Appropriately planned taxes can enhance a company’s overall value by improving corporate earnings, strengthening the PE ratio of company shares, and influencing the way analysts perceive and cover the enterprise. Tax issues are also closely tied to risk. When companies engage in tax planning, they are interpreting laws, an activity made risky by the possibility of disagreement between the company and tax authorities. If not property controlled, tax issues can lead to a finding of material weakness by auditors. Tax planning is therefore a crucial part of risk management.

To understand the impact that tax matters may have on value and risk, boards should be familiar with five main areas: tax cash management, international taxation, tax-efficient supply chain management, transfer pricing and inbound investment.

Tax cash management
Prudent tax planning can unlock one-time or annuity cash flows trapped inside a company. Although tax is one of the largest expenses on the income statement, companies often fail to consider tax issues when trying to improve their overall cash management. This year, Ernst & Young surveyed more than 500 executives from major companies. Only one in four respondents said that their firms considered taxes when reviewing cash management practices.

One of the first things a company should consider is whether it is making the maximum appropriate use of available tax credits. For example, in an emerging area such as climate change, many firms have not yet looked into available offsets for their existing or planned investments in clean technology. Most companies know about the federal research and development (R&D) credit, but they overlook eligible expenses such as investment in plant and equipment designed minimize the environmental impact of R&D. Numerous government programs supply tax credits, deductions and abatements to companies that conduct environment “scrubs” of their business.

Many states and cities offer incentives comparable to those at the federal level, such as credits and grants for companies that provide employee training and development programs. Opportunities in this area are growing now that a number of states have launched their own economic stimulus programs.

Companies may also be able to free up cash by reviewing their transcripts and accounts at the federal, state and local levels. Many companies fail to recognize that interest and penalty miscalculations pose a serious problem for corporate taxpayers. The rules for calculating interest are highly complex, and governments may lack the resources needed to make such calculations accurately every time. If a review does reveal overpayments, these can be kept as cash or applied to another tax liability.

Reviews of transcripts and accounts typically focus on income tax, but can also include sales and use tax, property tax and state employment tax. Concerns about overpayment have led many companies to look especially hard at indirect taxes. For example, opportunities exist to review property taxes and examine whether the plant and equipment on a piece of land can be appropriately depreciated to lower a company’s tax burden.

With many states facing budget problems, state and local governments are concerned about revenue shortfalls. Legislatures have raised taxes and closed loopholes, increasing the complexity of filing returns and preventing some companies from meeting their compliance requirements. In response, some firms are considering whether to outsource the compliance function related to sales and use tax, a step that can lower costs substantially.

In addition to federal, state and local taxes, companies are seeking to manage cash flows linked to foreign taxes. Among the questions board members should be asking in this area:

• How can companies ensure that they are effectively reducing their foreign tax without triggering US tax?

• How will proposed international legislative changes affect the company, particularly its cash flow, effective tax rate and business objectives?

• Has the company taken full advantage of opportunities to access foreign tax credits, cash held offshore, or both from its international operations?

International taxation
The international arena presents companies with a distinct series of tax challenges. First, there has been a marked increase in information-sharing by global authorities. Agreements to exchange tax information between countries have existed for decades, but recently the cooperation has intensified: more countries are using the agreements, and doing so more frequently. Governments worldwide want to lower deficits and stimulate their economies, and they are looking for uncollected revenue from corporate taxpayers. Companies must prepare for increased tax controversy, assembling a defense before it is needed. All planning should be amply and contemporaneously documented, something not always done in the past but now considered a best practice.

Second, the Obama Administration is weighing plans to reform deferral of overseas income earned by US multinational corporations. It’s still unclear what shape such reform might take, but significant change is possible, with the likely result that US multinationals will pay higher taxes on income earned abroad. Certain planning approaches can secure companies’ tax position regardless of how the law may change, and more firms are investigating these approaches as a possible hedge against future uncertainty.

Supply chain management
Tough times have prompted multinational corporations to scrutinize nearly every aspect of their supply chain in an effort to lower costs. Companies are seeking ways to rationalize their supplier base, rethinking the locations where they manufacture goods, and considering whether to outsource (or insource) manufacturing and distribution.

Although greater operational efficiency can reduce costs, high taxes will erode the savings. For that reason, firms are looking to make their supply chains more tax-efficient. They are asking where their most valuable intellectual property is located, a consideration relevant even for companies that are not manufacturers. Services companies, for example, can enter into global contracts in a variety of locations.

