I) Introduction

This paper studies the connection between the tax management and corporate governance. It examines ways in which they interact in order to objectively explain the relevance of taxation in the capability of a company to improve their value, in benefit of its shareholders. The objective of the paper is to promote a debate in one of the less studied areas in corporate governance by presenting the lecturers diverse situations and aspects regarding the role of taxation in grounds of what it is considered good corporate governance.

This article tries first to explain the role of good tax management in reaching a good corporate governance. Then we will discuss briefly the development of corporate governance in México and its advance right next to the tax management. We will also point out a set of aspects regarding the implementation of tax planning and aggressive tax strategies while we study the possible liabilities of the decision makers of a company and the difference between responsibilities before the tax authorities and the management body of a corporation. Finally we will focus our studies on some tax issues like transfer pricing or tax deferral and their possible consequences in the corporate governance of an entity.

In México as in the rest of the world, the term “corporate governance” has been created to describe a cluster of rules in order to encourage a greater transparency in the public corporate activities, enhance an equitable treatment of all shareholders and to recognize the rights and interests of the stakeholders.

In case of Mexico the practice of corporate governance began in 1999 with the conformation of the Committee of Better Corporative Practices of the Enterprise Council . Nevertheless, it wasn´t before passing the Sarbanes-Oxley Act in 2002, that Mexico began to take the idea of corporate governance more seriously. This Act triggered the Mexican expansion of the idea of corporate governance.

Among other countries, Mexico has adopted a very active attitude in encouraging good corporate governance and recognizing the tax management as a very important part in the corporation´s management. That, partly because of a better job of the Mexican Tax Authorities in the audit procedures, which suggests that corporations having a publicly recognized good corporate governance and more transparent relationships with tax administrations could expect fewer audit interventions and hence greater confidence in their operations.
Given the current global financial crisis and the necessity of resources, the management of tax liabilities is a matter that the board of directors cannot longer ignore. Tax planning and avoidance of taxation could represent very good vehicles to increase the company´s profit.
This has generated a public debate over the use of ethical principles or embracing the advantages of tax avoidance and aggressive tax planning in companies tax contributions. In summary, the implementation of tax strategies is now a days too relevant to be left only to the interest of tax practitioners. It has to be adopted by the managers of corporations.

Although there is some reference to the legal system of Mexico, this paper intends to be relevant in an international scope with aspects that can be generally applied.

II) Significance of tax management in good corporate governance.

In some way, the decline of today’s economy is a product of the lack of transparency and confidence in businesses. Less informed businesses diminishes the confidence in the market and increases the risk of financial collapse. Therefore, any aspect that could enlarge the certainty of the corporation’s actions before the public becomes relevant in capital gaining.

The economic crisis has made the corporations shift their headquarters offshore and to rethink their position over tax avoidance. At the same time, recent corporate dishonored scandals involving the success of tax administrations in demanding aggressive tax schemes have lead to the discredit of stakeholders and shareholders in their corporations. So, decisions “pro-tax avoidance” have now to consider even more the criteria of authorities and the consequences of being audited in the capital expansion of the company.

In this regard Mexico has had some important cases. The protagonist of the most famous case was TV Azteca, one of the two most famous TV enterprises in Mexico. The company faced a lawsuit for having made, allegedly, some irregular operations in the purchase of debt of one of its Subsidiaries (UNEFON), act that cost the company a very important detriment in its stock value .

Long term business depends on good corporate governance. The way public corporations deals with tax risks can influence its financial reputation and its seizure of capital. That’s why boards of directors and Tax Administrations are increasingly focusing on promoting effective tax management as part of their corporate governance.

Recent international surveys by major accounting firms indicate that tax risk management is increasingly gaining acceptance at board level. CEOs and boards are asking more complex questions about how their organization can manages its tax risk exposure .

Particularly, the importance of tax management in good corporate governance, derive from the fact that the more transparent is the behavior of the company, the greater the confidence and the lesser the chance of having large and annoying audits performed by the competent tax authorities.

