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Effective management of tax risk requires that tax functions and business are brought closer together

Johannesburg, November 2013 - Effective management of tax risk comes to the fore in times of economic challenge, as it is then that a corporate tax function can demonstrate its true value by bringing tax and business closer together in a coordinated effort to create and protect value, says professional services firm Deloitte.

Reaching this point says Annelies Dieusaert, Associate Director at Deloitte, means a repositioning of the role of the tax executive whose department’s outputs are seen to be only an exercise in compliance and reporting.

“Historically, colleagues within a business only see the added value in the tax planning area.”

“One of the primary reasons for this limited view is that tax controls and governance often occur outside existing business-wide computer platforms. They do not easily fit in the more established environment of financial reporting systems.”

“However, the traditional view of tax management is now being challenged. It is becoming a discipline that is firmly on the corporate radar because of a number of events, particularly corporate scandals, which have resulted in multi-million dollar judgements that have had major personal financial implications for board members and directors,” says Dieusaert.

These events have resulted in the concepts of “tax risk management (TRM)” and “tax control framework (TCF)” being raised on corporate agendas, discussed and implemented in some countries. They both aim to manage tax risks in an effective and efficient manner.

“The difficulty within most companies arises when a definition for a tax control framework is sought. Notwithstanding the growing awareness of the need to effectively manage tax risks, the range of practices falling loosely under this heading is vast and growing. In its widest context, a tax control framework refers to a system that aims to identify, mitigate, control and report tax risks. A tax control framework forms part of a business control framework, which is different for every organization,” says Dieusaert.

“When designing a tax control framework allowances should be made for customisation, but several characteristics should be considered,” says Dieusaert.

  • There must be a balance between risk and opportunity. Although it is important to evaluate potential crises, it is equally vital to consider the risks that are linked to success so opportunities can be capitalised upon.
  • The components of the tax strategy must be determined and supported through communication, training and appropriate tools required for implementation and further roll-out.
  • A tiered approach towards managing risk across divisions and jurisdictions, as well as tax operations.
  • Tax risks must be comprehensively understood, prioritised and mitigated in order to provide more certainty. Therefore, the communication of the tax strategy into the wider business and making people aware of their responsibility are critical in order to get tax onto the business agenda.

“It is challenging economic times, such as those presently being experienced, that provide a perfect opportunity for tax functions to demonstrate value by bringing tax and business closer together,”

“A clear tax strategy, supported by a solid framework, will support an organisation’s efforts to create and protect value. Likewise, a strong framework for tax risk assessment can provide CFOs and tax executives with a comprehensive snapshot of specific tax risks that have arisen in the past and are of concern for the future.”

“Management should therefore strive for a leading edge tax function which includes a tax control framework. Intrinsic to developing an effective function is the fact that execution requires engagement and alignment at all levels of a business, from the Board through the executive management and cascaded down to business units and functions,” says  Dieusaert.

Within the business context, risk intelligent enterprises should recognise three levels of responsibility in the corporate ‘pyramid’ for tax risk management, says Dieusaert.
These are:

  • Responsibility for risk governance, including strategic guidance and risk oversight, by the Board.
  • Executive management assuming responsibility for risk infrastructure and management, including designing, implementing, and maintaining an effective risk programme.
  • And at the base, business units and functions taking responsibility for risk ownership, including identifying, measuring, monitoring, and reporting on specific risks functions.

“The activities across these levels should be integrated into a systematic, enterprise-wide programme that embeds a strategic view of risk into all aspects of business management.”
“Organisations that are most effective and efficient in managing risks to both existing assets and to future growth will, in the long run, outperform those that are less efficient.”

“Simply put, companies make money by taking intelligent risks and lose money by failing to manage risks intelligently. Striving for a leading edge tax function that includes a tax control framework is essential in the process of creating and protecting value,” says Dieusaert.

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Name:
Annelies Dieusaert
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Deloitte & Touche
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Associate Director
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adieusaert@deloitte.co.za
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Kerry Naidoo
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Deloitte & Touche
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Senior Manager: Communication
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Tel: +27 (0)11 209 8630
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kenaidoo@deloitte.co.za
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