Taking a comprehensive approach to tax-efficient supply chain management raises its own operational challenges. Companies must decide whether qualified staff will be willing to move to the chosen location, whether exit taxes will be due when facilities are relocated, and what information technology costs will be incurred in integrating disparate operations.

Transfer pricing
Used correctly, knowledge of transfer pricing can serve as a risk management tool, a means of reducing taxes and a hedge against uncertainty. Annual surveys conducted by Ernst & Young show that transfer pricing consistently tops the list of international tax issues facing multinational companies. Transfer pricing has grown more complex as regulations and audit practices have evolved, and closer collaboration among worldwide tax authorities virtually guarantees that it will continue to be a concern. Two of the main issues uncovered in our surveys relate to permanent establishments and tax controversies.

Permanent establishments are taxable presences formed (often inadvertently) when personnel or property are located in a new country where a company has not set up a formal place of business. They can stem from something as simple as having salespeople repeatedly attend trade shows or exhibit products overseas, even for brief periods. Income tax treaties may afford some protection from this risk, but often a taxable presence is created anyway. If so, the best approach usually is to admit that a taxable presence exists and establish an agreement to treat it favorably. Companies that wish to avoid creating a permanent establishment must understand thoroughly any income tax treaties relevant to its overseas business.

Tax controversies related to transfer pricing are common, and can be expected to become more so. Usually they involve two governments fighting about which one gets to tax the same dollar of corporate income. These disputes speak directly to the issue of where value is created in a company’s global supply chain. Government A might believe, for example, that a foreign-owned factory located inside its borders contributes more value than the company’s other supply chain components. Government A therefore maintains that it should get the largest share of tax remuneration. But another country may play a role in that supply chain as well, leading Government B to argue that it, too, deserves a cut. Companies caught in the middle of such disputes may be subject to double or even triple taxation, an undesirable outcome.

Techniques exist to help companies anticipate and avert tax controversies. Firms can establish an Advance Pricing Arrangement (APA), an agreement between a tax authority and a multinational enterprise that determines the appropriate transfer pricing method used for intercompany transactions. Because APAs deliver a high level of confidence in the correctness of a company’s transfer pricing methods, they can save time and reduce risk by shielding taxpayers from litigation.

APAs can be unilateral, bilateral or multilateral. Under a unilateral APA, a company may negotiate an appropriate transfer pricing method with a single tax authority for use in a single country. Bilateral or multilateral APAs are agreements between a corporate taxpayer and one or more foreign tax administrations allowing multiple governments to pre-agree that a specified amount of profit will be allocated to one jurisdiction rather than another. APAs are complex to set up in some jurisdictions, but they can be extremely helpful under the right circumstances.

Inbound investment
Today’s international business environment provides companies with unprecedented opportunities to invest in the Americas. The global trend currently involves foreign multinationals buying US corporations. This has forced US firms to become familiar with matters they may not have dealt with before, such as tax rules governing payments to a foreign parent.

Companies contemplating their first investment in the Americas, or seeking to supplement their acquisitions in the region, may find approaches that were cost-prohibitive in the past are now attractive options. Recent shifts in profitability and asset valuation, for example, may have lowered the cost of tax-effective supply chain management. By working together more closely, different parts of the organization may be able to reduce the cost of cross-border cash movements and better manage overall financial risk. Inbound acquisitions may also create tax-inefficient structures that could, in turn, present opportunities for the company to rationalize its international tax structure.

Staying on top of legislative changes
All of these issues must be viewed in the context of the rapid and broad-scale changes taking place in Washington. Board members have a responsibility to ensure that management remains up to date on legislative initiatives, particularly those involving healthcare reform and energy. The details are complex and change almost daily, but the stakes are high, so companies must spend the time needed to understand these matters adequately. In particular, boards should ensure that the corporate tax department stays current on legislative developments. One step companies can take in this direction is to require tax directors to give the audit committee quarterly briefings on any new developments. In fact, this is now considered a best practice.

Board members who stay abreast of the five tax issues outlined above will be doing their companies a service. In the process, they may also find themselves acquiring a more holistic view of the enterprise. Taxation may be the purview of accountants and attorneys, but it touches so many parts of the business that boards must pay attention to it as well.

Kate Barton is Americas vice chair of tax services at Ernst & Young, LLP.

The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.