An organisation’s governance culture has a direct impact on the efficacy of its tax control framework. Tax risk often arises from business decisions that don’t involve tax people, and stretches far beyond an organisation’s annual compliance obligations. Changing regulations create challenges, and new technology is making it easier for tax authorities to monitor business behaviour. It is therefore increasingly important that business leaders understand where their company sits on the tax risk curve and how each part of their business can impact this.
So, where does your company sit on the tax risk curve? It may not be possible or even desirable to reduce tax risk to zero, given the changing landscape, but businesses need to understand their exposure. Leaders can then ensure all tax governance and risk management frameworks are aligned with their wider governance framework and embedded in the company culture.
There are three key reasons for doing this. First, more tax authorities globally are embedding the concept of tax control frameworks in their regulations and using them in their auditing. If you are not prepared, an audit can be more time-consuming and potentially costly.
Second, there is growing public and regulatory pressure to increase transparency in tax affairs. Having transparency built into the in-house tax control framework helps a business spot red flags and mitigate damage to its reputation.
Third, tax authorities are becoming increasingly digitally savvy, enabling them to find anomalies and errors across large data sets. Businesses should be able to match that capability.
While navigating this ‘perfect storm’, organisations often need to consider their customers’ business or tax risk tolerance, in addition to the impact on their own tax affairs.
Tax control frameworks and transparency
Tax authorities are increasingly focussed on identifying control weaknesses that highlight a systemic problem in tax data or processes. Equipped with real-time data and an analytics tool kit, they can identify issues efficiently, before even you do.
Having a strong tax control framework is the main defence for organisations. The day-to-day reality of being fully compliant in today’s environment, however, can be challenging. The data you need, for example, is not always in the format it should be, and standardised processes often need tweaking to make exceptions that the tax guidelines may not cover.
If organisations have strong tax controls in place, they are in a better position to accurately assess their level of compliance. And if these controls are based on a strong governance culture, it will be easier for business leaders to navigate the areas of law that are open to interpretation.
In parallel to this is greater pressure for organisations to be more transparent about their business models and tax affairs. The increased call for transparency is forcing organisations to state publicly that they are fully compliant with laws and regulations. A tax control framework is key to delivering consistent messages across your transparency statements and in your tax reporting.
Prioritising key areas
When businesses develop their governance frameworks, they often have to make choices and prioritise what they can do in house and what can be outsourced. Developing a clear sourcing strategy can help manage risk and ensure that the right work is done by the right people with the right skill sets. This might mean your shared service centre takes on tax responsibilities, as well as other more commonly outsourced functions. Upskilling staff may be required, or you might choose to transfer compliance and risk management to a managed service contract.
Changes in your strategy need to follow a review of your current processes and controls. You can then assess what to keep in house, what to outsource, and the training requirements your team might need.
Technology is an enabler. It’s not simply a means of freeing up staff by automating manual tasks that are repetitive or subject to human error. It is also a way to embed tax controls into your processes. Any technology solution will also need to be robust, and employees will need to have the skills to ensure it works consistently and securely.
Implementing all these strategies is not a guaranteed pathway to zero tax risk, particularly given the level of interpretation of tax rules and the way tax laws are updated and amended. Commercial sense would prevent most from investing in technology to keep track of every change in tax rules or to assign people to keep on top of every tax law twist, even when taking into account the impact of tax risk.
Managing and minimising the key risks should, therefore, be the goal. This involves understanding where the risks currently are and where the risk tolerance of the organisation should require them to be.
A heatmap approach for prioritising tax risk and its impact on the organisation can highlight to internal stakeholders the risk areas that require investment to reduce exposure. Upgrading the tax governance and control framework with a view towards transparency and technology will help bridge any maturity gap. While there is never a zero tax risk position, your organisation can manage risk to the level that fits within its governance culture.
