BoardMatters Quarterly, April 2012

Considering global tax risk and uncertainty

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Questions for the audit committee to consider

  • Does the audit committee understand and agree with the company’s overall tax risk profile? Where along the spectrum of risk does the company consider itself? Is it conservative or does it take the most aggressive positions available?

  • Are the board and audit committee confident that the company’s tax processes and controls enable it to meet its tax compliance and reporting obligations?

  • Does the company have the appropriate level of tax expertise in house and in the right jurisdictions to address tax technical matters and the increase in audit activity?

  • Are there any major disagreements between the company and a taxing authority? How are such disputes being handled? Have potential tax liabilities been adequately provided for?

  • Are the company’s financial statement disclosures regarding uncertain tax positions appropriate?

Tax risk management models that were effective five years ago may no longer provide adequate protection for companies today or in the future.

Managing global tax risk is becoming more challenging as companies face more aggressive tax authorities, new legislation and growing disclosure requirements, among other issues.

In fact, our 2011–12 Tax risk and controversy survey, which involved hundreds of audit committee members, as well as senior finance and tax professionals, suggests that the global tax landscape is more volatile and contentious than ever before.1

Fuel to the fire

With companies increasingly generating profits from new or emerging markets, governments and tax authorities around the world are increasingly focused on taxing those profits.

Of the corporate executives surveyed, 75% said that they have experienced a rise in the volume or aggressiveness of tax audits, while 97% of tax authorities surveyed indicated that tax risk related to international structures and cross-border transactions will be an enforcement priority during the next three years.

Audit committees on tax risk

In terms of risk to your company, would you say tax was a ...

Audit committees on tax risk

Rapid legislative and regulatory change creates even more risk and uncertainty. Tax directors at the largest companies (those with more than US$5 billion in annual revenue) report heightened risk and uncertainty around tax changes.

Emerging markets are viewed as the geography of greatest risk related to legislative change.

 Questions for the audit committee to consider

Meanwhile, stricter disclosure and transparency requirements are fueling the fire. Around the world, the increase in tax enforcement has been accompanied by a broad range of new requirements for businesses to disclose more information to the taxing authorities.

Finally, companies are facing unprecedented scrutiny and reporting of their tax affairs by advocacy groups and the news media, often hurting brand reputation and — in the worst cases — shareholder value.

Tax risk management models that were effective five years ago may no longer provide adequate protection for companies today or in the future.

As a result, companies are starting to take a more global and strategic approach to manage tax risk and tax controversies. They are developing specific policies and supporting frameworks, redeploying resources to where they are most needed, refreshing tax risk management processes and implementing technology systems to increase overall levels of control and visibility.

The role of the audit committee

These developments are not occurring solely within the tax function. Audit committees report that tax risks are moving up their agendas and that they are increasing their focus on the issue. They are asking the tax department to provide deeper, more regular updates on how the tax enforcement landscape is changing, while also working to give the tax department increased visibility into future transactions.

At the same time, tax authorities — particularly those in countries belonging to the Organisation for Economic Co-operation and Development — are firmly pushing to get tax risk higher up the board agenda, rewarding those who pursue good corporate governance in tax and increasing their focus on those who don’t.

So what does corporate governance in tax look like today?

Some 98% of respondents reported that board oversight of tax matters has either increased or stayed the same in the last two years. Board oversight also increased more markedly in companies based in Brazil, Russia, India and China, where the percentage of respondents reporting more oversight was 12 points above the average score for all companies globally.

Tax function leaders generally believe that their boards and audit committees not only understand them but also strongly support them. Only 9% reported that a lack of board support was an impediment to successfully managing tax and controversy risk, down from 13% in 2008 and 17% in 2006.

The sense that the audit committee “gets it” was supported by audit committee members.

Audit committee’s role

Does the audit committee play a strong governance role in the company’s tax affairs and tax strategy?

Audit committee’s role

Tax issues were reported as a top five risk by 60% of the audit committee respondents (see Figure 1), and 94% reported their overall focus on tax issues had either stayed the same (41%), grown (39%) or grown significantly (14%) in the last two years. Only 4% reported a decrease in focus during that same period.

Of the respondents, 80% agreed that the audit committee on which they sit has a good understanding of the level of tax risk that is acceptable to the company. Some 70% agreed that the audit committee understands the processes that management uses to identify, measure and oversee various categories of tax risk, and 61% said that the audit committee plays a strong governance role in the company’s tax affairs and tax strategy (see Figure 2).

Where to go from here?

When it comes to tax risk, the stakes are high — far higher than in the past. That is abundantly clear in the penalties, fines and reputational risk that result from non-compliance.

It also is evidenced by governments accelerating their interaction with boards on tax corporate governance issues.

All parties tell us that they expect this increased scrutiny to continue, so it makes good business sense to bring tax professionals, the board and the audit committee (and, if there is one, risk committee) closer together at a time when there is such a heightened focus on taxation.

1 2011-12 Tax risk and controversy survey; a new era of global risk and uncertainty, EY, November 2011,