Tax risk management

Where does tax risk occur?

Tax risk occurs in the following key areas:

• Transactional risk – concerns specific transactions, restructuring projects and reorganisations
• Operational risk – underlying risks of applying tax laws, regulations and decisions to the everyday business operations of a company
• Compliance risk – associated with meeting an organisation's compliance obligations
• Financial accounting risk – e.g. Sarbanes-Oxley Section 404 requirements

Tax risk occurs in all companies and so the need to manage this risk is universal. However, some companies are subject to additional risk – in particular those:

• Which allow their business units a high degree of autonomy where tax is concerned
• That are undergoing an acquisition or transaction
• With open enquiries with regulatory authorities
• Converting to IFRS
• In the financial services industry where front office operations carry additional risk
• With a newly appointed CFO or head of tax
• With share incentive plans

What is tax risk management?

Broadly, tax risk management involves addressing three key questions:

How do I determine a suitable tax risk policy and what level of risk is acceptable?

A good place to start is with the company's broader business strategy. For example, look at the overall risk, social responsibility, brand and reputation strategies – what do they tell you about the company's appetite for risk? What are the company's objectives and those of its current and future stakeholders including investors? What emphasis is placed on cost reduction or and reputation? These are just a few important considerations - a tax risk policy which is not aligned with these wider business needs can cause problems down the line.

Another thing to remember is that tax risk management is not necessarily about minimising risk. Businesses make profits by taking risks and a no-risk strategy is probably neither cost effective nor right for any business. Your tax risk management policy therefore needs to weigh up the value that can be achieved by taking risks, the costs that can be saved by reducing risks, and the resources needed to manage both the upside opportunities and the downside risks.

What is my current tax risk position in relation to my chosen risk policy?

This involves looking at the tax risks (compliance and planning) inherent in your business operations, tax planning and compliance obligations and at the associated controls. This includes identifying:

• Where the risks occur. Who are the key creators of tax risk in the business? This includes those outside of the finance function who undertake activities which have a tax impact (eg procurement and HR).
• What the risks are. What current tax (planning and compliance) risks are avoidable or not in keeping with the company's chosen tax risk policy?

What controls, communication and monitoring procedures do I need to put in place?

There are numerous considerations. Here are but a few of the questions you might ask:

• Are risk control procedures in place?
• Is it clear to the business when they need to consult the tax function and vice versa?
• Are control activities communicated and embedded throughout the organisation?
• Is it clear who has responsibility for individual control activities?
• Are you properly supporting those who have a risk mitigation role?
• Is there a process in place to ensure that tax risk management control activities are operating effectively?

How can we support you?

Our Tax risk services specialists can help:

• Formulate and document a suitable tax risk policy
• Evaluate your current tax risk position and identify specific existing and potential risks
• Identify and implementing relevant controls and processes

Why not contact us to find out more?

You can either contact the specialists listed on this page, or: