It’s also important to understand the links between tax policy and tax administration. Changes in tax policy and legislation tend to foreshadow future controversy, as tax administrations seek to understand and test the operation of new legislation.
Companies that are proactive about these changes are able to make tax decisions with a greater degree of certainty, a hallmark of good corporate governance.
The following leading practices can help satisfy both business objectives and tax administrators’ requirements.
Tax policy leading practices
Monitor and assess possible future tax policy shifts. Develop processes and channels to stay up to date with tax legislation and the tax policy environment in key jurisdictions. Communicate this process to your organization’s key stakeholders. These steps can help you anticipate potential adverse policy changes and identify potential opportunities.
Be an active participant in tax policy development. In such a rapidly shifting economic, legislative and regulatory environment, new tax laws may sometimes impede commercial decisions in ways unintended by policymakers. Companies faced with this issue can either adapt their business plans accordingly or work collaboratively with the government to explain the impediment, model the potential outcomes and develop alternative policy choices.
Join forces. Consider whether forming an industry or trade group is appropriate to develop a collective voice. Alternatively, assess opportunities to join an existing group.
Assess the impact of change. If change is clear and documented, create an impact assessment that contains economic modelling. Policymakers need information to develop good tax and economic policy. Comparative tax studies and insightful analysis of the effects of tax policy proposals on competitiveness can help in this effort.
Tax controversy leading practices
Stay connected with tax administration shifts. By developing “tax administration intelligence,” companies can better understand the key focus areas of the tax administration in jurisdictions in which they operate. Companies should also understand what tools and techniques can lower overall risk levels. Risk ratings models, risk assessments, advance pricing agreements, rulings and new dispute-resolution tools are all evolving and useful for these purposes.
Adopt a global approach to tax controversy and risk. Companies should develop and assess their tax controversy and risk management strategies and actions from a global perspective, because that’s how tax administrations are increasingly viewing them.
At a high level, companies should establish a global vision and strategy for tax controversy and risk management. The strategy should consider how to develop enhanced relationships with tax administrators in key jurisdictions, weave in all available tax administration intelligence, understand the methods that can be used in the jurisdiction to achieve a lower risk rating, and encompass — where culture permits — a more transparent, collaborative and responsive relationship with tax authorities.
Evaluate global systems and resources for tax risk management. Managing future controversy requires an understanding of both the scope and direction of a likely tax audit or examination. Companies need to ensure the right processes are in place to manage the risk of potential tax controversy. Global tax risk management systems should have processes to identify, assess, measure, mitigate and monitor actions and strategies.
While many tax functions may have designated “tax risk manager” and “tax controller” positions to monitor and manage tax risks on an ongoing and proactive basis, controls and procedures should be integrated into the various tax and business processes as far upstream as possible — and not be treated as separate activities within the tax function.
Manage any controversies at a strategic level. For issues that advance to the controversy stage, it’s necessary to assess the relative merits and weights of each issue and analyze the nature of disputes with tax authorities. For cross-border issues, it’s important to evaluate how a settlement or adjustment in one jurisdiction will affect others.
In addition, businesses should consider the following suggestions:
- Establish criteria to identify business transactions that require proactive management to avoid or mitigate controversy (e.g., documentation, pre-filing agreements).
- Track current controversies, as well as business transactions and decisions that may result in controversy.
- Establish priorities for jurisdictions that have significant or potentially significant controversy issues.
- Understand key tax jurisdictions’ legislative and regulatory environment, information exchange policies and strategic direction.
- Conduct, for each key jurisdiction, a technical risk assessment of tax return positions, considering existing documentation and recent enforcement activity.
- Use resolution tools and processes to facilitate closure of disputes and issue resolution.
- Understand the potential multiyear and multijurisdictional impact of the issues and the means by which they are resolved.
Include global tax risk as a corporate governance issue. Tax administrations are working diligently to elevate tax strategy to the boardroom agenda. Policymakers and tax administrators expect corporate boards to understand their responsibilities with regard to their business tax strategies and outcomes. Some tax administrators are engaging CEOs and CFOs, as well as corporate boards, in dialogue regarding tax risk.
In response, companies should consider ways to address the following issues:
- Educate the board about the tax implications of business decisions as well as the structure, processes and policies related to tax controversy and risk management within the company.
- Prepare for board-level inquiries related to tax risk management strategies.
- Actively engage the C-suite and board in discussions related to tax risk management.