The increased importance of tax risk management

By Jacques van Wyk, JGL Forensic Services, member IAFEI Technical Committee. From the IAFEI December 2020 Quarterly Bulletin

Financial crises, well-documented corporate collapses and creative accounting practices are taking their toll on the general public’s trust in our institutions.

Customers, communities and regulators are increasingly expecting more, and the bar continues to lift on what a good corporate citizen entails. The complexity of tax legislation is adjusting to the complexity of international trade, and this is placing a result in compliance burden on companies.

One of the biggest issues is that tax law is not standardized across all countries and continents. As a multinational company, you need local tax expertise in every country in which you operate, yet you have to consolidate your financials in your home country. This is where it all becomes a little tricky.

Just as one man’s trash is another man’s treasure, one countries tax compliance could be another’s tax structure. Thanks to the various tax treaties between countries, where relevant information is exchanged between tax authorities, non-compliance in one country may well have a knock-on effect in another period

Even traditional tax havens are now coming under the scrutiny of some of the world’s more prominent countries. So, if your business has its head office in a tax haven, you might now find yourself the target of much-unwanted attention. You might even end up being the subject of an intense investigation, accused of base erosion and profit stripping.

This could then lead to additional scrutiny by other countries, and the risk of reputational damage if your local company is branded a tax evader or not paying what is due, is significant.

E-Commerce, virtual trade, decentralized operations, cryptocurrencies and so on, resulting more dynamic business and economic trends. We’re talking about digital economies, blockchain, e-business and AI to mention just a few.

The creators of tax legislation could never have envisioned the multitude of ways in which transactions are concluded today. Every new development presents new challenges for tax advisors, revenue authorities and multinational enterprises (MNEs) alike.

Because the global tax landscape is growing ever more contentious and volatile, we are seeing more incidents of controversy and tax disputes. Wide-reaching tax reforms in the US and EU, not to mention the plethora of complicated tax rules relating to Brexit, all have far-reaching implications for MNEs.

this constantly changing tax landscape and the rapid pace of changes to tax laws means companies are always aiming at a moving target when it comes to tax compliance. Get it wrong, and businesses find themselves slapped with insanely costly penal taxes and interest payments. Investors too are quick to punish a company for any tax breaches – intentional or otherwise.

Many tax authorities are making it mandatory for large companies to be more transparent about the amount of tax paid and their tax strategies. Board members too can no longer hide behind their accounting teams. They are expected to have an understanding of, and take responsibility for, the tax risks of the companies for whom they act. Managers and directors at the top of the food chain may even find their jobs at risk as a result of willful noncompliance.

It is true that risk is an inherent part of any business. Managing risk is a part for everyone’s role, and a core responsibility of every company. But tax compliance has actually now become a corporate governance issue, and unprepared companies and executives face severe reputational and financial consequences if their compliance is found wanting.

As a result, tax risk management and tax compliance are no longer issues top managers can afford to delegate. They have to be tackled at a strategic level.

Thanks to dramatic changes in the tax landscape for corporate taxpayers in recent years, tax authorities are becoming more assertive against those businesses that transgress. Emboldened by high-profile successes against deliberate and aggressive tax evasion, and armed with new powers bestowed on them by global governments, they are becoming ever more willing to pursue businesses for the slightest perceived offenses.

With the world increasingly concerned about who is and who isn’t paying their fair share of tax, both multinational corporates and tax authorities are continually worrying about tax governance.

What does that actually look like?

The efficacy of any companies tax control framework is directly impacted by its governance culture. Tax risk is often created by decisions made that don’t even involve tax people! This is why it’s critically important that leadership understands that every single transaction at the transaction date affects their tax risk profile.

Of course, it’s not usually reasonable, feasible or even desirable to reduce tax to zero. But the more businesses understand about their potential exposure, the better period in this way, they can ensure all necessary risk management and tax governance frameworks are not only in place but also aligned with the company’s wider governance framework.

Developing a tax control framework

A Tax Control Framework has five essential elements:

Appetite – how much risk are you prepared to take?

Identification – what risks are you trying to manage?

Management – how do you plan to manage those risks?

Responsibility – who needs to do what to make sure those risks are managed?

Governance- how is the whole process monitored and overseen?

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