Task Risk Management:

From Risk to Opportunity

Why this book?

Tax Risk Management: From Risk to Opportunity provides a practical guide for those
working in today’s ever-changing corporate environment. This book contains an
introduction to tax risk management and discussions on the tax control framework
that allow corporate tax departments to identify and manage companies’ tax-related
risks. The book also includes country chapters, which provide practical examples of the
development and application of tax control frameworks.

The book is an essential reference for anyone operating in the current corporate world.
By providing a better understanding of the complex issues of tax risk and its effective
management, the book will assist tax authorities, legislators, tax practitioners and tax
directors in their daily practice.

Title: Tax Risk Management

Subtitle: From Risk to Opportunity
Editor(s): Anuschka Bakker, Sander Kloosterhof
Date of publication: April 2010
ISBN: 978-90-8722-070-9
Type of publication: Print Book
Number of pages: 498
Terms: Shipping fees apply. Shipping information is
available on our website
Price: EUR 120 / USD 160 (VAT excl.)

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 Table of contents

Tax Risk Management: From Risk to Opportunity

Table of contents

Foreword

Chapter 1: Introduction to Tax Risk Management

1. Introduction
2. Valuation of the tax position
3. Economic capital
4. Reporting of tax risks – Tax risk management from an accounting perspective
5. Reputational risk
6. Operational tax risk
7. Tactical tax risk management
8. Integrated tax risk management

Chapter 2: Tax Control Framework

1. From risk management to opportunity management

2. Tax control framework: terms and definitions
2.1. Building an effective, efficient and transparent tax function
2.2. From risk to opportunity
2.3. What is tax control?
2.4. Overview of the building blocks
2.5. Overview of the roles
2.6. Stakeholders
3. Building the tax control framework
3.1. Introduction
3.2. Tax strategy
3.3. Tax operations and risk
3.4. Tax accounting and reporting
3.5. Tax compliance: a global scope
3.6. Automation
3.7. Organization and resources
4. Culture
4.1. How can sustainable compliance be achieved without losing flexibility
and creativity?
4.2. Alternatives to COSO
4.3. Levers of control
5. How to get started
5.1. Blueprint TCF
5.2. Conclusion
Chapter 3: Tax Accounting

1. Introduction
2. Part I – Risk of incorrect reporting of income taxes in the financial statements
2.1. Overview
2.2. Complexity and pervasiveness equals risk
2.2.1. IAS 12 and ASC 740 overview
[Link]. Recognition of deferred tax assets
[Link]. Special topics
[Link]. Interim reporting
2.3. Consequences
2.4. Today’s tax department
2.4.1. European headquarters – Scenario 1
2.4.2. HQ income tax calculation and consolidation
2.4.3. US subsidiary – Scenario 2
2.5. Risk mitigation
2.5.1. Internal controls
2.5.2. Standardization
2.5.3. Personnel training
2.5.4. Technology
2.5.5. Interim period and year-end strategies (e.g. preliminary hard-
close process)
2.5.6. Outside resources
2.6. On the horizon
3. Part II – Accounting for income tax risks in the financial statements
3.1. Overview
3.2. A brief history
3.3. Accounting for uncertain tax positions under US GAAP and IFRS – An
overview
3.3.1. Accounting for uncertain tax positions under ASC 740
3.3.2. IAS 12 versus ASC 740 – Overview and key differences
3.3.3. What does this mean?
3.4. Accounting for non-income-based tax risks
4. Conclusion

Chapter 4: Tax Risk Management and Corporate Taxpayers – International Tax

Administration Developments

1. Tax risk management: the different perspectives of tax authorities and

corporate taxpayers
2. Economic and social developments
3. Background to tax-related risk management and approaches to regulation
3.1. The growth of risk management
3.2. Corporate governance
3.3. Responsive regulation and enhanced cooperation – A compliance
model
3.4. Risk rating
 3.5. Limitations of the risk rating approach
4. The OECD initiatives
4.1. The Seoul Declaration and the study into the role of tax intermediaries
4.2. Aggressive tax planning
4.3. Tax risk management and risk rating
4.4. Corporate governance
4.5. International experience of the risk management approach
4.6. Tax compliance and banks
4.7. Difficulties with tax risk management by tax authorities
5. The European Union
5.1. The Fiscalis Guide
5.2. Tax risks arising for tax administrations and corporate taxpayers in
the Member States
6. Conclusion

Chapters 5 – 16: Country surveys

Includes chapters on: Australia, Canada, China, France, Germany, Japan, Mexico, the
Netherlands, Singapore, South Africa, the United Kingdom, the United States.

