KPMG si□ Tax risk management in he financial sector An international KPMG survey 1里
Tax risk management in the financial sector An international KPMG survey
Foreword Regulation and wider awareness of corporate governance issues are forcing groups to confront all aspects of risk in their business Tax is not immune from this. Increasingly, tax is coming under scrutiny as an area of risk that needs to be understood and managed, while multinational businesses are having to deal with ever more complex tax legislation. At the same time national governments are looking for ways to protect their domestic tax revenues and tax authorities are becoming more robust in their approach to tax collection and enforcement Against this background, KPMG has commissioned this internet-based survey of global, regional and national heads of tax. The survey focuses exclusively on the financial services sector and looks at attitudes to and trends in, tax risk management We should like to thank all respondents for their participation in the survey. They have provided valuable insights into the progress that many of the world's leading financial services businesses have been making in this emerging area. Equally they have shown there is still work to be done in improving the way that tax risk is identified and managed and in getting tax risk firmly on to the board room agenda Thiis B Hugh von Bergen Jane McCormick KPMG Meijburg Co KPMG LLP (UK) KPMG LLP(UK) Industry Leaders, Global Financial Services Tax practice
Foreword Regulation and wider awareness of corporate governance issues are forcing groups to confront all aspects of risk in their business. Tax is not immune from this. Increasingly, tax is coming under scrutiny as an area of risk that needs to be understood and managed, while multinational businesses are having to deal with ever more complex tax legislation. At the same time national governments are looking for ways to protect their domestic tax revenues and tax authorities are becoming more robust in their approach to tax collection and enforcement. Against this background, KPMG has commissioned this internet-based survey of global, regional and national heads of tax. The survey focuses exclusively on the financial services sector and looks at attitudes to, and trends in, tax risk management. We should like to thank all respondents for their participation in the survey. They have provided valuable insights into the progress that many of the world’s leading financial services businesses have been making in this emerging area. Equally they have shown there is still work to be done in improving the way that tax risk is identified and managed and in getting tax risk firmly on to the board room agenda. Thijs Brans Hugh von Bergen Jane McCormick KPMG Meijburg & Co KPMG LLP (UK) KPMG LLP (UK) Industry Leaders, Global Financial Services Tax practice
Executive summary Tax has always been a significant factor in the overall risk profile of a business: it can eat into the revenues, swell the expense base and erode one third or more of profitability, so you have to get it under control The growth in cross-border transactions, the tight focus of fiscal authorities around the world and the increasing sophistication of tax regimes have all made international taxation more complex in recent years In some shape or form, tax is embedded in almost every aspect of the key financial data which a company publishes. It is also an area where significant judgment is required- itself a generator of risk. But even though risk management is pervasive and tax is a key component, there is a historical tendency for tax to be viewed as a complex area which should be left to the tax professionals. This can lead to tax becoming isolated from the rest of the business. It has certainly not commonly been subject to independent review or oversight by Boards. Under the influence of new legislation like the Sarbanes-Oxley Act 2002, this approach is no longer tenable This poses interesting questions. How can senior management-and the business as a whole- ensure they are lear about what the tax function(Tax )is doing? And are the same standards of risk management applied to tax as to other material areas of the business? ax experts should now accept that their strategies and processes will have to be subject to the same rigor as every other area of business. Similarly Boards and tax directors should take charge of the tax risk assumed by their corporations, before they become aware of it for the wrong reasons Key themes from our survey Tax departments cannot afford to be isolated from the rest of the business. Tax is a function like any other it requires a strategy on risk that is well understood within the organization and takes into account the whole risk spectrum, rather than focusing solely on tax technical issues. Boards need a clear understanding of the work Tax is doing and its effect on overall risk. Boards must keep asking questions about controls and the tax consequences of major transactions, and ensure that reliable independent reviews are in place Tax directors need to re-focus their attention to ensure they do not remain rooted in corporate tax. A significant part of the overall tax function is often not under the control of tax directors, so they must be sure they are fully informed on all issues-at global, national and local level The Sarbanes-Oxley Act has been instrumental in increasing the level of attention paid to tax risk. Our survey revealed that the organizations directly affected by the Act have focused greater attention on controls relevant to tax not surprisingly, our results revealed the financial industry's innate conservatism. Nearly a half of ur respondents said that either they would not do anything to provoke the tax authorities in the first place, or alternatively that their organization would not go to court to defend its tax planning Respondents felt too much time was spent on compliance and not enough on planning. Better use of technology and other efficiencies would enable tax professionals to re-focus their efforts 0 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to client Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved
