Tax Risk Management

Tax risk management is a process that relieves business of much of the trauma and difficulties that we all face through tax exposure by planning is taxes adequately and accurately.

The Company has to set the general standards for tax issues by defining a global tax philosophy and setting a framework for the governance of tax issues throughout the business. The tax philosophy on a practical level is the code of conduct for tax issues. A code of conduct is intended to establish the ethical norms of the company and to set standards for ethical behavior when dealing with those inside and outside the firm. So the tax philosophy as code of conduct with regard to tax issues states the overall position of the company towards tax.

 The OECD Guidelines for Multinational Companies indicate what can be addressed: “It is important that enterprises contribute to the public finances of host countries by making timely payment of their tax liabilities. In particular, enterprises should comply with the tax laws and regulations in all countries in which they operate and should exert every effort to act in accordance with both the letter and spirit of those laws and regulations. This would include such measures as providing to the relevant authorities the information necessary for the correct determination of taxes to be assessed in connection with their operations and conforming transfer pricing practices to the arm’s length principle.”

The tax philosophy needs to be embedded in the overall goals of the business. As the code of conduct it must not only be a set of rules for good behavior but must be part of company’s culture and become a factor in everyday business dealings27. Establishing a position requires the board to decide on the focus areas for tax management. Is tax mainly seen as a normal cost factor that needs to be minimized as a duty to shareholders or is its payment a social obligation and a duty to the local community. Most companies take a position closer to the idea that ‘tax is a cost factor’ and therefore a decision needs to be made on how aggressive tax management should be and what level of risk is acceptable for the company.

Companies need to be proactive with tax risk management which requires decisive steps to be taken by the Business Owners and tax manager. The aim of the process is to eliminate the tax risks before they become disputes, and with adequate tax risk management  process, the taxpayer’s ability to tax plan into the future increases proportionately.

Tax should be an integral part of the internal control and the risk management system of a business.

Hence the same rules apply for tax risks as apply for recognition and control of general business risks. Publishing the tax philosophy and tax strategy is important as is a control environment that ensures that deviations from rules are dealt with. Only then does a control environment actually exercise control. Establishing the control environment is normally the duty of the board.

Effective control also implies that the tax department is subject to independent reviews from internal audit. To review the tax processes professionals need to have adequate knowledge and experience in tax. The review should address compliance with strategy and policies as well as the quality of advice provided by tax staff to other functions

Compliance can only be assured if tax issues are identified and dealt with in a timely way. This will only be achieved by awareness of tax issues throughout the business. A close link between the compliance process and other tax functions (e.g. planning) is important. One of the department’s goals will be to manage compliance efficiently to ensure that tax processes are cost effective also that no overpayment of taxes takes place.

The board is responsible for tax risk management and will be held accountable for it by the stakeholders of the company. Challenges in the global capital markets result in increasing expectations from stakeholders and in tightening regulation on corporate governance with a strong focus on internal controls. Furthermore, companies are more and more relying on their reputation of behaving in a socially responsible way as a factor contributing to their success. These developments will cause a shift from the board being in charge of tax risk management to a responsibility for tax governance as more widely conceived.

Olatunji is a Manager (International Tax & Advisory Services) with Saffron Professional Services(Member firm of Geneva Group International), Lagos, Nigeria.

E-mail:Oabdulrazaq@saffron-ng.com,Oabdulrazaq11@gmail.com