The origin of tax risks is the uncertainty about what the correct interpretation of tax law in relation to particular transactions should be, according with the tax administration of one particular country. In relation with the tax adviser´s opinion, an opposite view of the Tax Administration can be expected. In this matter, previous consultations with the latter regarding the taxpayer criteria in one particular issue can bring beneficial results, specifically a better “look” before the tax authorities and fewer audit interventions.

Tax management could also be considered important in corporate governance because of the possible responsibility of the board of directors and major shareholders. Generally, the liability will stay in the company, although if a failure to comply with the respective law is so considerable that the financial information showed to the public fail to give a real and fair view of its economic situation, liability of the board members could arise. This will make the principal shareholders subject to the respective penalties, depending on the country tax, corporate or criminal law.

In this regard, States have enforced rules in order to compel corporations to report on the effectiveness of the company´s internal control over financial and key operations that can involve the reporting of tax strategies. For instance, rule 404 of the Sarbanes Oxley act and rule 3.5 of the Mexican Code of Better Corporate Practices requires the public accounting firms or external auditor to document and report the policies over key strategies and risks. These rulings require to assess and report the effectiveness of the company´s internal control over financial reporting and its level of law compliance. This can be extended to the determination of tax risks in which the corporation is involved. We should mention that the rules here described, only refers to the report of key strategies toward the shareholders not toward the Tax Authorities.

According with the information note regarding the corporate governance and tax risk management published by the OCDE, having the following features in their large business compliance programs has helped to encourage good corporate governance and enhanced relationships:

• A robust risk assessing approach that identifies non-compliance and poor governance as early as possible.
• Early and direct communication with CEOs, boards and senior managers about concerns the tax administration has about a business governance and tax compliance.
• A professional workforce with adequate resourcing to resolve compliance issues and respond to businesses in a timely manner.
• Appropriate legislative tools to ensure compliance.
• In relation to cross-border issues, good collaboration with other jurisdiction through treaties and exchange of information agreements.
• Special diligence and strong deterrence where there is evidence of the inappropriate use of tax avoidance or tax havens.

III) Corporate governance in México

The set of rules that regulates the corporate governance in Mexico are: the Mexican Code of Better Corporate Practices, the Mexican Stock-Market Law, and the Public Warning number 11-33 issued by the National Bank and Stock Commission.

The Mexican Code of Better Corporate Practice was a result of the Enterprise Council and contains a group of non binding recommendations headed to public and private corporations. Nonetheless, according with the Public Warning 11-33, corporations have the duty to reveal to the National Bank and Stock Commission their consent about the level of commitment to those recommendations.

According with results of the National Bank and Stock Commission in 2002, 175 of the 232 regulated companies have followed the Mexican Code of Better Corporate Practice.

The Mexican Stock-Market Law, enforced in 2006, regulates three new types of corporations 1) The Stock market Corporation, 2) The Stock market Investment Promoter Corporation and 3) the Investment Promoter Corporation.

What stands out of this new regulation are the duties of care and loyalty applicable to the members of the board of the Stock market Investment Promoters Corporations. It is worth mentioning that these duties correspond exactly to the duties of care and loyalty regulated already in some common law countries.

The duty of care is defined as the obligation of each director or member of the board to look after the corporate goods with the accurate diligence, and managing those goods as if they were theirs.

The duty of loyalty is the obligation of members of the board and major shareholders to behave in a fair and scrupulous manner in affairs in which, directly or indirectly, could receive a benefit from cases in which conflict of interests may arise.

IV. Cases regarding the application of the duty of care and loyalty on tax grounds.

Duty of Care:

An application of the duty of care in the tax arena is very difficult to find. Nonetheless, it will be very illustrative to explain one of the model cases in the United Sates: Kamin v. American Express of 1976.

Two American Express (Amex) minor shareholders demand the misuse of the assets of the company because of the distribution of special dividends. In 1972 Amex bought shares of Donaldson Inc. at a price of 30 million dollars. In one year the value of those stocks descend until 4 million dls. In 1975 the board of directors ordered the payment of dividends in order to distribute the stock of Donaldson between its shareholders.

