Risk management: adding value with a tax control framework

The tax risks facing global organisations increase every year. In the EU alone, data from the European Commission shows there are around 900 double taxation disputes, estimated to be worth €10.5 billion.
These figures are likely to continue increasing over the coming years, as governments and tax authorities around the world align their approaches, increase global transparency and strengthen their vigilance. Managing tax risks in this continually evolving environment is a significant challenge, especially for multinational businesses. Even a large blue-chip is unlikely to have the depth of inhouse tax expertise necessary to keep on top of all the details of the tax obligations they face around the world. Moreover, in many organisations, tax risk is not only a function of the tax or finance department. It often cuts across numerous other functions whose roles have an impact on tax, such as sales, logistics, or HR, where it is managed by people with limited specialist tax knowledge.
Ensuring that tax risks are identified, understood, monitored and, where necessary, mitigated, is a huge challenge. Some of the biggest areas of tax risk in a typical multinational might include transfer pricing, permanent establishment, withholding taxes, and indirect taxes like VAT and import duties, as well as onerous compliance risks that vary from country to country.

Robust risk management

Managing these risks effectively requires a robust risk management process to ensure that where tax risk occurs in any country, they implement a strategy to address it, and then share this knowledge across the relevant functions to strengthen future risk management.

There are three stages to the tax risk management process:
Step 1: identify the tax risks, whether they are just a consequence of the way the business operates, or a lack of awareness and understanding.
Step 2: prioritise the risk, so resources and attention can be focused on the key risks.
Step 3: implement and report on mitigation strategies to reduce the tax risks.

It’s worth noting that the objective at stage 2 is not necessarily to eliminate every tax risk. Some risks may be deemed as acceptable and can just be monitored. Others will need prompt action. For example, a business that regularly sends people to its sites in other countries for a few weeks at a time might identify a permanent establishment risk. But having assessed the specific regulations in the countries concerned, it might also decide that the risk is acceptable and no action is required.

Using a tax control framework to manage risks

Tracking and monitoring numerous tax risks across multiple jurisdictions, and potentially multiple entities, is no easy task. And this is where a tax control framework (TCF) comes into play.
A TCF provides a dashboard that can sit on top of any existing risk management system. It strengthens transparency and clarity on the kind of risks a company can face by providing a single, consistent view of tax risks: what they are, the level of risk, the mitigation strategy adopted, progress to date, etc. It becomes part of the internal control of a company, helping to implement appropriate governance and assign rules responsibilities for tax management to specific functions.

To be truly effective, the TCF needs to be aligned with the overall business objectives and take into account the company’s tax obligations and tax risk appetite. It can also be used to manage other risks, not only tax. It could be applied to a chief controlling function, to an internal control mechanism, because the methodology is fully transferable to other functions.
As the global tax environment becomes ever more transparent, tax authorities more aggressive, and the penalties for non-compliance more onerous, no business can afford to run the risk of mismanaging its tax affairs. Not only does a TCF enable a business to effectively manage its tax risks clearly and consistently across multiple jurisdictions and functions, but the fact a business has a TCF is also, in itself, an indication of proactive transparency and compliance that can help build trust and positive relationships with tax authorities around the world.

Discover more on how a tax control framework solution can benefit your business by visiting our dedicated TCF homepage, which has a collection of resources to support you on your tax journey.