1 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved. Executive summary Tax has always been a significant factor in the overall risk profile of a business: it can eat into the revenues, swell the expense base and erode one third or more of profitability, so you have to get it under control. The growth in cross-border transactions, the tight focus of fiscal authorities around the world and the increasing sophistication of tax regimes have all made international taxation more complex in recent years. In some shape or form, tax is embedded in almost every aspect of the key financial data which a company publishes. It is also an area where significant judgment is required – itself a generator of risk. But even though risk management is pervasive and tax is a key component, there is a historical tendency for tax to be viewed as a complex area which should be left to the tax professionals. This can lead to tax becoming isolated from the rest of the business. It has certainly not commonly been subject to independent review or oversight by Boards. Under the influence of new legislation like the Sarbanes-Oxley Act 2002, this approach is no longer tenable. This poses interesting questions. How can senior management – and the business as a whole – ensure they are clear about what the tax function (‘Tax’) is doing? And are the same standards of risk management applied to tax as to other material areas of the business? Tax experts should now accept that their strategies and processes will have to be subject to the same rigor as every other area of business. Similarly Boards and tax directors should take charge of the tax risk assumed by their corporations, before they become aware of it for the wrong reasons. Key themes from our survey Tax departments cannot afford to be isolated from the rest of the business. Tax is a function like any other: it requires a strategy on risk that is well understood within the organization and takes into account the whole risk spectrum, rather than focusing solely on tax technical issues. Boards need a clear understanding of the work Tax is doing and its effect on overall risk. Boards must keep asking questions about controls and the tax consequences of major transactions, and ensure that reliable independent reviews are in place. Tax directors need to re-focus their attention to ensure they do not remain rooted in corporate tax. A significant part of the overall tax function is often not under the control of tax directors, so they must be sure they are fully informed on all issues – at global, national and local level. The Sarbanes-Oxley Act has been instrumental in increasing the level of attention paid to tax risk. Our survey revealed that the organizations directly affected by the Act have focused greater attention on internal controls relevant to tax. Perhaps not surprisingly, our results revealed the financial industry’s innate conservatism. Nearly a half of our respondents said that either they would not do anything to provoke the tax authorities in the first place, or alternatively that their organization would not go to court to defend its tax planning. Respondents felt too much time was spent on compliance and not enough on planning. Better use of technology and other efficiencies would enable tax professionals to re-focus their efforts
Our approach The KPMG survey was published on the Intermet in December 2003 and senior tax personnel from major financial organizations around the world were invited to take part. Just under 100 responded responsibility for different taxes within the organization preparation of a strategy for tax and the Board's involvement appetite for risk and the adoption of risk management techniques; the issue of independent review of the tax department; interaction of the tax department with any front office tax function compliance processes. Our analysis of the results comments on strategy, risk management and operations and for each of these main areas we identify suggested industry best practices. We do stress, however, that different organizations will of course take different views on what they consider optimal performance Figure 1: Geographical responsibility of the tax Of the 96 respondents, 34 had global responsibility Regional (i e Pan-national but not global) for tax, 33 regional, and Single countries)only 29 national 36% Base: All respondents (96 Figure 2: Location of respondents Ultimate Holding Companies 18% Europe, Middle East Africa 69 worked for corporations whose ultimate holding Americas company was based in the 72% Asia-Pacific EMA region, 10 ASPAC. Figure 3: Primary Business 11% Sector of Banking 9 regarded banking as Insurance heir organizations primary business sector, Investment management 21 insurance, and 16 Other financial investment management and 'other financial 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients Each member firm is a separate and independent legal entity and each descnbes itself as such All rights reserved
