Tax Risk Management and Board Responsibility - International Tax ...

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The results of the survey show that only 14 % of the companies included in the research had board-approved tax objectives. Regular formal reviews of the tax department by internal audit were carried out in only 22% of the companies. Only 10% of the tax departments felt that they were widely understood outside the tax function. 19 The reasons for the contradiction between the awareness of the board and the lack of implementation are many. It is mainly caused by the increasing complexity of tax law as well as increasing reporting requirements that leave less time to consider strategic issues and debate the big picture. A lack of expert staff makes change even more difficult. Finally there is a lack of understanding on how the world’s tax authorities are changing their approaches. 2 Tax risk attitudes versus actual behaviour When informally asked about their risk appetites the majority of the board members questioned would designate themselves ‘conservative’. Only very few would see themselves as ‘very conservative’, meaning that they would do nothing to provoke the tax authorities. The majority require a legal opinion comfort of more than 50% on their tax planning. Companies are mainly willing to defend their tax planning in court, but none of the board members questioned think a reputational risk is acceptable. The research suggests also that attitudes have shifted towards the risk-averse end of the spectrum. 20 Surprisingly there is a gap between tax risk attitudes and actual behaviour as the results of legal proceedings from tax authorities often show. Since that is the case the board members are facing significant problems due to the fact that the company’s behaviour does not reflect their attitudes and might trigger inquiries by tax authorities. Tax authorities have shifted to a risk-oriented approach to identify non-compliant taxpayers and look especially at questions like: Is a clear direction from the board given as regards tax matters? Does the audit committee request information on tax issues and is adequate supervision in place? Have there been compliance issues in the past? Is there 19 KPMG’s Wired Tax survey 2004 and 2006 20 KPMG’s Wired Tax survey 2004 and 2006 Page 10 / 25
extraordinary pressure from investors to deliver results and are directors or management under pressure to achieve personal goals? 21 A key challenge is to ensure that the risk attitude of the board is reflected in the company’s actual behaviour and in the mindset of everybody involved. There cannot be two policies: one for the board and one for the tax department. 3 Managing tax risks – what is the challenge for the board? Tax risks include the risk of overpaying taxes or of paying less tax than legally required. Reputational damage resulting from such errors can incur additional costs which are hard to measure. Errors in assessing the tax effects of transactions can lead to wrong business decisions. For many businesses tax is a cost factor that can be important for its competitiveness. To summarise: tax risks mainly consist of compliance risks, transactional risks, and operational and reputational risks 22 . These are good reasons for the board to be involved in tax risk management. The goal for the board is to implement a tax risk management process that has the right balance between risk and opportunity. The business processes need to ensure that taxes are not overpaid but that legal obligations are fulfilled. Going forward, organizations will need a dual focus: (1) sustaining an ongoing assessment process for compliance and (2) balancing risk and controls while identifying and pursuing process improvement opportunities to better the business. 23 The question of how to implement a tax risk management system that ensures this objective is met will be addressed in the following chapter. 21 KPMG Tax is in the Boardroom, A Discussion Paper, 2004 22 KPMG Tax in the Boardroom, A Discussion Paper, 2004, Appendix II 23 KPMG The Compliance Journey Balancing Risk and Controls with Business Improvement, 2004 Page 11 / 25
Page 1 and 2: Tax Risk Management and Board Respo
Page 3 and 4: I. Introduction Is the board respon
Page 5 and 6: II. The changing Landscape - Why ha
Page 7 and 8: usiness transactions such as merger
Page 9: III. Tax is in the boardroom - What
Page 13 and 14: made on how aggressive tax manageme
Page 15 and 16: department needs to be in line with
Page 17 and 18: Processes to raise awareness of tax
Page 19 and 20: Direction The tax philosophy has to
Page 21 and 22: Control It is the responsibility of
Page 23 and 24: VI. Future developments Stakeholder
Page 25: VII. Conclusion The board is respon

Tax Risk Management and Board Responsibility - International Tax ...

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