Keeping tax risks under control

Tax governance and controls have never been more important – or under more scrutiny.

Tax authorities everywhere are relying increasingly on digital technology for tax collection. And in today’s ESG-driven business environment, stakeholders expect organisations to contribute their fair share of tax, and to be transparent about what they’re paying.

The result is a growing focus on businesses’ ability to build and demonstrate full control of their tax data and processes. As a result, internal audit teams are keeping an increasingly close eye on tax management.

At the same time, regulatory requirements are on the rise. Governments are demanding that businesses embed effective tax risk management into their day-to-day operations.

For example, the OECD is continuing its review of the principles of corporate governance. It recommends that boards set a supranational ‘tone at the top’, to embed a strong tax governance culture as best practice.

Here in the UK, meanwhile, HMRC requires firms to implement effective tax controls within a coherent framework. This can be seen in its Business Risk Review, Corporate Criminal Offence regime, and updated Senior Accounting Officer guidance.

In addition, tax authorities are relying more on tax governance as an indicator of a company’s risk – which in turn influences the frequency and direction of tax audits. Put simply, good tax governance means less scrutiny. Plus, if an audit does occur, then a strong tax control framework is the first line of defence.

In this context, tax governance has become more complex than ever before. And it has become not just an ethical and regulatory imperative, but also an opportunity.

Strengthening your tax controls will offer vital reassurance to internal and external stakeholders. And it will improve your tax data and processes. The upshot being better awareness and visibility, and therefore more effective compliance. That not only brings comfort by mitigating compliance risk; it also makes customer-facing operations, such as billing and cash collection, more efficient.

As such, a demonstrable grip on tax compliance is not a nice-to-have: your licence to operate depends on it. So how can tax leaders ensure their governance and controls are sufficiently robust?

The first step is to map three key aspects of tax governance – risk, strategy and process – by asking yourself the following questions:

Risk

• Do you know your key tax risks?
• Do you have global visibility of them?
• What are your ‘known knowns’ and ‘known unknowns’?
• How is tax risk identified, assessed and escalated?
• Are you confident that all of your risks are being proactively managed?
• If not – how do strengthen your risk management?

Strategy

• Do you have a clear tax management vision and strategy?
• Is the strategy approved by the board?
• Is it aligned to the wider organisational strategy and corporate values?

Process

• Does your business understand the role it plays in controlling tax?
• Do you maintain a tax-risk register?
• Have you embedded effective tax-management controls upstream of your return processes?
• Do you have clear escalation procedures to enable you to respond to risks?
• Can you share tax-process documentation with tax authorities?
• Do you have a clear RACI matrix covering tax management?

If you can’t immediately answer these questions, don’t panic. Start with a simple brown-paper exercise to:

• set out your vision for tax governance
• decide what is and isn’t in scope
• identify who has responsibility for the activities and processes that impact tax.

That will lay the foundation for a comprehensive tax-governance framework.

From there, identify, prioritise and document your task risks; then design any controls required to manage them that are currently missing.

The next phase is to establish lines of defence for when risks become problems. That will mean putting a suitable method in place to identify, manage and address issues as they arise.

Tax is everywhere in an organisation – so tax governance will affect every function. And different firms will have different levels of tax control maturity, depending on their industry, size and degree of scrutiny from tax authorities.

But building an effective framework doesn’t have to be a daunting task.

As you create your framework, look for resources you can build on to make life easier. There may be controls in the Finance Manual or SoX framework, which can be readily adapted to tax governance.  

Securing buy-in from the business, and sponsorship from the leadership team, will also help. To do that, you’ll need to continually push the advantages of strong tax governance, and its importance to embedding your ESG agenda. With the world watching how businesses manage tax, that matters not just to your function, but to the company as a whole.

Expert support can also be invaluable. The KPMG team can help wherever you are on your tax governance journey, by working with you to:

• identify and define clear tax-governance roles and responsibilities
• ensure you have the tools to proactively manage your tax risks
• address issues before they arise
• give stakeholders the right levels of assurance

Please get in touch to find out how we can help your organisation.