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Tax Risk Management
Your reputation is not worth risking
These days, risk and reputation issues are some of the biggest concerns on a tax director's mind. Changes in the regulatory and political climate mean that tax risk must be assessed in the context of wider risk management policies and in a way that facilitates communication and understanding to those outside the tax group. Governance and regulatory developments are forcing boards and audit committees to take notice of an organization's taxes.
Canadian companies not adequately assessing tax risk: Deloitte survey
A Spring 2004 survey of Canadian tax executives on the status of tax risk in their organizations uncovered the following:
- The majority of Canadian companies have not adequately assessed the level of tax risk in their organizations
- Only a fraction of tax risk is actually generated directly or directly controlled by the tax function
- There is a lack of policy in obtaining management, audit committee and board approvals for decision-making involving tax matters.
Four steps to an effective tax risk management methodology
Through proper communication and alignment between the corporate tax department, the business units, and management, tax risk can be appropriately considered and managed through these four steps:
- Risk identification and assessment, through which every aspect of the business is examined with a specific eye towards tax risks
- Risk reduction, through which management and Boards develop controls to mitigate risks and provide indicators of when it might arise
- Ongoing execution, during which risk owners are identified within different groups to coordinate and improve risk strategy, processes, and measures
- Tax risk policy and strategy, through which formal policies are established to set the "tone from the top", the tax risk threshold for the organization, and to facilitate and communicate future tax planning opportunities.
Benefits of good tax risk management
Not only does good tax risk management help your company meet regulatory requirements, it also provides:
- Board level understanding of tax strategy
- Better internal communication between business units
- A framework and process for tracking and managing tax risk
- A context for the identification and approval of new tax strategies
- Improved effective tax rates and thus earnings per share
- Fewer successful tax authority challenges
- Cost savings through more efficient working practices
Deloitte's Tax Risk Management practice
Our tax risk management practice is comprised of a group of professionals who have experience in a broad array of tax solutions and have supplemented that with a very valuable focus on enterprise risk. They delve deeply into an organization's business aspects and are able to succinctly communicate tax risks to both management and the board.
One of the most effective tools used is the decision support graph which provides an organization with an ongoing means to plot proposed tax ideas against the organization's tax risk profile — a value-added tool for the tax director, management and the board, since it allows those not familiar with detailed tax policy issues to participate in tax risk assessment and decision making.
