Tax Risk

Management
By Oyoti
What is tax Risk

Tax risk is the risk that companies may be paying or accounting

for an incorrect amount of tax or that the tax positions a
company adopts are out of step with the tax risk appetite that
the directors have authorised or believe is prudent.
Types of Tax Risks
1. Compliance Risks
• Filing Errors
Filing errors refer to mistakes made while preparing and submitting tax returns, such
as incorrect data entry or calculation errors. These errors can lead to inaccurate tax
reporting, resulting in potential financial penalties and increased scrutiny from tax
authorities.
• Late or Incomplete Reporting
Late or incomplete reporting involves the failure to submit tax returns or required
documentation within specified deadlines. This can result in fines, penalties, and
interest charges, negatively impacting a business's or individual's financial situation.
• Incorrect Tax Classification
Incorrect tax classification occurs when businesses or individuals improperly classify
their income, expenses, or transactions for tax purposes. This can lead to
underpayment or overpayment of taxes and may result in financial penalties or legal
2. Operational Risks
• Changes in Tax Legislation
Changes in tax legislation refer to alterations in tax laws and regulations that may
impact businesses and individuals. Staying current with these changes is essential for
maintaining compliance and avoiding potential financial and legal consequences.
• Cross-Border Transactions
Cross-border transactions involve international trade, investments, or operations
that may be subject to varying tax rules and regulations. These transactions can
create tax risks due to differing tax requirements and potential double taxation
issues.
• Transfer Pricing
Transfer pricing refers to the pricing of transactions between related entities within a
multinational corporation.
Tax authorities scrutinize these transactions closely to ensure they are conducted at
arm's length and in compliance with transfer pricing regulations, which can pose tax
3. Reputational Risks
• Tax Controversies
Tax controversies arise when tax authorities dispute a business's or individual's tax
positions or practices. These controversies can lead to audits, investigations, or
litigation, potentially damaging a company's or individual's reputation and financial
standing.
• Aggressive Tax Planning
Aggressive tax planning involves implementing tax strategies that push the
boundaries of tax laws and regulations to minimize tax liabilities.
Such practices can attract the attention of tax authorities and may result in
negative consequences, including financial penalties and reputational damage.
• Corporate Social Responsibility
Corporate social responsibility (CSR) encompasses a company's commitment to
ethical behavior, social welfare, and environmental sustainability.
Tax practices that are perceived as unethical or overly aggressive can harm a
Key Risk Indicators

• The number and amount of tax penalties and interest

charged by Revenue or another tax authority;

• The number and amount of late tax return filings and tax
payments;

• Any adverse media in relation to tax affairs;

• The change in Total Tax Contribution each year;

• Any other risk indicators to be agreed by Management

Tax Risk Management

• Tax risk management involves identifying, assessing, and mitigating tax-related

risks that may impact businesses and individuals.

• This process aims to minimize the potential negative consequences of tax risks,
such as financial penalties, legal issues, and reputational damage.

• An effective tax risk management strategy comprises several key components,

including identifying and assessing tax risks, implementing appropriate risk
mitigation measures, and monitoring and reviewing tax risks regularly.
1. Identifying Tax Risks

a) Internal Risk Assessment

• Internal risk assessment involves evaluating a business's or individual's internal

processes, policies, and practices to identify potential tax risks.

• This assessment helps pinpoint areas where improvements or changes may be

necessary to ensure compliance with tax laws and regulations.

ii) External Risk Assessment

• External risk assessment involves examining external factors, such as changes in tax
laws or regulations, that may impact a business's or individual's tax obligations.
Assessing Tax Risks
a) Probability of Occurrence
• Assessing the probability of occurrence involves estimating the likelihood that a
specific tax risk will materialize.
b) The impact
The consequences of occurrence. This could be financial or reputational impact

• Financial impact is the potential monetary consequences of tax errors or non-

compliance, such as fines, penalties, and interest charges.
• Reputational impact is the potential damage to a business's or individual's
reputation due to tax controversies, aggressive tax planning, or non-
compliance with tax laws.
Understanding the likelihood and impact of potential tax risks can help
businesses and individuals prioritize their risk management efforts and allocate
resources effectively.
Mitigating Tax Risks
a) Implementing Internal Controls
• Implementing internal controls involves establishing procedures and processes to
monitor and manage tax risks effectively. These controls help ensure compliance
with tax laws and regulations, reducing the likelihood of errors, late reporting, or
other tax-related issues.
b) Developing Tax Policies and Procedures
• Developing tax policies and procedures involves creating a comprehensive set of
guidelines and instructions for managing tax-related activities within a business or
for an individual.
• These policies and procedures help ensure consistent tax practices and reduce the
likelihood of tax errors or non-compliance.
c) Training and Education
• Providing training and education on tax laws, regulations, and best practices is
crucial for ensuring that employees and individuals understand their tax obligations
Monitoring and Reviewing Tax Risks
i) Regular Risk Assessment Updates
• Regular risk assessment updates involve reviewing and updating tax risk assessments
to ensure they remain current and accurate.
• These updates help businesses and individuals stay informed about changes in tax
laws and regulations and address emerging tax risks proactively.
ii) Compliance Audits
• Compliance audits involve reviewing a business's or individual's tax practices, records,
and reporting to ensure compliance with tax laws and regulations. These audits can
help identify potential issues, allowing for timely corrections and improvements.
iii) Continuous Improvement
• Continuous improvement in tax risk management involves regularly evaluating and
refining tax policies, procedures, and internal controls to enhance their effectiveness.
• This ongoing process helps businesses and individuals maintain compliance with tax
laws and regulations and minimize their exposure to tax risks.
The Tax Control Framework

• The Tax Control Framework (TCF) is a set of rules, procedures, organisational

structures and safeguards, to detect, measure, manage and control tax risks, ie
the risk of non-compliance with tax regulation or conflict with legal principles.
• Components of Tax control framework:
• process,
• people and
• systems
A. Process

• Tax risk governance – how do we oversee tax risk?