The plaintiffs sustain that if the company have sold the stock instead of ordering the payment of dividends, Amex would have had a tax loss, which could have signified a tax saving of millions of dls to the company. Thus, the board avoids the company of having substantial savings violating the duty of care.

Despite how defendable can be situation, the New York Court decided that any court shall not interfere in the business of a company unless a matter of fraud, illegality, dishonest objectives or bad faith is involved.

The duty of care, to the US Courts, compel the board of directors to treat the corporate assets as if they were theirs, and as long as they acted with good faith and based on a acceptable judgment at the time of the decision, their guilt of having made a bad decision will not be carried over their shoulders.

Duty of Loyalty:

A very good example of the duty of loyalty can be found in the Sinclair Oil Corporation v. Levien Case.

Sinclair Oil Corporation (Sinclair) led its Subsidiary to the nonfulfillment of a contractual obligation by making it buy amounts under the agreed price. In detriment, also of the Venezuelan Subsidiary and its minor shareholders, Sinclair ordered an excessive payment of dividends.

Regarding the dividends payment, the Delaware Supreme Court decided in favor of Sinclair since Levien did not prove that the minor shareholders were not able to take other business opportunities because of the order of dividends payments.

In respect with the nonfulfillment of the contractual obligation of the Venezuelan Subsidiary, the judge order Sinclair the payment of damages due to the clear illicit commercial operations that have conclude in a purchase of products below the minimal agreed that produced an exclusion of benefits on the minor shareholdings profits.

V) Liability of Corporations, directors and major shareholders

The internal rights and obligations of shareholders according to the company law are enforced differently than the external obligations of the corporation in the fields of tax law.

As aforementioned, the duties of managing directors and major shareholders are focused towards each other, not towards the authorities. The members of the board do not have to respond of the tax liabilities of the corporation before the tax authorities, unless tax evasion is involved. That means that the management and decisions in tax matters are part of the responsibilities of the board of directors in response to the duty of care before the share and stakeholders but not in response to the duties before the tax authorities. Following this idea, the Tax Authorities do not have the power to force the major shareholders to fulfill their duties (of care and loyalty) before the people with business interests in the corporation.

Normally, Corporate Law shields the responsibility of the shareholders of the corporation by giving the latter its own legal personality, by which the liability of the shareholders is limited up to the amount of capital contributed to the corporation before any creditor .

In Mexico it is the General Law of Commercial Companies that regulates their legal personality. According with its article 87, corporate shareholders are responsible only to the limit of their shares. In this context, contrary to what happens in the United States , in Mexico the legal personality or its treatment as a pass-through entity will be determined by the law itself, not by choice.

Hence, talking about companies, the members of the board or their chief executives, generally speaking, are not responsible for the tax debts of a corporation, although, in Mexico there are some few exemptions. For instance, if they allow any tax evasion they will be subject to a penalty which consist in prison time . It is important to highlight that none of those exemptions make chief executives or members of the board responsible for having approved aggressive tax avoidance strategies or even abusive tax evasive operations. In case, tax authorities wishes to sue the directors or officers against any approval of tax evasion schemes, at least in Mexico, they have to do it in grounds of criminal law. Regardless the jail time, the worst part may be the loss of credibility of the way the corporation operates. The difference between tax avoidance and tax evasion (and its consequence in corporate governance) will be analyzed further on.

Thus, the taxpayer is the natural person and their directors are not automatically liable for neither the tax burdens of the entity nor debts to ordinary creditors. In Mexico as in the U.S., members of the board or chief directors owe their duties of care and loyalty towards the company itself and its members, but not towards the company’s creditors, including the tax authorities.

Considering the aforementioned, the hesitation that directors or major shareholders may have in deciding tax avoidance or aggressive postures will decrease enormously, since they are not jointly obligated to respond to the corporation´s tax liability before the tax authorities according with article 26 of the Mexican Federal Tax Code.

