Influence, Prevention and Management of Tax Risks

Introduction

The tax landscape for an organisation keeps changing, more so due to the world becoming more interconnected and digitalized. Hence, the tax policies may not be up to par with the increase in globalisation and business developments creating various tax risks for an organisation. It is important for an organisation to prevent, manage and resolute disputes to protect themselves from today’s biggest tax risks.

Tax-related Reputational risk

Tax-related Reputational risk emerges from an organisation’s actions if they are open to the public. Due to the digital advancement, information about an organisation can be distributed to the public in seconds, most importantly in case of complicated tax arrangements. This can be through the internet or 24 hours news coverage where “complex issues” can be “brutally summarised”. A company’s reputation can be damaged greatly through this even before they have an opportunity to clarify their position. Therefore, public opinion is powerful regardless of whether it is based off an inaccurate information.

According to Deloitte 2018, the most important drivers of reputational risks were related to “ethics and integrity… security, and products and services.” Companies are being held responsible for the actions of brokers, suppliers and other comparable associates so third party relationship risk is emerging quickly. This clarifies that the reputation risk is a “by-product” or an inevitable secondary result of another business risk. Therefore, to prevent this critical issue, “Understanding the interconnectivity of reputation risk is essential”.

To manage tax-related reputational risk in an interconnected and digitalized world, organisation can control the level of interest the public has in their tax profile. This involves intently monitoring media coverage of their organisation and may include tracking of social networking channels that may not have been as important to their tax function. The company should also watch over legislative developments in order to recognise the possibility of new tax disclosure requirements and obligations. An example includes the BEPS Action 12 which “Require taxpayers to disclose their aggressive tax-planning arrangements”.

Another measure to preventing regulation risk is by making sure that the internal stakeholders are communicating well with the external stakeholders where they effectively communicate about the organisation tax policies and profile. The tax function must have the desire to approach risk officers, public affairs, board of directors etc. internally. This is done with the goal of securing an agreement on the impact of reputational risk. As media channels mostly target the tax related aspects when discussing about any company, companies will need to be prepared to give constructive feedback if inquired.

Tax-related Operational risk

Risks that arise inside an organisation from technology, people and processes are defined as operational tax risk. The types of tax risk associated will differ depending on the types of operations run by a business. This risk includes heavily relying on data originating from foreign jurisdictions, most of which can only be provided by finance personnel using various software packages. As the world becomes more interconnected, globalisation of trade increases causing taxable presence in the country where they are operating.

To prevent and maintain tax-related operational risk, the organisation will need to ensure that their technology, people and processes are functioning, working and most importantly improving effectively. There will need to be an effective framework in place for their digital tax administration, communications and tax internal control along with a strong tax governance. An organisation’s business risk must be in par with their risk tolerance and their policies for tax. Also, to meet the increased transparency demands, policy statements must be reviewed e.g. reporting country-by-country.

To successfully manage operational tax risk, detailed and tax-sensitized data is vital. The organisation can improve their data quality by creating a data management strategy that is effective. For example, supporting the tax lifecycle by using a tax technology framework. Furthermore, companies can enhance their performance management to ensure quality and data integrity. This can be done by revising finance and tax role descriptions to explicitly include responsibility.

Moreover, as the world is globally interconnected, it is important for businesses to create global roles. Organisations can ensure transparency and accountability within their individual functions by organising globally. This minimises tax-based operational risk by improving the relationship objectives between tax and finance. To successfully prevent operational risk, companies should have a clear strategy for their tax technology that helps the organisation boost their technological infrastructure and investments.

Companies can recruit people in regional and global roles who will be able to work effectively with other business functions and have the skills to work together with external stakeholders, public and private.

Tax –related Legislative risk

Legislation or regulations imposed by the government can significantly change the business prospects of an organisation, this potential risk is known as legislative risk. For a business in an interconnected world, a change in the legislation may deter them from performing well. An example would be the government imposing tax on an industry that may discourage investors.

As the world becomes more interconnected globally, governments will need to ensure that the current business model is reflected on the global tax practices. This directly impacts organisation as there are direct changes being made to tax legislation. For instance, the OECD is “Reforming international tax rules”. The way multinationals are taxed would be changed through this new regime.

Due the spread of media, information about tax operations of a company can be easily obtained by the public and the government. For example, although tax avoidance is legal and compliant with the law, in the eye of the public it might be seen as abusive causing a negative impact of the company’s reputation. This may cause the government to implement stricter tax legislations. If an organisation fails to comply with these legislations, it may lead to financial loss which poses a great threat to the organisation’s well-being.

To prevent legislative tax risk, an organisation can take a global approach and implement a framework that includes tax audit management and tax controversy management reporting. These global approach can reduce audit risk, create higher control over audits concerning sensitive issues and also increase knowledge sharing. It enables the organisation to maintain and be up to date with the latest information on tax authorities and any future risk associated with legislative risks. The organisation can also impose Alternative Dispute Resolution (ADR) mechanisms where they can work towards creating a better relationship with the tax authorities.

Furthermore, an organisation can ensure that their tax activities are carried out by professional expert team who ensure that they are in line with the tax legislations. This can be done by applying procedures and systems effectively. For example, creating a risk map that identifies tax risks that could result from tax policies that are applied, instability of legal tax or any controversies around the application of the legislations.

Tax-related Enforcement risk

Enforcement risk relates to the hazard towards an organisation’s reputational or financial standing resulting from codes of conduct, violation of laws and regulations.

From a tax-related point of view, enforcement risk is the risk that relates to an organisation being able to meet its tax compliance obligations. Tax-related enforcement risk addresses the overall risks in the processes, procedures and systems the company will face while preparing and submitting their tax returns. This risk therefore associates with the implications of taking sensitive tax information from the accounting system, the risks involved in assuring that the processes of tax compliance analysis are up to date and based on the latest tax law, whether the technology being used is efficient and proper.

Due to digital advancement, new compliance and ethical risks are created each day. Moreover with the global recent recession, companies are forced to examine their resources and budgets closely. This means that companies are pressured to work with tight resources along with new obligatory regulations. The events that can give a rise to this risk includes lack of proper management, insufficient resources, data integrity issues and legislative changes.

To prevent tax-related enforcement risk, it is vital that the organisation recognises the range of tax returns that are required and that withholding sales taxes/VAT may be more crucial and have higher risk compared to corporate income tax.

Moreover, the organisation can also implement internal control which helps achieve compliance with the regulations and applicable laws. It will also improves reliability in financial reporting as it ensures that the people in the organisation will be able to understand the information that will be needed to control risk in an organisation.

Conclusion

Overall, organisations will inevitably have to face these tax risks as long as the digital and interconnected world prevails. To conclude, as businesses expand into new markets, the government, public and tax authorities will demand and be able to access tax affairs of organisations more so than ever before. Therefore, it is important for any organisation to identify, prevent and manage these risks to survive and run effectively amidst the ever changing tax landscape.