100 participants. Mr. Larsen expresses his appreciation to Messrs. Salamon and Ezrati for their involvement in the session.

Boards of directors are increasingly requesting information and input on tax matters and tax risk, as well as on operational aspects of the tax function. They have expanded their role in most companies to provide guidance in balancing the often competing goals of tax minimization, risk management, and certainty in the reported financial results of their companies. Before the enactment of the Sarbanes-Oxley Act in 2002, many boards of directors (as well as internal audit departments) questioned their competency to oversee the tax function and thus paid little attention to the tax function, perhaps viewing it as a "black box." After the implementation of Sarbanes-Oxley and the alarming number of tax-related material weaknesses and restatements reported by a number of companies, many boards realized that they could--and should--provide more guidance and oversight in key areas of managing risk, ensuring that the tax function is operating appropriately and that the significant tax positions a company takes on its tax returns are aligned with the company's overall risk tolerance level.

Beginning in 2004, the Australian Commissioner on Taxation strongly encouraged boards of directors to take a more active role in overseeing their company's tax function. Commissioner Michael Carmody said that "an important issue of a board and CEO is to consciously decide the position they wish to take on tax planning, rather that have it made for them by others." A similar message was delivered in the U.K. by Dave Hartnett, the Permanent Secretary for Tax at H.M. Revenue & Customs, who encouraged "top management and audit committees of larger enterprises to take a greater interest in, and personal responsibility for, tax strategies."

More recently, in the United States, the Commissioner of Internal Revenue, Douglas Shulman, during a speech at the 2009 Corporate Governance Conference of the National Association of Corporate Directors, said boards of directors can play an important role in overseeing corporations' tax risk and tax strategies. Commissioner Shulman's goal was to start a discussion concerning the board of directors' role in overseeing tax risk. He noted that many companies have instituted regular meetings between their audit committee and tax director to ensure open dialogue.

A discussion among Chief Tax Officers attending the 61st Midyear Conference of Tax Executives Institute on April 5, 2011, focused on two primary topics: (1) the dialogue between chief tax officers and their boards; and (2) the board's involvement in tax department oversight. This article addresses the first topic.

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