The above, disregarding the criminal penalties to directors that may represent a much more significant disincentive if the operation is considered, by the Tax Authority, as tax evasion.

In Mexico, as in other countries the major shareholders are not compelled to disclose the tax strategies to the tax administrations or to the general public, only to the rest of the board members . It will depend on the willingness of the directors to elaborate an ethical set of rules in their statutes in order to oblige the board members to disclose the information about tax strategies to the general public.

The disclosure of tax strategies to the share and stakeholders of the company will also require a statute regulation, even though, it will be convenient to publish which are the possible new tax scenarios of a future policy, in order to give time to shareholders to decide whether they agree and improves their investments in the company or disagree and decide to pull out part or all of their capital.

Finally, in case of subsidiary companies it is important to remind the reader that these are considered, for legal purposes, totally independent entities. So, every strategy reached and applied by a subsidiary will be under the responsibility of that subsidiary and in case, their board members, but not under the rest of the corporations of the group. Still let´s not forget that economically, the subsidiaries are part of an economic unit and as such, they can get involved in any strategy as separate legal entities in order to diminish their tax responsibility, i.e. the use of transfer pricing, problem that we will discussed more over.

VI) Relationships between businesses and tax advisors

According with the Mexican Code of Better Corporate Practices (rule 4.2), it is advisable for the board of members to support their strategic planning with the opinion of an expert, either using a group of tax advisers or one well known international firm.
The responsibilities of the tax advisors are different from the ones of the board members. In Mexico tax advisors could be subject to an infringement fine imposed by the Federal Tax Code. If a tax advisor issues a legal opinion regarding a tax operation that does not consider the revenue rulings (Tax Administration interpretation of the tax law) published by the Mexican tax authorities, the specialist can be subject to a penalty fine. Nonetheless, this infringement fine won’t be applicable if in the legal opinion, the tax advisor clearly submit and establishes the Tax Authority criteria in the revenue ruling.
Therefore, even as a board member or tax advisor you are compelled to look after the way the Tax Authorities interpret the kind of transaction you are intended to do, in order to have a better basis to decide whether take the risk or not, taking into account future possible audits, lawsuits and penalty fines.
VII) Relationships with tax authorities

The connection between the Tax Authority and the taxpayers is similar to the creditor-debtor relationship, even though this link does not derive from a contractual relationship. Yet with the non-contractual connection between the taxpayer and the tax authority, the latter has a safe possibility to claim any due payment, although with no priority in relation with other ordinary creditors. If derived from a corporate malpractice, the corporation goes insolvent, in some countries like Mexico and US, according with their Bankruptcy Codes the tax credit occupies the seventh and eighth place in the creditors line, respectively.

Other important aspect has to do with the fact that if a company is committed to the policies of Better Corporate Practices and most of its operations are carried with enough transparency, the company could find a more relax treatment of the tax authorities.

According with the OECD report in Corporate Governance and Tax Risk Management the following challenges may arise for tax administrations in promoting good corporate governance and enhanced relationships with large business:

• Building a relationship of trust with some large business may be challenging where there is a history of audit interventions by the tax administration.
• How to develop and articulate clear procedures and other support mechanisms that help large business and tax administration staff implement collaborative approaches.
• Tax administrations could consider initiating direct dialogue with CEOs and directors about the administrations expectation that they recognize their role in ensuring that the business has good corporate governance approach to managing tax risks.

To face these challenges tax administrations could consider to collaborate with relevant associations and institutes to ensure tax risk management, work with tax intermediaries to boost their role in promoting good governance and engage bar associations, accounting associations and professional tax communities to alert about the importance of good governance .

Furthermore, it is also vital to define which will be the policy of the corporation before bribery. For some corporation these kinds of practices will be permissible and beneficial because of the lack of seriousness of the tax authorities in one particular country. This issue gain relevance in adopting a policy in certain tax matters. Tax burdens does not depends only in arithmetical calculations but also in negotiations with national or foreign tax authorities, for example, deciding whether or not entering into an advance transfer pricing agreement with the correspondent tax authorities.

