Common problems when dealing with tax risks and how tax governance can be part of the mitigation strategy

Problem 1 – Identifying and tracking tax risks across your organisation is necessary, complex, and time-consuming.

Many organisations are flying blind when it comes to their tax risk environment. Based on a survey undertaken by EY in 2023 among over 2,000 tax professionals, 75% of respondents say they don’t have complete visibility over disputes and tax risks in their organisation. A lack of understanding and appropriate action can have material financial, legal, organisational and reputational risks.

Not only is identifying risks important, linking findings of the risk assessment to actionable improvements relating to the root cause of the risk is crucial. A risk can occur at any team, but how teams deal with ensuring it does not materialise again can significantly impact the assessment of a tax authority. Amending a control or process, obtaining advice or proactively reaching out to the tax authorities can be successful mitigation strategies.

Problem 2 – Tax risks are complex, scattered across the organisation, and difficult to manage, potentially leading to knowledge gaps and information black holes.

Tax risks can occur at any time and in any part of the business. However, tax professionals typically don’t have a standardised process to qualify or even manage tax risks. This results in ad-hoc mitigation strategies which are difficult to implement, analyse and improve. Optimising access to relevant information, process standardisation, and governance are key to improving the risk management process.

Having a central overview and response centre to manage risks is therefore crucial to adopt successful mitigation strategies. However, an end-to-end process and central repository are often missing. Based on the above survey undertaken by EY, 83% of respondents said adopting a tax risk register would deliver value to their tax function.

Problem 3 – Coordinating tax risk management across multiple departments and entities is highly sensitive, and can lead to communication breakdowns, friction and compliance issues.

Tax risks are sensitive and typically contain confidential information. Therefore, it is difficult to share information on tax risks. However, a tax team member working in one area of the business can often not be aware of risks occurring in other areas, even though these could be linked or impact one another.

Managing disparate and sensitive information through a detailed RA(S)CI matrix can form part of a successful risk prevention and management strategy. Furthermore, putting in place a reporting and escalation process in a controlled environment strengthens the controls around the organisation’s risk policies.

Problem 4 – Reporting on tax risks can be confusing and irregular

Reporting tax risks can be complicated and messy. Which of your tax risks are quantifiable and reportable? How do you quantify the risk of a soft control failure? How do those risks evolve over time and where can you find data you can trust? How do these tie into the larger picture? Operating a single platform with clearly defined parameters and processes can harmonise and standardise reporting on tax risks throughout the organisation. This further allows the team to assess each risk against the risk appetite and Tax Strategy of the business, providing for a better overall understanding.

Problem 5 – Communication with senior management on tax risks should be concise, quantifiable, and actionable.

Providing updates to senior management on tax risks is challenging and time sensitive. Senior leaders in the business need fast, clear and actionable communication on tax risks. They typically respond better to visual information supported by a clear methodology.

In order for the communication to be as streamlined as possible, teams should be able to demonstrate what the risk relates to, the materiality of the risk (based on the risk appetite of the organisation), which entity or jurisdiction is in scope, how the risk has evolved over time and what the team is doing to combat the risk. Again this requires a documented process and can be difficult to achieve without the help of technology.

Tax risks, governance, and control

Tax governance covers, among others, the extent to which a business has clear processes and procedures in place to support its tax decision-making and manage its tax risks. For a more comprehensive overview, again please refer to our Tax Control Framework whitepaper.

A key element of effective governance with respect to tax risks is maintaining a tax risk register, i.e. a comprehensive list of potential tax risks associated with an organisation's operations. By maintaining a tax risk register, tax professionals can systematically identify and assess potential tax risks and prioritise their management efforts accordingly.

A risk register teams can trust is one that is reliable, auditable and ideally, supported by technology. A register can live in an excel but that encounters the same problems we identified above: how is this managed, who has access and how do you communicate a spreadsheet? Technology enables the more robust, visually comprehensive and interactive forms of risk assessment and strategic intelligence tax leaders need to support their decision making.

Key benefits of tax risk management and tax governance

Benefit 1 – Risks are identified early and are more likely to remain in the hand

By placing a strong emphasis on risk management, organisations can achieve heightened awareness and establish robust processes. This enables the implementation of controls to enhance monitoring activities in respective risk areas. Once a risk is identified, streamlined management procedures can be put in place. This ensures that the relevant stakeholders are promptly informed, corrective actions are taken based on predefined mitigation strategies, and the impact is closely monitored.

Benefit 2 – Increases accuracy of reporting

A comprehensive risk register provides tax teams with a better understanding of their operating environment, enabling them to identify issues at an earlier stage. Companies that maintain a risk register experience enhanced quality in tax data and reporting, leading to reduced risks associated with tax returns and disclosures. Consequently, having a risk register allows tax teams to proactively invest in their future and anticipate legislative developments. The digitisation of tax processes and leveraging technology can greatly benefit this aspect of tax management.

Benefit 3 – Establishes trust with the tax authorities

Accurate monitoring of tax risks facilitates earlier engagement with tax authorities, enabling the timely resolution of potential controversies. This proactive approach helps prevent risks from escalating into liabilities and avoids prolonged tax audits or legal disputes. A well-developed tax register can also contribute to reducing the risk rating assigned by tax authorities at the onset of an audit.

Benefit 4 – Increases profitability

Robust governance structures reduce the likelihood of compliance failures, lower audit fees, and minimise reliance on external advisors. When a business has better control over its tax affairs and effectively manages risks, it becomes less dependent on external support and is less susceptible to surprises during tax audits. This strengthens internal communication regarding the challenges and requirements of the tax team, ultimately contributing to improved profitability.