Tax Risks and why Risk Management increases in importance
It’s 2023. We’ve just entered the post-Covid era, and it’s clear that the world has not returned to ‘normal’ as we may have hoped. War in Europe, global financial difficulties, inflation, and supply chain disruptions. After a brief pause during the pandemic, tax authorities again look to increase audits on multinational enterprises. Based on a survey undertaken by EY of senior tax leaders, they expect the number and intensity of audits to grow by 79%.
All the while global organisations must manage challenges from multiple directions, increasing the possibility of tax risks crystallising and affecting the bottom line. Safeguarding risk was one of the top four strategic priorities for corporate tax departments, as identified in Thomson Reuters’ ‘2022 State of the Corporate Tax Department’.
That’s why we’ve prepared a three-part Article Series on Tax Risks. We will explore why in-house teams spend more time worrying about tax risks, which common problems in-house teams encounter when dealing with tax risks, why governance is an essential part of a mitigation strategy, and finally how teams can adopt a risk register to enhance their tax risk environment.
In our first article, we’ll do a deeper dive into how tax teams fulfill their role as the first line of defense against risks, and why this role is increasingly important.
In-house tax teams are in the vanguard of tax risk management
Tax risks can take various forms and can result in financial, organisational, reputational, commercial (and even criminal) damage to an organisation. Companies such as McDonald's, Coca Cola, Google, and UBS are etched in the public consciousness, not only as large multinationals, but also for their part in headline-grabbing tax cases.
In-house teams obviously play a critical role in identifying, assessing, and managing tax risks. Given the place of tax teams in an organisation, they are tuned in to a lot of processes and projects. Tax data is downstream from finance, legal, treasury and other organisational data. As a result, tax is not a standalone risk in most organisations, it comes from business operations, finance, legal or treasury projects and processes, and organisation-wide activities, and so tax teams must be, and typically is, highly aware of the wider business.
Therefore, when tax professionals identify a tax risk, it can help to standardise and understand where issues may have arisen across the business, which could benefit the business as a whole. However, with tax teams’ long to do list, understanding, safeguarding and looking out for the business is increasingly difficult to achieve. That’s why we at Loctax have launched the risk management functionality as the next step in our mission to support our in-house tax teams. As part of the launch, we’d like to share our thoughts on tax risk management which supported the development of the tool.
Why tax risk management continues to increase in importance
What constitutes a tax risk typically varies from organisation to organisation. A larger organisation may have a higher threshold for accepting late filing penalties, and may consider certain fines as part of the cost of doing business. More and more organisations are defining their risk appetite as part of their Tax Strategy. A good understanding of the risk environment of an organisation, and potentially a tax risk register through a wider risk assessment, often form the foundation of a successful Tax Control Framework. For more information, please find our Tax Control Framework whitepaper linked here.
However, when risks do crystallise, the financial, organisational and reputational impact has never been greater. The public expectation on companies to be good ‘corporate citizens’ has grown and both international organisations (i.e. B Teams’ Responsible Tax Principles, or GRI 207) and national governments have intensified their activity in this space to drive companies to formalise their risk management processes.
In the UK alone, a number of measures have been introduced that require businesses to focus on governance and risk management (e.g. Senior Accounting Officer regime, the requirement to publish the tax strategy, HMRC notification of uncertain tax treatment, HMRC’s Business Risk Review Plus, and the Corporate Criminal Offence of failing to put in place controls to prevent tax evasion).
The general increase in transfer pricing audits and the increasingly strict approach tax authorities take as part of audits also underline that there is less room for error on the part of in-house teams. Furthermore, tax is an important aspect of a business’ ESG agenda. We at Loctax have thought extensively about the link between ESG and tax, our article series can be found by following the link here.