VIII) Profits of shareholders

The ambition of the shareholders could be solely the profit maximization. Investing in a company responds to the objective of receiving greater dividends or part of the profits of the latter. And since all dividend distribution has to pay taxes before it reaches the hand of the shareholder, their interest will be to, by any means, increase the amount of the after tax profits.

In fact, if we consider the obligation of the major shareholders to act accordingly with the duty of care described before, we can get to the conclusion that directors of the company are compelled to reduce by any means the tax burdens in order to make the distributing profits bigger. Therefore, we need to ask ourselves, to what extent shareholders are engaged with the employment of legal tax strategies.

In this respect, the shareholders first need to turn their eyes to the statute of the company and to the chosen policy regarding the aggressiveness of tax planning. If the statute set up an open window in this regard, the board of directors or major shareholders should be completely free to adopt any tax strategy as long as it is legal. We must not forget that the business of a company is to do whatever their statutes establish, not to avoid the payments of taxes. Thus, along with the crucial activities of the entity stated in their statutes, tax avoidance could not represent the main activity of the corporation.

It is important to consider that most of the Tax Authorities had issued criteria against the maneuver of any strategy only for tax purposes. The operation in question has to have some business and economic substance. As we will see in the next section ethical and honesty policies could also play an important role in settling a tax strategy.

As a shareholder one also has to consider the profit allocation between companies. As we said, investing in a company responds to the objective of receiving greater dividends. Transfer Pricing or tax deferral are tactics that can tackle that objective. Shareholders may not be quite comfortable with a situation where all the profit stays for long periods of time in one entity in which they have no business interest or with a situation in which the company do not make money on purpose for tax reasons. In both cases no big dividends are going to be distributed.
But lets supposed that the management is in the Subsidiary and your company value is based on the profitability of your Subsidiary. In that case you will care what your books are reporting to the public. Therefore sometimes there are companies carrying two set of books. One is the internal reporting for management purposes and the other is the tax reporting book. This common situation shows a competing concern of the actors of the subsidiary about what they are reporting, in order to be more desirable before the public.

Despite the decisions the corporate groups may have in relation with reporting strategies, the United States(US) have enforced some rules in order to regulate these malpractices. The rules were called in the US Controlled Foreign Corporation Rules (CFC rules) or Subpart F rules.

For instance, if the CFC is in a low tax jurisdiction then the income of the group will come back, in this case to the US, very sporadically. Without the Subpart F or CFC rules this income will not be currently tax in the US for a very long time. These rules are international tax rules which establishes that some of the income earned by the CFC must be reported on the parent return in the same year.

If a US shareholder owns a certain amount of stock in a CFC, then certain income earned by that CFC, which is a foreign source income, will be tax by the US in the very same year in which it is earned, even when no distribution was decreed. Then Subpart F will be very significant to the pockets of the US shareholder .

The connection between transfer pricing and anti deferral rules is that they share the same concern. With different methodology through transactions CFC rules try to get the profit from a low tax foreign entity and transfer pricing rules try to undo that by bringing the profit back into the parent. They both try to tackle circumstances in which related parties are having most of the profit reported in a low tax foreign entity.

If the government cannot successfully challenge the price used in a transaction then Subpart F might serve as a backdrop to the transfer pricing rules, because if the CFC earns a lot of profit and gets caught in the net of the rules then that money is taxed, even though the price used between related parties was challenge.

Unfortunately, Subpart F rules are not always applicable. Only certain income earned by CFC has to be reported by the parent return. Also if the relation is between a foreign parent and US Subsidiary Subpart F have no relevance whatsoever, because there is no jurisdiction. So good transfer pricing rules are necessary and Subpart F can never replace transfer pricing rules.

