Tax risk management – cutting through the complexity
20 October 2015
Posted by: Author: Joubert Botha
Author: Joubert Botha (KPMG)
Joubert Botha argues
for a consistent methodology and approach to tax process management with
clarity on accountability and responsibility between the tax function and the
A lot has been published, and even more said, about the importance of
tax risk management (TRM), the advantages of TRM and the importance of a good
TRM framework that should be embedded into an organisation’s corporate
governance regime. It has been said that TRM can even bring a competitive
advantage to an organisation:
"An interesting point is
made; namely that TRM should not be undertaken purely to satisfy the
expectations of revenue authorities, but also because TRM could bring
competitive advantages. Those that succeed will incorporate tax risk management
into the core of their business decisions – from the boardroom and audit
committee agendas to the operations on the ground in various tax jurisdictions.
Getting global tax risk management wrong can mean material financial and
reputational damage. Getting it right can yield significant competitive
The Australian Tax Office states:
"Managing your tax risk well
is core to good corporate governance, particularly if you are operating in
…and the importance of TRM has been explained as:
"The need to address risk management at all in a
tax context arises due to the inherent indeterminacy of tax laws, which give
rise to uncertainty around their interpretation. Where there is uncertainty,
there is a risk to be quantified and managed, which ultimately links risk
management with degrees of tax aggressiveness and attitudes to the law.3”
Not a lot is said, however,
about what TRM really is and the different elements of the tax risk management
An appropriate definition for
TRM could be said to be:
The proactive management of the tax life cycle
as a business risk through the implementation of embedded strategies, policies
The above definition may, on
the face of it, appear very simple; however, there are a number of key
fundamental aspects. Following below is an analysis of the fundamental aspects
of this definition.
TRM needs to be proactive
Tax is often considered too
late during a transaction or not considered at all. It is imperative to
implement tax strategies and policies in order to be able to proactively identify
legislative changes, changes to tax risks due to the ever changing business
environment, and tax opportunities.
The tax strategy should set
out the strategic direction and objectives around taxes. This could, for
example, include the way in which taxes are managed to ensure legal compliance
(the right amount of tax being paid) while creating sustainable shareholder value
and keeping in line with ethical and philosophical principles. The tax strategy
should balance commercial imperatives with strategic decisions; it is therefore
important that the tax strategy is aligned with the overall business strategy
and company philosophy and objectives.
Given the importance of
transparency and reputation, more and more companies are communicating the tax
strategy, in one form or another, to external stakeholders.
The tax policies should be aligned with the tax
strategy. The policy should provide clear guidance on the principles that
govern the approach to tax, the tax governance framework, and the tax
delegation authority. The policy could inter
alia include aspects such as:
- Tax coverage
- Accountability, roles and responsibility
- Tax review policy
- Documentation policy
- Technology policy
- Recruitment and training policy
- Use of external advisors
Awareness of taxes and TRM
throughout the organisation are important to ensure a proactive approach to
tax. The tax policy should be clearly communicated within the organisation in
order to ensure not only organisational awareness but also consistency and
clarity in the treatment and management of taxes throughout the organisation.
It is therefore important that tax management includes an organisation-wide
communication plan with clear tax and tax function objectives.
The tax strategy and policy should be approved
and supported by the highest authorities within the organisation, for example,
the board and executive committees.
Accountability in terms of
the enforcement of the practical application of the tax strategy and policy is
key, as what is written on paper should be applied in practice.
Management of the tax life cycle
The responsibility to manage taxes is
substantial, and the tax charge is only a small component of the overall tax
management responsibilities of the tax function. Modern tax functions have
evolved and their responsibilities are no longer limited to compliance and the
calculation of the tax charge in the Annual Financial Statements (AFS). Their
responsibilities encompass a tax governance framework that will ensure that all
taxes are managed in accordance with the relevant tax laws in place at any
point in time.
The tax life cycle should thus be managed
through a well-established tax governance framework that includes documented
processes and procedures. These processes and procedures should include the
identification of key activities, risks and controls that are in place to
detect and prevent risks. An important focus area of the governance framework
is the operational aspects of the tax life cycle, which sets the basis for how
tax is managed within the tax life cycle.
The tax life cycle can be illustrated as
All transactions entered into will result in either a direct or indirect
tax implication or a combination of both. Tax management requires tax involvement
from the start of a transaction (negotiation) to the conclusion of the
Proper processes and procedures should be
implemented in order to ensure that:
- A detailed tax evaluation is performed prior to
entering into critical and significant transactions. Tax management is not only
the evaluation of the tax implications and tax planning aspects of the
transaction (for example cost, technical, legal, operational and reputational),
although these are very important elements, but also wider aspects such as
evaluating which transactions require tax involvement based on size,
complexity, frequency and risk, which transactions require internal or external
opinions, and rulings etc.
- Transactions are in line with the tax strategy
and policy of the organisation.
As stated earlier, organisational awareness
around taxes is important. It is therefore vital that the tax governance
framework includes processes and procedures to create an awareness of tax
throughout the organisation. This will ensure that tax is proactively
considered on all levels within the organisation prior to entering into a
Processing of transactions
All transactions are processed in the accounting
records utilising accounting and financial systems. There are various
technological solutions to ensure that transactions are effectively and
efficiently processed. The technological solutions should be "tax sensitised”
and as far as possible be linked to tax-management software to create an
end-to-end tax information system. This system should support automation and a
clear audit trail.
In the case of recurring transactions (daily,
weekly, monthly) such as sales, procurement and payments, there are usually
well-established financial processes and procedures to ensure that the
transactions are completely and accurately processed. These financial processes
and procedures often lack consideration for the tax implications. It is
important that proper tax management controls and procedures are implemented as
part of the financial processes and procedures to ensure that transactions are
accurately and completely processed in line with the tax principles as set out
in the tax strategy and policy. Tax technology tools and software can play an
important role in controlling, monitoring and reviewing these transactions.