Where possible country coverage includes:

1. Introduction
2. Tax control framework
3. Impact on tax risk management of legislative and/or regulatory changes and
public opinion
3.1. Legislative and regulatory rules
3.2. ATO’s compliance model
3.3. Tax legislation
3.3.1. Anti-avoidance mechanisms and associated risks
3.3.2. Transfer pricing rules and associated risks
3.3.3. Dividend imputation
3.4. Commercial environment
4. Tax control framework in practice
4.1. Common mechanisms of tax control frameworks
4.2. Benefits of sound tax control frameworks
5. Approach of tax authorities
5.1. Risk reviews and audits
6. Tax risk management in a global environment
6.1. International arrangements entered into by Australian taxpayers
6.2. Australian bilateral agreements on tax issues
6.3. Implications for businesses operating internationally
7. Future developments and expected implications related to the changed
approach to tax risk management
7.1. Henry tax system review
7.2. Tax reporting
Chapter 17: Tax Risk Management – Look before You Leap and Be in Control
1. Introduction
2. Historic background
3. Essentials with respect to tax control framework
4. Tax Accounting
5. International developments
6. Country perspectives
7. Concluding remarks
 Sample chapter

Tax Risk Management: From Risk to Opportunity

Tax Control Framework

Robbert Hoyng,∗ Sander Kloosterhof∗∗ and Alan Macpherson∗∗∗

This chapter is based on information available up to 1 November 2009.

1. From risk management to opportunity management

This chapter describes the key elements of a tax control framework (TCF) and how
such a framework is to be built. In this respect one should realize that there is no
“one size fits all” TCF. Each TCF needs to be custom built to the specific needs of
the organization and taking into account the specific DNA of that organization.
Nevertheless, when building a TCF there are a number of generic elements both in
process and building blocks that apply to each TCF.

In this chapter we will try to provide insight into the aspects of constructing a TCF
tailored to your organization and these “common elements” so you can use this as a
benchmark to your TCF or as a starting position for building your own TCF. The first
part will provide an overview of the terms and definitions used, and a first
introduction into the background of tax control. Next, the construction of a TCF will
be described. This part provides an overview of the building blocks of a TCF. It
provides a description on all the building blocks needed to build and construct a TCF
(see 3.). The following paragraph addresses the cultural and organization context of
tax control (see 4.). The last paragraph suggests how to get started with the
introduction of a TCF and to get in control of tax risks (see 5.).

[…..]

3. Building the tax control framework

[…..]

3.7. Organization and resources

This part will address the following topics:

(a) organizational resources; and
(b) questions to ask.

(a) Organizational resources

People are the cornerstone of any tax function and ensuring they have the right
skills, knowledge, motivation and tools is fundamental to the management of tax and
minimizing risk.

∗
Partner Tax Management Consulting, Deloitte, the Netherlands.
∗∗
Partner Tax Assurance, Deloitte, the Netherlands.
∗∗∗
Partner Tax Transformation, Risk and Co-sourcing, Deloitte, United Kingdom.
The challenge for organizations is to ensure the right level and balance of resources
given the available budget. To enable effective resource management, some tax
departments are focusing on the following four elements to achieve the required
levels of performance and quality while balancing cost constraints:

– Management. Tax directors need to focus on giving the right work to the right
people. This will enable a balanced workload that should be consistent with
the wider organization’s operating strategy.

– Skills utilization. Allocate specific tax work to those staff that have the
necessary tax technical background and skills to undertake that work. Often,
tax directors fail to recognize the extent of areas where an activity requires
technical skills or experience that is not tax-related. Where this is the case,
tax directors can benefit from contracting that work outside of the tax function.

– Incentivize. Tax personnel should have clear job descriptions, attainable

opportunities for career progression, and a development and training plan. Of
course, remuneration is also important and these attributes will ensure that
the organization can attract and retain the best tax people.

– Motivate. Ownership and pride in the work carried out by tax personnel is
important. A main risk area for the tax director is to unwittingly create a
working environment which engenders monotony, career stagnation or a
sense of unrewarded effort. This can readily be resolved by including staff in
meetings, providing clear communication channels for feedback and
discussion, providing achievable goals that challenge the individual,
delegating effectively and building trust.