2 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved. Our approach The KPMG survey was published on the Internet in December 2003 and senior tax personnel from major financial organizations around the world were invited to take part. Just under 100 responded. Questions covered: responsibility for different taxes within the organization; preparation of a strategy for tax and the Board’s involvement; appetite for risk and the adoption of risk management techniques; the issue of independent review of the tax department; interaction of the tax department with any front office tax function; compliance processes. Our analysis of the results comments on strategy, risk management and operations and for each of these main areas we identify suggested industry best practices. We do stress, however, that different organizations will of course take different views on what they consider optimal performance. Figure 1: Geographical responsibility of the tax department Of the 96 respondents, 34 had global responsibility for tax, 33 regional, and 29 national. Figure 3: Primary Business Sector of respondents’ Companies 59 regarded banking as their organization’s primary business sector, 21 insurance, and 16 investment management and ‘other financial’. Figure 2: Location of respondents’ Ultimate Holding Companies 69 worked for corporations whose ultimate holding company was based in the EMA region, 10 ASPAC, and 17 in the Americas
Strategy The starting point in managing and controlling a group s tax should be to define its tax strategy. The tax director- with approval from his Board - needs to set out the principal objectives, all of which should tie into the underlying business objectives 65 percent of our respondents had written objectives. The survey did not ask whether these were part of a broader strategy document, or part of individual appraisals, but on the surface the result is encouraging. 86 percent of those with written objectives agreed or strongly agreed that their objectives supported the overall business objectives and were suitably aligned. However, while this suggests that objective setting is becoming more prevalent, a necessary postscript is that there are still 34 percent for whom written objectives remain an unknown luxury. Yes, for some the objectives may be understood from conversations or osmosis, but are these respondents really expected to manage the tax function's performance, and be judged, on such a basis? ca respondents had oos ity of Only a small minority of those responding(14 percent) had obtained the Board's formal approval of Only a small minori ined their objectives(fig 4 the Board's formal approval of their obiectives Figure 4: How tax The objectives are formally agreed by the board 14% departments objectives are set and approved The objectives are approved outside the tax department (e.g. by the CFO) The objectives are approved solely by the tax department% There 10%20%30%40%56% Base: All respondents ( 96) Percentage of respondents A greater number had received approval from outside Tax, often from the CFO, but the overall picture is one where the most senior management has either not signed off on what Tax is trying to do, or believes it to be something which can be delegated. Yet tax can erode a third or more of a companys profitability. Is it likely that such a level of trust would be placed in other areas of the business which have such a potential impact on the bottom line? Because of its specialized nature tax is seldom subject to close oversight by the board of directors. This is causing concern in some quarters. In Australia, the Commissioner of Taxation is writing to the chairmen of publicly listed companies', advising them to take a greater role in the management of tax risk. Source Australian Taxation Office 0 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to client Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved
3 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved. Strategy The starting point in managing and controlling a group’s tax should be to define its tax strategy. The tax director – with approval from his Board – needs to set out the principal objectives, all of which should tie into the underlying business objectives. 65 percent of our respondents had written objectives. The survey did not ask whether these were part of a broader strategy document, or part of individual appraisals, but on the surface the result is encouraging. 86 percent of those with written objectives agreed or strongly agreed that their objectives supported the overall business objectives and were suitably aligned. However, while this suggests that objective setting is becoming more prevalent, a necessary postscript is that there are still 34 percent for whom written objectives remain an unknown luxury. Yes, for some the objectives may be understood from conversations or ‘osmosis’, but are these respondents really expected to manage the tax function’s performance, and be judged, on such a basis? Only a small minority of those responding (14 percent) had obtained the Board’s formal approval of their objectives (fig 4). A greater number had received approval from outside Tax, often from the CFO, but the overall picture is one where the most senior management has either not signed off on what Tax is trying to do, or believes it to be something which can be delegated. Yet tax can erode a third or more of a company’s profitability. Is it likely that such a level of trust would be placed in other areas of the business which have such a potential impact on the bottom line? Because of its specialized nature tax is seldom subject to close oversight by the board of directors. This is causing concern in some quarters. In Australia, the Commissioner of Taxation is writing to the chairmen of publicly listed companies1 , advising them to take a greater role in the management of tax risk. Figure 4: How tax departments’ objectives are set and approved Only a small minority of respondents had obtained the Board’s formal approval of their objectives 1 Source: Australian Taxation Office