Preventative and detection controls are key to monitoring and reviewing what
has been implemented to ensure it continues to work as intended.
It is often found that a detailed tax
investigation is performed and tax opinions are obtained prior to entering into
a transaction; however, proper implementation and post-implementation reviews
are often not performed. It is important that the implementation of the
transaction is aligned with the agreements, the opinions, and conclusions
reached. Proper controls and procedures should be implemented to ensure that
transactions are accurately and completely processed in conformity with the tax
A critical success factor is to create and
maintain an enterprise-wide information system and performance framework that
will enable the organisation to assess and monitor the effectiveness and
efficiency of the ‘end-to-end’ tax processes in line with the rest of the
The transaction and the related tax are recorded
in the AFS
The accounting records are ultimately reflected
and disclosed in the AFS. It is important to ensure that the tax implications
relating to a transaction are accurately and completely calculated and
ultimately correctly disclosed in the AFS. Tax controls and processes should
not only include the calculation of the taxes but also the identification of
key transactions that impacts the taxes calculated, the review of the tax
treatment, and the disclosure.
It is important to obtain clarity over the coverage of the tax within
the organisation: which taxes are paid by the organisation, how are they
recorded and accounted for, and for which taxes the tax function is
accountable. The tax function (and those with tax responsibilities outside the
tax function or a material interface or input into tax) should recognise their
roles and responsibilities and have the required technical and managerial
skills to deliver these responsibilities. The training and development needs of
the tax team, including those with tax responsibilities outside the tax
function or a material interface or input into tax, should be managed and
monitored. It is necessary that the team has a detailed career-and-development
structure and is properly rewarded, not neglecting a robust succession plan.
Reporting to the board and the audit committee
Clarity over the tax information required will
ensure that the needs of the stakeholders are met as far as tax reporting is
concerned. Without the correct information being available, it is less likely
that the tax function will be able to meet the key performance indicators for
its stakeholders (both internal, the executive and the board, and external, the
revenue authorities and shareholders).
Communication with the Revenue Authorities
There are various ways in which organisations
communicate with the Revenue Authorities and vice versa:
- Submission of returns: The completion of the tax
return is based on the information as reflected in the financial systems of the
organisation, and includes the processing of the individual transactions. The
stronger the tax governance framework, the more confidence there will be in the
information disclosed and submitted to the Revenue Authorities. Technology and
tools (for example, tax-reporting and tax-calculation tools) can play a major
role in assisting with the effective and efficient completion and submission of
- Assessments received: A timely and consistent
approach should be followed to review assessments and reconcile the assessments
to the returns submitted and the tax information reported and disclosed in the
AFS. Where necessary, objections should be submitted in timely manner.
- Queries and audits: Often queries and audits are
received throughout the organisation and not necessarily by the tax function.
This tends to result in the queries and audits not being addressed at the right
level within the organisation or not addressed in a consistent or timely
manner. Organisational awareness is critical to ensure that all queries and
audits are directed to the right person within the organisation and are in line
with the tax policy to ensure a consistent methodology.
be managed as a business risk
Tax should not be disconnected from the business
operations. It is important that tax is managed in the same way that an
organisation would, for example, manage its stock or its debtors. Accordingly
tax should receive the same degree of attention compared to any other business
risk within the organisation.
strategies, policies and procedures
Tax strategies, policies and procedures cannot
operate in isolation from the financial and business strategies and policies of
the organisation. These strategies, policies and procedures need to be aligned
and embedded within the organisation to form part of the organisation’s wider
strategies, policies and governance framework.
A consistent methodology and approach to tax
process management across the organisation should be adopted, with clarity on
accountability and responsibility between the tax function and the
organisation. Ideally, the processes and controls should be standardised, harmonised
and automated to provide confidence in the underlying tax numbers. A common
testing, monitoring and validation approach should be introduced to ensure
effective management, continuous improvement and independent verification of
the key tax processes both within and outside the tax function.
The amount of tax managed by an organisation is
significant and in the absence of an appropriate tax risk management framework,
the potential of penalties and interest on the underpayment of taxes may be
tax function will be responsible to both manage tax risk and to create value.
It will never be possible to discharge tax risk in totality; however, the
implementation of a tax risk management framework will provide a level of
acceptable risk. In this regard it is noted that:
"Tax risk management is not necessarily about
minimising tax risk but rather about a determination of the level of risk that
is acceptable to the particular corporation and putting in place processes and
procedures that ensure tax risks do not exceed acceptable levels.”4
other hand, the implementation of a tax risk management framework will create
and add value by allowing the tax function to focus its resources on value
creation initiatives such as:
- Improved communication internally and
externally, with the Revenue Authorities, boards, audit committees, the broader
- Tax consequences of proposed transactions being
addressed timeously and proactively.
- Proactive identification and addressing of key
tax risks, changes to the tax legislation, and tax planning opportunities.
- Increased protection of the organisation’s reputation and reduced risk
of negative press coverage with regard to taxes.
- Improved and focused relationship-building with tax authorities,
including pro-active relationship management.
1 "TaxTalk issue
51 at p. 53. and Governance and risk in a global economy"
2 "Large business
and tax compliance publication” at par. 3 under "Good tax governance – Sound tax-risk management processes”
3 Emer Mulligan and Lynne Oates, "Tax Risk Management: Evidence from the US”
4 Catriona Lavermicocca, "Managing tax risk and compliance”, the tax specialist, Volume 13,
No 2, October 2009, at p. 69
This article first appeared on the September/October 2015 edition on Tax Talk.