The global business landscape is evolving rapidly and many organizations worldwide are experiencing challenges from regulatory changes and the increasing need for transparency in financial reporting. Recent global trends such as BEPS 2.0, tax accounting or tax transparency have gained in importance of financial controls in all areas including tax. Tax authorities worldwide are increasingly expecting companies to have effective approaches regarding tax risk management in place.
Due to these developments in (tax) laws and accounting standards, tax functions are increasingly obliged to demonstrate that they are on top of the company’s fiscal situation. Furthermore, they must be able to provide global transparency and manage risks facilitating real-time compliance and data-oriented auditing by tax administrations. Companies need to strategically manage their tax risks and respond to a much wider base of stakeholders than ever before. A failure regarding tax compliance potentially leads to financial losses and penalties as well as a tarnished reputation.
These recent developments make a fully integrated Tax Control Framework (TCF) essential. In 2016 the OECD published guidelines with regard to TCF, recommending implementing a TCF based on existing enterprise-wide models of internal controls. So far, there were efforts in various countries to implement country-specific TCF requirements: e.g. Germany (tax compliance monitoring system, IDW PS 980), UK (publication of tax strategy), Netherlands (cooperative compliance program), Spain (VAT reporting system), Australia (guidance on tax control frameworks).
Benefits of a TCF
So far, Switzerland does not have country-specific TCF requirements in place. Nevertheless, if a global company is operating within a country with TCF requirements, it would make sense to roll out the TCF within all countries the company is operating in. Furthermore, it is increasingly important to have dynamic and consistent tax risk management procedures in place so as to create business value and minimize risk providing the ability to respond to a fast-changing tax environment.
Combined with technology, a TCF can ensure that local and global tax risks are identified, measured, understood and that appropriate responses are in place to mitigate the impact of the risks. It also supports the tax function in identifying tax opportunities and integrating governance policies as well as internal controls – taking into account a wide range of tax topics such as corporate income and capital tax, VAT, TP etc. What is more, a TCF improves a company’s image and increases the confidence of the tax authorities, potentially resulting in less inquiries and audits which in turn lowers costs and resource requirements.
Companies that are working efficiently with a TCF have a strong tax governance with an agreed tax strategy in line with global standards as well as an in-depth understanding of possible tax risks and opportunities. They are able to dynamically react to worldwide changes of (tax) regulations and to tax authorities around the world increasingly focusing on processes and controls in a TCF.
Technology to support a TCF
As outlined above, it is advantageous to set up a structured corporate tax risk control system such as a TCF as it is mentioned within the OECD research papers. In this regard, there are possibilities to add technology as support. Solutions on the market can assist in providing a centralized compliance tool including for example data collection, workflow collaboration, data management, analytics, document management. Furthermore, they provide features such as central strategic overviews of tax risks with illustrations of effects of mitigating activities. Additionally, they offer automations to ensure that delegated controls are easily performed, documented and reported.
What can you do?
To enhance compliance in a dynamic tax risk management, taxpayers should:
- Evaluate the current approach
- to identify, measure and understand local and global tax risks;
- regarding the responses in place to mitigate the impact of risks.
- Identify potential efficiency gains and cost saving opportunities.
- Design a dynamic tax risk management process based on a TCF by
- defining a targeting tax strategy,
- analyzing the business and assess tax risks,
- designing and implement a specific TCF.
- Automate manual and repetitive tasks and add technology as support.
By following these recommendations above, companies will stay on top of their risks and safeguard their reputation.