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

I. Introduction
Is the board responsible for tax? This question might have caused interesting discussions
among board members a few years ago. Statements such as “It’s a CFO issue”
and “tax is under control” might quite possibly have been among the responses. Taxation
gives rise to complex, multi-faceted problems in every country in the world, that can only
be dealt with by tax specialists. This argument used to be met with some sympathy,
especially by members of the public who were familiar with the complexities of filing their
own income tax returns every year. But the question remained: how can an issue that might
encourage a corporate reorganisation or influence the payment of dividends to
shareholders, or which might affect a merger or take-over, possibly stay out of the board
room?
Particularly in the wake of corporate scandals like Enron and WorldCom, or the
collapse of the new economy in Germany it has become clear that there is a need for the
board to set up a transparent governance system throughout its company. Legislative
requirements as regards internal control systems have increased significantly, as well as
other initiatives from governmental and non-governmental bodies.
Stakeholders are showing increasing interest in obtaining comprehensive information on
how tax risk management and corporate conduct are implemented and supervised.
Financial key performance indicators used to be the most important measures for the
performance of companies and therefore “the lower the tax charge the better” was the
simple rule. Now concepts of sustainability and the management of long-term value added
are assuming increased importance. The value of tax avoidance strategies is increasingly in
doubt especially when taking the potential damage to reputation into account. Stakeholders
demand sufficient long-term information on how tax risks are being controlled, the tax risk
management system is implemented and the corporate conduct is supervised.
In theory there is no doubt that tax risk management is part of the corporate governance
system and therefore it is the responsibility of the whole board.
From every theory arise a number of practical questions. Are the board members aware
of their responsibility for tax risk management? What impact does tax risk management
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