The CFO agenda for tax risk and controversy management
2011–12 tax risk and controversy survey
CFOs must work more closely than ever with tax departments to minimize the risk of controversy, and ensure that key tax risks are brought to the attention of the board and management team. They should also ensure that tax is integrated more closely with business planning.
Adopting a strategic approach to managing tax risk and controversy requires companies to focus on the issues that are of most interest to tax administrators.
In particular, a more rigorous approach to managing tax risk and controversy requires finance functions to take five key steps:
Step 1: Adopt a global approach to tax risk and controversy management
Tax administrators are increasingly taking a global view of companies, and finance leaders must ensure that their own tax functions follow suit. Viewing risk and controversy from a multilateral perspective can help companies mitigate risk and engage with tax administrations in a way that is consistent with their own more international focus.
CFOs must view this more global approach to tax risk management in the context of broader efforts to improve the effectiveness of finance functions.
Step 2: Evaluate global resources, processes and systems for tax risk management
CFOs must ensure that their tax function has the right framework of systems, processes and resources in place to identify, track, report and manage risk and controversy. This framework needs to be global in scope, have the right governance and controls in place, be effectively resourced and aligned with other tax function processes.
Companies should have processes in place to identify and evaluate the risk of the tax positions they take before tax returns are filed. This means designing, embedding and maintaining controls and procedures as far upstream in the decision-making process as possible, and not treating tax risk and controversy management as a separate or distinct activity within the tax function.
Step 3: Address tax risk and controversy at a strategic level — and execute well
Developing wide-ranging, global tax risk and controversy management strategies — and then executing them well — can reap significant benefits for a company, beyond basic financial savings.
By developing criteria to identify business transactions that should be managed proactively to avoid or mitigate controversy, CFOs and their teams have the opportunity to mitigate the risks associated with areas of exposure.
This helps them to anticipate potential controversy issues, avoid disputes before they occur and effectively mitigate the effect of any conflicts that do arise. In turn, this reduces financial, resource and reputational risks and provides opportunities to protect the enterprise against future reoccurrences.
Step 4: Make strong corporate governance in tax a priority
Leading companies have robust, regular communication between tax executives and their boards and audit committees. This communication is two-way, so that boards are kept up to date on key risks and issues, and the tax function is fully aware of key strategic moves and related transactions.
For CFOs, there is an urgent need to ensure that tax corporate governance is sufficiently robust.
They should ensure that the board and audit committee have a good understanding of the structure, processes and policies related to tax controversy and risk management within the company.
CFO’s should also ensure that there are clear channels of communication in place between the tax function and the board, so that potential risks can be escalated quickly and tax executives can provide input on key strategic decisions and investments.
Step 5: Stay connected with global legislative, regulatory and tax administration change
The ability to identify, communicate and assess the effect of changes in the tax policy environment can reduce compliance risks and support tax planning activities and the broader business agenda.
CFOs have a responsibility to ensure that the company is engaging with government and tax administrations in a proactive way. Many countries demonstrate a willingness to work with taxpayers to develop policy alternatives.
As the most senior finance professional in the organization, the CFO has the credibility and experience to lead these engagements. Governments and tax administrations are cooperating more closely; companies need to make sure they are too, not only to manage risk, but also to identify opportunity.