• Defining tax risk – what are we trying to manage?

• Tax risk management segregation of duties – who is responsible for

what?
Tax risk:
• Financial loss in the form of increased tax costs, interest and penalties.
• Suboptimal commercial outcomes due to missed opportunities to
structure arrangements in an efficient manner.
• Restricted ability to achieve goals due to damaged reputation and
relationships with stakeholders (e.g., tax authorities).

• Two tax drivers

• Judgmental –understanding and interpretation of tax law and manifests
itself as tax planning and advisory risk.
• Operational –processes, people and systems in place to manage tax risk
and
Tax Risk Appetite(Tax risk appetite – what risks are we willing to take?)
• Risk appetite is a part of broader organization-wide capacity and appetite for
risk (e.g. capital requirements).
• The risk appetite must reflect a balance of competing pressures i.e. value,
compliance.
Tax risk management processes
Identification
Assessment
Mitigation
Monitoring and reporting
B. People
1. Culture is the foundation for all components of the tax risk control
framework and is the platform on which it is built.
2. The board and executive management should take the lead in
establishing a strong risk management culture
3. Appropriate levels of training and communication is required to ensure
staff understand what is expected of them
4. Staff need to be able to speak the control and risk management
orientated
language of regulators, tax authorities, internal and external auditors and
risk professionals
5. Oversight, accountability and performance appraisal should reinforce
values and contribute to a strong tax risk culture
Systems
• Management need to periodically consider the suitability of the IT
infrastructure and its configuration for tax
• Management need to assess the potential IT related risks to tax
processes and determine the dependency between the use of technology
in tax processes and technology generated controls
• Tax control activities need to be aligned with established entity level
controls
• Management should be aware of tax specific software that can reduce risk
and free up resource for other aspects of compliance
• Work flow and reported related systems can be used to automate and make
more efficient tax risk management monitoring and reporting processes
Tax governance

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.

It involves identification of roles and responsibilities of the subject

involved in tax management, definition of the information flows
between these actors and of processes for effective and preventative
control of tax risk.
1. Board/ Audit Committee

• Embeds risk culture and awareness

• Defines tax strategy and policy

• Sets on monitors tax risk appetite

• Reviews areas of significant uncertainty and judgement

2. Group Tax Risk Committee (Heads of Tax, Finance, Legal, HR, Risk and
SSC)

• Defines roles and responsibilities for management of tax risk

• Defines common risk framework (policies, standards, controls)

• Monitors tax risk profile, risk appetite and control environment

• Ensures objective assurance, monitoring and reporting on tax risk

• Review material or strategically significant matters escalating to board

as necessary
3. Group Tax Risk Forum (Head of Tax, Regional and Functional Tax
Heads)

• Review of tax risk profile (inc risks and provisions)

• Review of tax control issues – internal audits, risk events, change

• Assess emerging risk and control issues

• Review new, or material changes to, tax policies and standards

• Review materials submitted to Group Tax Risk Committee and Board

4. Business and Function Governance and Control
Committees

• Tax risk identification and assessment

• Tax risk control activities

• Tax risk monitoring and reporting

• Documentation of end-to-end processes

• Objective assurance and testing

Benefits of Tax Risk Management

• It helps ensure compliance with tax laws and regulations, reducing the
likelihood of financial penalties and legal issues.

• Moreover, effective tax risk management can enhance a business's

reputation and contribute to long-term financial stability.
Role of Tax Professionals in Tax Risk Management
• Tax Advisors and Consultants
• Tax advisors and consultants provide expert guidance on tax laws, regulations, and
planning strategies. They assist businesses and individuals in navigating complex tax
issues, minimizing tax liabilities, and ensuring compliance with tax laws and
regulations.
• In-House Tax Departments
• In-house tax departments manage a company's tax obligations and risks. They
develop and implement tax policies, procedures, and internal controls, ensuring the
company complies with tax laws and regulations while minimizing tax liabilities.
• External Auditors
• External auditors independently assess a company's financial statements, tax filings,
and internal controls to ensure accuracy and compliance with tax laws and
regulations.
• Their objective evaluation helps identify potential tax risks and areas for
improvement in a company's tax practices.
Tax Risk Management Best Practices

1. Proactive Tax Planning

• Proactive tax planning involves anticipating potential tax risks and developing strategies to
minimize them before they materialize.

• This helps businesses and individuals maintain compliance, reduce tax liabilities, and avoid
costly tax controversies.

2. Transparent Communication With Tax Authorities

• Transparent communication with tax authorities involves openly discussing tax positions,
transactions, and interpretations of tax laws.

• This practice can help prevent misunderstandings, facilitate cooperation, and reduce the
3. Collaboration With Tax Professionals

• Collaborating with tax professionals, such as tax advisors, consultants, and external
auditors, can help businesses and individuals manage tax risks more effectively.

• These professionals provide valuable expertise, guidance, and support in navigating

complex tax issues and ensuring compliance.

4. Keeping Up-To-Date With Tax Law Changes

• Staying informed about changes in tax laws and regulations is essential for effective
tax risk management. Businesses and individuals must continuously update their tax
practices, policies, and procedures to ensure compliance with evolving tax
requirement
Thank you