Tax risks can pose a significant problem especially when it affects your business’ cash flow or results in a leakage in profits. It could be that your company has been paying more tax than it needs to, or that your business’ fiscal profile or tax positions are not well aligned due to the inadequacy of tax provisions. A tax audit or investigation by tax authorities does not necessarily mean that additional taxes must be paid if your business has the right tax planning and risk management practices.
Identifying Tax Risks
There are two key drivers of tax risks. Tax risks may result due to poor understanding and interpretation of tax laws (which results in tax planning and advisory risks), or due to poor operational processes, people and systems (which results in tax compliance risks). Tax risks may include:
- The inability to meet tax requirements
- Financial loss due to unexpected tax costs and penalties
- Failure to capitalise on tax savings
- Limitations in achieving business goals due to a damaged reputation
Identifying, monitoring, reporting, mitigating and managing tax risks will enable your business to generate efficiencies and enhance tax reporting, compliance as well as financial results while reducing tax burdens.
The Importance of Managing Tax Risks
Managing tax risks used to be a perfunctory function in any finance department. However, the global tax environment now expects businesses to increase tax transparency, take greater responsibility over tax management, and embed tax risk management measures in their important decisions and day-to-day operations.
Besides reducing task risks and promoting corporate governance, tax risk management may also create value for your business. For instance, good tax risk management will:
- Enable your business to proactively evaluate and adapt to regulatory and legislative changes
- Provide assurance to stakeholders and investors that risk is well managed
- Ensure that tax strategies and processes are standardised across your organisation
- Avoid tax fines and penalties
- Avoid reputational damages
Businesses are thus advised to address tax-related issues before they arise, and set in place operational safeguards against potential risks.
Seven Steps to Effective Tax Risk Management
Establish a Strong Tax Risk Management Culture
Your company’s board and executive management should take the lead in establishing a strong tax risk management culture. This is because corporate culture forms the foundation for tax transparency and accountability and is the platform on which good tax risk management controls are built. Performance appraisals, for instance, should reinforce such values, which will contribute to a strong tax risk management culture.
Appoint a Tax Team
The first thing your business should do is to plan ahead and take control of its tax obligations before proceeding with any business transaction or financial accounting event. Appoint a tax team that comprises the Chief Financial Officer, a tax manager, a representative from each division in the business, tax advisors and a legal team who will collectively investigate sensitive tax areas. This tax team will report to an audit committee.
Be Aware of Tax Risks in Every Jurisdiction
As tax jurisdictions around the world review their share of global tax, have your tax team review or undertake a tax planning strategy that covers all jurisdictions that your business operates in. This is because your tax liabilities will differ across tax jurisdictions, and there could be gaps in your company’s governance policies. Furthermore, initiatives such as the Base Erosion and Profit Shifting (BEPS) initiative will significantly change how your business will be taxed globally and it is important that your business adapts quickly to these changes.
Compile a List of Outstanding Tax Issues
Within your business and with the help of relevant tax authorities, compile a list of outstanding tax issues such as the filing of returns or audit queries. This may include outstanding issues known to relevant tax authorities, as well as historical tax issues identified by your tax team that should be reviewed before the tax authorities attempt to challenge something. Gathering the relevant facts and making these issues a boardroom topic will enable you to be well prepared for any queries and audits by regulatory bodies.
Draw Up a Tax Control Framework
To identify tax opportunities and integrate corporate governance, draw up a tax control framework that includes key internal controls and processes that monitor, manage and mitigate risks arising from financial reporting and tax compliance. This will include the regular assessment of tax risks that your business might face.
Stay Updated on Tax Laws
As a global member of the business community, you are expected to stay up to date on evolving tax laws. This will increase your business’ ability to respond quickly to the challenges of today’s dynamic and evolving compliance and reporting environment. Keep updated on the changes to tax regulatory frameworks as you expand your business into different tax jurisdictions.
Leverage Technology and Data
Consider if IT infrastructure and other digital innovations such as robotic process automation, artificial intelligence, blockchain and cloud solutions can be configured for tax to mitigate your tax risks. This will automate or digitalise the way your business identifies, monitors, reports, mitigates and manages tax risks. There will also be a need to assess if transiting to these digital solutions results in IT-related tax risks.
Engage a Reliable Corporate Services Provider
If you are looking for help in managing your tax risks, we have the perfect solution for you. At Corporate Services Singapore, our experienced and professional tax risk and strategy team will identify opportunities and spot flaws within your company’s internal practices. We will also advise you to act on any shortfalls such as the incorrect application of tax laws or ways to reduce your business’ tax liabilities.
Access expert financial advice and solutions and stay on top of your business with Corporate Services Singapore. To find out more about our customised outsourced accounting services, tax risk management and other value added services, give us a call at 6602 8286 or email us at email@example.com to get started today.