Tax risk management is an enterprise-wide issue
(As originally published in the Financial Post, June 2013)
By Fred O’Riordan, National Tax Advisor, EY
In the years since the global financial crisis hit, governments have been trying to collect every cent possible to boost their revenues. As part of these efforts, tax authorities in Canada and many other countries have become increasingly aggressive in their audit approaches towards businesses of all sizes. As a result, tax controversies between businesses and governments have risen dramatically, bringing tax risk management to the fore of the corporate agenda.
While Canadian companies are doing a good job of paying more attention to tax risk management, many are still falling short when it comes to increasing the awareness of tax risk in non-tax business units and improving reporting protocols to senior management.
In Ernst & Young’s 2012–13 Canadian tax governance survey, we reviewed the level of tax risk awareness among various departments in organizations and found, to our surprise, that the majority of non-tax business operations leaders aren’t as engaged in tax risk management as we expected.
If companies are going to succeed in fending off governments’ drive to extract more and more tax dollars, they need to get all business units on the same page to address tax risk across the organization. While many companies are, in fact, doing this with increasing effectiveness, it’s a leading practice that other organizations should be watching and following.
The Canada Revenue Agency (CRA) and other tax authorities around the world increasingly expect company leaders to understand their responsibilities respecting tax strategies and outcomes in order to fulfill their broader corporate governance responsibilities.
Our report revealed how businesses manage tax risk, and where responsibility typically lies.
Tax leaders still mainly responsible
A surprising 56% of non-tax business unit leaders are unfamiliar with tax risk management policies. There’s a lack of tax risk awareness among non-tax and non-finance-related departments, such as business operations and procurement.
On the other hand, not surprisingly, nearly all tax groups (95%) and 91% of finance departments are involved in managing tax risk. While the primary responsibility still lies with companies’ tax leaders, 79% of the C-suite and 60% of risk management committees are also engaged in tax risk management.
These figures for senior management are encouraging, as they show that more companies are moving in the right direction in engaging company leaders in setting tax governance guidelines and policies and overseeing tax plans.
Routine discussion and reporting not the norm
The tax function itself spends on average a mere 7% of its time on tax risk management and reporting. That said, many controls and risk-mitigation activities occur as part of the execution of other tax processes, such as planning, compliance, reporting and audit resolution. Still, there’s clearly room for improvement here.
According to our survey results, only 15% of participants consider that all tax risks and opportunities are identified on a timely basis to support business decisions and improve results.
Half of companies only report tax risks as needed, and some never report. Those companies that do practise routine or frequent tax risk reporting mostly do so either quarterly or annually. Regular reporting is a healthy practice to promote periodic involvement of senior management.
There are also some encouraging signs. We found that 38% of respondents saw a moderate to significant increase in boardroom discussions concerning tax risk transparency and reporting in 2012. This suggests that companies are moving in the right direction.
A work in progress
Our survey results indicate that tax risk management is on the minds of Canadian business owners in a more meaningful way than ever before. No longer the sole domain of the tax function, it’s finding its way onto the agendas of the finance department and senior management.
Having said that, while Canadian companies are paying increased attention to tax risk management, there’s more work to be done. Areas requiring particular attention include increasing the awareness of tax risk in non-tax business units and improving reporting protocols to company leaders.
Governments and tax authorities are only going to increase their pressure on companies, so it’s more and more important for tax risk to be on the radar of every function across the business.
You can find the full Ernst & Young Canadian tax governance survey at ey.com/ca.