As awareness is being raised towards corporate compliance, discussion regarding corporate governance has truly blossomed. Without a doubt, the idea that legal compliance will lead to enhanced corporate value will attract even greater attention in the future.
However, among laws which are discussed in the same vein of legal compliance, how much emphasis is placed on tax law? For fields such as those related to the Companies Act, the Financial Instruments and Exchange Act, the Antimonopoly Act, and the consumer laws, there is a high level of legal compliance realized through internal controls. However, the same awareness does not exist for tax law.
Every day, there are news reports regarding tax evasion and unreported income by corporations. However, for the majority of such incidents indicated by the tax authority, a spokesperson for the company involved will make a statement such as “we have finished amending our tax statements in accordance with indications from authorities, and have paid the required tax” or “although we had a different opinion from tax authorities regarding the indicated items, we have implemented processing necessary for correction.” Upon making such comments, it seems that the companies manage to avoid any problems. In my view, I have almost never heard of any cases in which shareholders expressed strong anger at violation of tax law by a corporation and ultimately forced management to resign. Unreported income by politicians is one case in which anger is expressed by the general public; but even so, such scandals hardly ever mark the end of a political career. Considering diatribe against politicians at least temporarily in case of violation of the Political Funds Control Act, this is something that should be addressed immediately.
With regard to other countries, on the other hand, I’m sure that you have heard of how citizens (consumers) boycotted Starbucks after the company was accused of large-scale tax avoidance, although the accusations never escalated to full-scale tax evasion. Tax evasion is a clear violation of tax law, while tax avoidance cannot always be said to constitute a violation. Nevertheless, attention must be given to how citizens are taking action against tax avoidance. Moreover, media reports on tax avoidance by Google, resulted in the creation of what is known as the Google tax, a tax law which applies to multi-national corporations that conduct advertising businesses via the internet. Furthermore, David Cameron (former Prime Minister of the UK) and other people who had their name listed in the Panama Papers have resigned. Compared to the situations in other countries, Japanese citizens have a very low level of awareness towards tax law compliance.
The tax environment is becoming increasingly complex due to factors such as corporate internationalization and implementation of ITC, increasing the difficulty of tax investigation. Furthermore, due to personnel limitations at tax authorities, it is impossible to secure the required number of investigation days or to keep the number of investigations being started at the current level. In response, recent steps have been taken to enhance the taxpaying environment. For example, an additional tax system as penalty have been strengthened and requirements for providing tax information have been expanded. Put simply, attempts are being made to maintain appropriate reporting through deterrence and collection of materials.
In that respect, the National Tax Agency of Japan is showing interest in fostering compliance awareness of corporations. Recently, the tax agency implemented a project for corporate governance for taxes. The agency is also preparing a system which grants benefits such as exemption to tax audits for corporations which are recognized as having constructed corporate governance in relation to taxes.