The US has been one of few countries that had enforced these kind of rules, which could be beneficial to the shareholders of the US parent. Despite the fact that it will be very difficult to see those kind of rules in other countries, it is advisable to other countries to perfectly establish all these followed strategies in public statements given to the shareholders to allow them to have real expectations over the profits distributions.

IX) Tax Risks and their role in corporate governance

In Mexico and other jurisdictions, the difference between avoidance and evasion, is that the first one involves the use of blackouts of the law and diverse possible interpretations of it, in order to arrange the taxpayers affairs expecting to reduce their tax liability (always using the elements given by the law) and the second involves the misinterpretation of the facts by deliberately omitting the application of the law in any particular transaction looking forward to increase the after tax profits. Thus, in Mexico as in several jurisdictions, tax avoidance will be legal and considered inappropriate by the tax authorities and tax evasion will be illegal and considered a crime by tax and criminal authorities.

If paying taxes now a days makes you a good citizen, no one should be proud of being one. Unfortunately in Mexico, there is a general sensation of respect towards the people that have been able to outwit the Tax Agency. Considering the allocation of risks, anyone with the opportunity would pass an open door that could lead you to a lesser tax burden, even when there is no certainty of what you´ll face in the other side. The only possible obstacle to freely cross that door could be found in the corporate governance policies of the company, consequences in their reputation and the ethical and honest postures of people with the power of decision in the company.

For some directors being ethical will only means being legal. An ethical obligation will not be in any jurisdiction, enforceable. The predominant intention is to pay as little tax as legally possible. In fact, as aforementioned, under the duty of care, the management body could be obliged to make use of aggressive tax strategies as long as they are accomplished within the statute framework.

Let’s face it. The goal of every business is to create profits. As it is well said in business chambers, “the business of business is business”. The only question you may want to ask yourself as a director of a corporation is “am I doing something illegal?” Who would rather be insolvent than unethical? Every business and every shareholder wants to do more with less, and tax planning (without thinking about transfer pricing and tax deferral) could represent a suitable vehicle to do so. Indeed, in times in which every penny counts, to confer too much weight to honesty and ethics in a business decision may be truly distressing or discouraging to the interests of the shareholders.

In spite of these remarks, as we have appointed, other factors can play a role in these decisions. For example, the degree of economically connection with the operation, meaning: does the operation was implemented solely for tax purposes?; the amount of taxation; the controversial of the tax theme; likelihood of future changes in law or court interpretations and, of course, the probability of being sue by the Tax Authorities for the implementation of an agressive transaction. Even when their reason does not respond to any of these factors, there is nothing that can force the directors of the company to accept any aggressive tax planning, provided the statutes of the company give them the chance to disqualify business operations. Any aggressive or simulated tax scheme can be declined by the board on an ethical basis, on a reputational basis and on any defendable basis.

However, making some steps back, the question that we should have been asking is: ¿putting business first in a decision, excludes totally the possibility of having an ethical decision? The use of ethics may not represent a total exclusion of business in your decision. Ethical and business can live together in the same planning strategies field. The business is the principle objective of the company and ethics are only the principles that the corporation should follow to accomplish that objective. Imagine a corporation that wants to make a charitable contribution. This donation will give the corporation good presence before the public. The business decision will deal with doing or not the contribution, and the ethical decision will became relevant when deciding the amount of that contribution. If it is too big, that could represent an increasing of expenses on purpose. So, does that operation will show good corporate governance? There have been some attempts to established limits in these kinds of operations or in the tax planning area by creating some principles like the reasonableness principle in the United States, but unfortunately their applicability is almost impossible.

The use of tactics in the taxation field is never a zero risk bet. Every corporation has to measures the probability of success and the odds of tax authorities taking a different view which could trigger a litigation process. Besides you need to examine the risk and the economic and social (reputation) costs of the court deciding in favor of the tax administration.

As a very good example of how the Tax administration could promote the inclusion of tax risk control into corporate governance it is worth mentioning the effort of Chile in adopting the following approaches:

• Providing opportunities for large corporations to obtain more tax certainty in a transparent and truthful context through real time auditing.
• Implementing a tax audit function based on tax risk assessment processes.
• Respond timely according to real business terms, providing a higher tax certainty to specific transactions .