Of course, many tax directors also look outside their immediate function for skills and
resources. Equal benefits can be leveraged by alternative resourcing options such
as outsourcing, use of shared services centres and external technical consultants.

The important issue for the tax director however is to try and ensure there is a
consistency in the skills and resources used to manage tax in the organization. Loss
of knowledge and expertise of a company’s tax processes and controls (especially
when these may be opaque) is a significant risk.

(b) Questions to ask

– Do we have the right tax competencies in the organization?

– Do we have enough skilled tax personnel in our organization?

– Do we have assurance on the continuity of our tax department?

– Do we have access to external expertise in a timely manner?

– Do we have enough budget to reach our tax goals, considering the tasks and
responsibilities assigned to our tax department?
[…..]

5. How to get started

Tax risk management covers the identification of business risks originating from the
tax position of a company and identifies ways to manage these risks. The
identification, implementation and maintenance of risk management and supporting
systems should be done in three phases. The first phase includes a zero
measurement in which the organization identifies its key risks. The second phase
includes the implementation of a TCF to mitigate these risks. The third phase is the
maintenance phase in which the organization is in control of its tax risks and updates
the framework when necessary. These phases will be described in more detail in the
next paragraph.

Apart from the execution of the tax risk management method during these phases,
the organization should also consider communication and cooperation with the tax
authorities. Building a good relationship with the tax authorities will speed up and
improve the tax filing process in the future. Transparency about tax risks is also a
way to improve good communication with the tax authorities and assures control on
uncertain tax positions. The implementation of a TCF could enable insight and
control of these positions.

5.1. Blueprint TCF

[…..]

Phase I: Zero measurement

Based on interviews, an initial list of risks is identified. Important in this process is the
explicit definition of a risk in order to create a common understanding of the risks
discussed. The overview of identified risks contains all tax risks which can be
identified for the organization, but not all risks can be acted upon because of time
and resource constraints. Acting upon every conceivable risk is not a necessity
because not all risks have the same urgency to be solved. To identify the key risks of
the organization, the risks need to be rated and prioritized. The risks will be rated on
“impact” and “preparedness”. These concepts will be explained next.

[…..]

Phase II: Implementation

In this phase, the risk register will be introduced. In a risk register, the assessed risks
from the previous phase can be documented. The risk register is a means to
communicate the key risks to the management of the organization.

The risk register is a central place where the identified risks are schematically
presented. It contains KPIs which are relevant to the organization. A risk register, for
example, consists of the following labels: number, name of the risk, risk definition,
cause for the risk to occur, risk category and the risk owner.
After the creation of the risk register, the identified risks must be analysed to create a
plan on how to mitigate them going forward. The organization should also identify if
additional (key) controls should be implemented to mitigate the risks. This analysis
should be added to the risk register by formulating an action plan, evaluation of a risk
profile and integration with the strategic planning process.

For each risk, an assessment is made on how to approach the risk. There are four
generic actions an organization could take, identified in the diagram below:

Picture 1: Four ways to approach tax risks

[…..]

Phase III: Test and use

When the controls are defined by the risk owners, they should be tested in practice.
A central question in this process is whether the controls are effective. This also
relates directly to the control objectives. The controls are tested to prove their
working and mitigating effects.

In line with the risk register, the risk owners will do the testing of the appointed
controls. The method of assessment of whether the control is effective is a
management decision. A solution could be to carry out the physical testing of the
control, but a control self-assessment or similar testing is also a solution.

The first step in control testing is to identify the existence of a control and how it is
set up. The next step could be to test the working of the control and whether it
indeed covers the related risk. The test results could be used to reconsider the
approach towards existing risks.

To improve transparency about the status of identified top risks and the overall risk
profile, the organization could use a TCF report. The TCF report is a means to
monitor the risk profile of the organization and creates the ability to manage
upcoming risks or the mitigation of existing risks.

5.2. Conclusion

In this chapter we have tried to provide you with a flavour of the common elements of
a TCF. There are aspects that need to be addressed in each TCF, irrespective of the
kind of organization. Although every organization is unique, every organization has a
different business control framework, and therefore a different TCF, experience does
show a TCF blueprint. The TCF blueprint items can be addressed along the lines of
six building blocks:

Picture 2: The building blocks of a tax function

Ultimately, this should lead to a tax function which is embedded in the organization
and which is effective, efficient and transparent.
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