Arguably, the time has never been riper for tax controversy.Nor has the tax enforcement landscape been more difficult to negotiate.More than ever, companies must take care that their own tax risk management models are sufficiently mature, robust and embedded to ensure that the risk of tax controversy, like any other business risk, is subject to consistent control and reporting at the appropriate levels.
There are a number of factors that are working together to make the tax environment a trickier one to negotiate.These include the commitment on the part of tax administrations to join forces (evidenced by the Convention Administrative Assistance in Tax Matters and the establishment of ATAF)(Africa Tax Administration Forum), the sharing of taxpayer data and information, and the increase in joint audits.The increased collaboration between tax administrations and the rapid and tangible rise in enforcement is attributable in large part to the financial crisis with governments being forced to source revenue to balance their deficits.
A recent Ernst & Young survey found that 75% of tax directors in large multinationals have experienced a rise in the aggressiveness of tax audits.Supporting this is the findings of another survey on global compliance and reporting where, in the past 12 months, the following percentage of Fortune 500 were experiencing:
•Unplanned tax audits - 64%
•Unexpected tax assessments - 45%
•Penalties - 42%
•Business interruption due to lack of compliance - 17%
A subtle but important change has also taken place in the social role of companies and the way they manage their tax obligations.As some commentators have pointed out, tax is no longer only a cost of doing business, but has, to a degree, become a social business card.Good corporate citizenship means paying – and being seen to pay – a fair share of tax.
The environment shift is compounded by the accelerated pace of new regulatory and reporting requirements and the increasingly complex and subjective nature of tax legislation in many countries.This together with the evolving business models and transforming finance functions is presenting global business with new opportunities to better optimise efficiency, control and value. Historic models are no longer sufficient to support the needs of the new business environment.
When looking at a business as a whole, tax-related activity is often dealt with by departments other than the tax department (employment, indirect and operational taxes) and will reside outside the tax department’s remit within the various financial (procure to pay, order to cash, inventory management, payroll, fixed assets and financial statement closure process) and operational processes (supply chain management, customer management, human resources, operations and infrastructure) of the organisation.As the key tax processes relating to these taxes are not always owned by the tax department and often managed within the wider business community, effective tax risk management can be challenging.
Many companies are aware that their tax risk management models need to be taken to the next level of maturity so as to operate more effectively in today’s environment.In this regard, the first point to recognise is the fundamental link between the tax risk and corporate governance.
It is not sustainable for the tax risk to be shouldered by tax directors or tax departments; the trend for companies to embed tax risk more securely within their corporate governance is increasing.According to the Ernst & Young survey mentioned above, the number of companies applying greater internal audit scrutiny of tax controls and processes has increased nearly 30% since 2006.Leading organisations have or are developing, often in line with finance transformations, tax control frameworks that are appropriate for their organisations and support their current tax risk management processes.
The control frameworks being developed address three key areas:
•Governance: establishing an effective governance framework across the organisation, function activities and business processes in terms of tax control.
•People: having appropriately qualified and skilled resources to manage the tax function.
•Methods and practices: building methods and practices to support efficient and effective ways of implementing, monitoring and reporting tax risk within the constraints of a clearly defined tax control framework.
An effective tax control framework allows an organisation to:
•Consider and document the key factors impacting the tax control environment.
•Understand the implications of each factor in relation to business strategy, objectives and obligations to key stakeholders.
•Decide where it wishes to be in terms of tax control maturity inrelation to each factor at any given point in time.
•Implement actions to remediate any likelihood of failure to meet itsstrategy, objectives and obligations.
•Regularly assess its performance against each factor, taking into consideration the industry, markets and geographical areas in which the organisation operates.
•Develop efficient and effective tax risk reporting to the audit/risk committee and board.
•Integrate tax risk into the enterprise risk management of the organisation.
Such an approach paves the way for decisions to be made and actions to be taken that are aligned with the group’s overall strategy and business objectives, enhancing operational agility and performance.Given the current existing tax risk landscape, an organisation’s ability to implement and maintain leading tax risk management processes requires ongoing commitment and an approach to tax risk management that is risk-based, control-enabled and performance-led.An efficient and effective tax control framework supports the tax risk management of the organisation in a sustainable manner, allowing tax professionals within the organisation to be forward looking in the mitigation and control of tax risk.
Source: By Darly Blakeway (TaxTALK)