One issue the Commissioner apparently has in mind is that company Boards should have a view on the level of tax risk that is acceptable, rather than have others determine it for them. The survey found that 67 percent of respondents believed that their corporation's tax risk strategy either did not exist or was not widely understood thin the organization as a whole(fig 5), and one can infer that a number of Boards are among those who do not understand it. Boards might well respond that because of its complexity, they cannot hope to understand the detail of their tax position, but it is still possible to ask relevant questions and establish relevant guideline The tax risk strategy is comprehensive and is widel understood within the organization and also by its chosen 5: The current 16% external advisers status of organizations tax risk strategies The tax risk strategy is comprehensive and is widely understood within the organization 17% There is a tax risk strategy but it is not widely understood outside the tax department 50% b y understood10% There is a tax risk strategy but it is no There is no tax risk strategy 7 5%10%15%20%25%30%35%40%45%50% Base: All respondents(961 Percentage of respondents Industry best practice- tax strategy Prepare a tax strategy, including a risk strategy, and get approval from the board Set key performance indicators(KPIs), which align to business objectives. Tax should be seen as a business partner by the rest of the business and be integrated a Ensure external advisers are aware of strategy so that their contribution is relevant and so that they can operate as part of the overall tax team. 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
4 © 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. Industry best practice – tax strategy Prepare a tax strategy, including a risk strategy, and get approval from the Board. Set key performance indicators (KPIs), which align to business objectives. Tax should be seen as a business partner by the rest of the business and be integrated with the business. Ensure external advisers are aware of strategy so that their contribution is relevant and so that they can operate as part of the overall tax team. One issue the Commissioner apparently has in mind is that company Boards should have a view on the level of tax risk that is acceptable, rather than have others determine it for them. The survey found that 67 percent of respondents believed that their corporation’s tax risk strategy either did not exist or was not widely understood within the organization as a whole (fig 5), and one can infer that a number of Boards are among those who do not understand it. Boards might well respond that because of its complexity, they cannot hope to understand the detail of their tax position, but it is still possible to ask relevant questions and establish relevant guidelines. Figure 5: The current status of organizations’ tax risk strategies
Risk management What do we mean by tax risk? The broad answer is that it is the risk that something may go wrong, so that the tax consequences of a transaction or business may not be those expected However one can be more specific than this. For financial organizations, tax risk can be better understood if it is divided into the general risks that most commercial organizations are likely to face, and the specific risks attached to financial products offered by the industry. These are llustrated in Tables 1 and 2 below Table 1-General risks Type of risk Nature of risk compliance Technical or factual inaccuracies Miscoding of expenditure Late payment of tax Failure to plan Technical imperfe cessive aggression in the planning Failure to implement planning corectly Accounting Incorrect recognition of tax liability Table 2-Transaction risks Type of risk Technical The technical basis of the tax treatment is successfully challenged The tax analysis is dependent on an accounting treatment which is not accepted change of law a change of law affects the transactions before maturity, break even point or the Inconsistency The treatment adopted and arguments to support one transaction prejudice arguments in another transaction Multiple transactions fail as a result of a single technical failure The risk that the transaction will not be implemented as required so that it fails on a question of fact Administrative The ongoing administration of the transaction is not correctly recorded in the accounts. or the tax returm elections are not made or there is some operational failure the fiscal authority Publicity conceming the transaction adversely affects standing with shareholders, counterparties, policyholders and other customers 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
5 Risk management What do we mean by tax risk? The broad answer is that it is the risk that something may go wrong, so that the tax consequences of a transaction or business may not be those expected. However one can be more specific than this. For financial organizations, tax risk can be better understood if it is divided into the general risks that most commercial organizations are likely to face, and the specific risks attached to financial products offered by the industry. These are illustrated in Tables 1 and 2 below. © 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. Table 1 – General risks Type of risk Compliance Planning Accounting Table 2 – Transaction risks Type of risk Technical Accounting Change of law Inconsistency Concentration Implementation Administrative Reputation Nature of risk The technical basis of the tax treatment is successfully challenged The tax analysis is dependent on an accounting treatment which is not accepted A change of law affects the transactions before maturity, break even point or the required return is met The treatment adopted and arguments to support one transaction prejudice arguments in another transaction Multiple transactions fail as a result of a single technical failure The risk that the transaction will not be implemented as required so that it fails on a question of fact The ongoing administration of the transaction is not correctly recorded in the accounts, or the tax return; elections are not made; or there is some operational failure The transaction or approach significantly prejudices the relationship with the fiscal authority Publicity concerning the transaction adversely affects standing with shareholders, counterparties, policyholders and other customers Nature of risk Technical or factual inaccuracies Miscoding of expenditure Late submission of returns Late payment of tax Poor presentation of tax planning Failure to plan Technical imperfections in planning Excessive aggression in the planning Failure to implement planning correctly Incorrect recognition of tax liability