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Taxation is an act, process or means by which the sovereign (independent state) through its law-making body (legislative branch of the government) makes demand for revenue in order to support their existence and carry out its legitimate objectives (Scribd, 2011). It is imposed in different types of levies: capital gains tax, income tax, inheritance tax, VAT, corporate tax and property tax. Taxes are authorised by government to the public for the enhancement of the economy which are invested in improvement of infrastructures, for funding for education and NHS.
Tax has always been the important factor in the business area. The development of new technologies has impacted the working atmosphere that is visible from the digital presence in the form of location, data and physical assets. With the new advancement of technologies, tax authorities are making an effort to follow via operating the new business models and technologies.
The fast pace moving tax landscape have a wider impact on the multinational companies on the way they function their business activities. The change in the tax landscapes affects the Base erosion and profit sharing (BEPS). It aims to eliminate financial activities that diminish taxable profits through complex structures or by withholding taxes. Although action plan identifies a number of actions enabling global approach to address the identified risks.
The concepts of tax avoidance and tax evasion are managed by organisations. Tax avoidances are legal which are generally obtained from deducting business expenditures, setting up retirement plan and more. Alternatively, tax evasion is the illegal practice for not paying taxes of the income earned.
Risk is a possibility of threat or damage that might occur or happen. Taxation risk is the chance that tax rules may change resulting in losses due to higher than expected taxes (Spacey, 2016). There are four types of tax related risks which are followed by:
Reputational risk is a risk that threatens the good name of a company or a business which includes direct risk due to the action of the company, indirectly due to the actions of employee/s or tangentially through other third parties such as joint venture, partners or suppliers (Investopedia, 2018).
Businesses usually inclines to reduce costs during recession. However in a present time, tax burden (consequences of a specific tax on the distribution of economic welfare) for the CEO/ the boards are increasing. With the growing amount of social media users, news channels and public views on the tax affairs impacts the reputation of the company. The PWC 2019 states that increasing tax burden was named as the top business threat by 55% of CEOs in 2011 and 62% in 2012 from the 15th Annual Global CEO survey. It also states that corporate income tax only makes up just over a third of the total tax rate which raises the concern of interest to the stakeholders and public that if the companies should pay fair share of tax.
Hence, the reputation of the company is put on the risk. It is completely companies decision whether to publicize the financial tax information. It gives more pressure as it exposes out the financial activities including their working ethics are and how they operate. The tax arrangements causes to change the opinion of the company by its customers, suppliers or employees.
Reputational tax risk can be prevented by
Operational tax risk relates to the processes, people and systems in place to manage tax risk and manifests itself as tax compliance risk (Www2.deloitte.com, 2016). It defines the relationship between tax, finance and other operational risks. The different types of tax operation depends on the tax risk that includes staff turnover, new and large projects, audit or internal checks programs etc… However, the relationship can pressure resulting globalization to obliteration of skills. Likewise in the past, VAT had a low risk of failing with the high number of people configuring the account; finance team and tax team works as a team enabling the location and increasing the efficiency of the workforce.
Operational tax regulation processes and controls the means of technology when requires in order to maintain the reputation of the regulators. Operational risks can be prevented by
Legislative tax risk is the potential that regulations or legislation by the government could significantly alter the business prospects of one or more companies (Investopedia, 2019).
This legislation rises the public image of the significance of the government, as well as providing the individual politician with marketing. The legislative risk focuses the relationship between business and governments. Government has the right to interfere in the industry if the business are reluctant to follow the regulation. There is a high possibility for investor to suffer loss if the government passes the law.
The risks can be obtained in the form of specific taxes, sponsorships, new regulation and more. It generally protects the right of the employees or free trade agreements enabling industry to be less competitive against external counterpart.
Wal-Mart stores is one of the example of legislative risk. The higher tariffs from overseas suppliers has increased the cost price of the goods resulting the sales to fall slightly. Investopedia, 2019 states that the organization outlined certain legislative and political/economic risks of yearly 10-K charges in recording with the Securities and Exchange Commission (SEC) under its operation risk section.
With the increasing range of people using digital technologies, information about how the business is operated is very accessible to the public and government. It pressurizes the organisation and hence the tax legislation is very rigid. Even though the tax avoidance is legal, it generates the question about if they the organisation is fair or not.
Legislative tax risk can be prevented by consulting with a tax or financial advisor about the law changes/ additional laws and their impacts on the business. Additionally, it can be prevented by understanding the gearing or leverage ratio and involving on the business can change the level of risk.
Enforcement risk is exposure to legal penalties, financial forfeiture and material loss an organization faces when it fails to act in accordance with industry laws and regulations, internal policies or prescribed best practices (SearchCompliance, 2014).
They oblige companies to operate ethically and legitimately indulging the collective governance, risk management and discipline. It complies the outcomes into registration, filing, reporting and pay when the risks is identified and the plans have been implemented. It focuses more on acquiescence situation than the individual taxpayer.
Enforcement risk can be prevented by inducing compliance behaviour in order to guidance opportunities, fair decisions, values and economic incentives. Another way is by following more proactive approaches such as highlighting the importance of tax policies and altering the way of functioning such as online filing, communicating with stakeholders regarding to strengthen the working progress etc…
With the digitalized new technologies and advancement have enabled different ways of performing taxation. Governments today have an exceptional amount of data straight from organisations with detailed so the other competitors companies has to report faster. It tags along the advantages and the risks depending on the circumstances. Hence it depends on the organisation to show the tax transparency with approvals of boards.
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