In some countries there is a special need to particularly calculate the opportunity´s cost of the tax plan, since these countries may apply the law retroactively. Also, it will be necessary to check if in the country exist rules requiring the disclosure of any tax avoidance plans to the tax authorities before submitting their tax return, in order to has the complete picture and be able to foresee the possible demands regarding bad corporate governance.

Finally, regarding the duly corporate governance in tax restructures some specific matters gains relevance. When you consider the relationships between holding companies, subsidiaries and permanent establishments, as we previously launched, a very strong incentive to allocate profits could arise. That kind of operation can lead us to a transfer pricing issue, in detriment of the shareholders of the country carrying the worst part (less profitable) of the operation. There are also some areas in which an alliance between tax and corporate governance is unquestionable. For example, in matters of takeovers, spin offs, mergers and acquisitions.

A very important case, that served to draw the future pages of the relationship between the tax Authorities and the board members is the Dupont Case in the 1950s.

That case was the last time the Internal Revenue Service had a complete victory in challenging a transfer pricing situation.

The business of the Dupont (US Parent) was to sell products and goods. It wanted to distribute those products into Europe. It could have decided to sell them directly to its subsidiaries across Europe but that was not the best tax scenario. Instead, they sold the goods to the Swiss Subsidiary and the Swiss Subsidisary sold, then, the goods across Europe. Thus, the US parent sold the goods to the Swiss Subsidiary at a very low price, allocating little profits in the US and then the Swiss Subsidiary sold the goods at a market price to Europe allocating most of the money in Switzerland which is a low tax jurisdiction.

The IRS was able to show memos and letters from the executives of Dupont explaining how they were going to make up prices to sell the goods to the Swiss Subsidiary so that they could artificially put all the profit in the low tax jurisdiction. That made much easier the work of the IRS to say that those are not appropriate prices. Many executives took this case as a message about not to write down your tax plans in such an explicit language. Therefore now it has been a little bit harder to examine and get favorable resolutions in transfer pricing matters.

Considering all of the above, either with an ethical or unethical tax plan, the manager body of a corporation needs to take every possible scenario into account, in order to avoid any reprisal by ordinary shareholders or tax authorities, because of a bad corporate governance, that as we have seen could represent a detriment in their stock value.

X) Conclusion

In today’s world we are facing a stronger interaction between tax and corporate governance. All the studies made in several international bodies around this matter, like the International Accounting Standards Board, the OCDE and the US Securities and Exchange Commission are a clear proof of its significance in corporate governance.

As we have exposed, it is almost inevitable to not suffering side effects for breaking the corporate governance rulings and tax rules play a major role on the way the companies do their business. Some tax strategies could represent a detriment in the shareholder’s interests, like transfer pricing and tax deferral. Hence, the more transparent is the behavior of the company, the greater the confidence and the lesser the chance of having large and annoying audits, and therefore less uncertainty in the future wealth of the corporation.

In Mexico, as in other countries the major shareholders are not forced to disclose tax strategies to the Tax Administration or to the general public, only to the rest of the board members, provided a statute obligation of doing so. Nevertheless in every tax operation, the board needs to put in balance the Authority´s and the tax adviser’s opinion in the grounds of the corporate governance duties. In this matter, it will be advisable to publish to every shareholder which are the possible new tax scenarios of a proposed policy, in order to give them enough time to decide whether they increases their investments or pull out their capital and to avoid any sue for bad corporate governance.

We analyzed the problem arisen with the application of ethical principles in every business decision and we concluded that they are not mutually excluded, although, the legal aspect of every operation will prevails.

As the OCDE have concluded, tax administrations have a vital role to play in ensuring that the Corporate boards understand that they are ultimately responsible for their business´s tax strategies. The application of tax management in corporate governance should help the company to transmit confidence and transparency in every transaction, which could be translated in more investment of shareholders.