This article looks at the types of tax risk associated with a company’s business and the role of board directors in managing them
TAX risk is increasingly being discussed at board level due largely to a rapidly evolving environment of tax law changes accompanied by a more aggressive stance taken by tax authorities on related compliance issues.
Thus the topic has moved up the corporate agenda for companies both in Malaysia and globally, as tax risk is considered one of the most important areas of a tax function.
Corporate boards therefore are expected to take a pro-active stance on tax risk management to identify, assess, control and monitor such risks as part of the overall enterprise-wide risk management process of the company.
Whilst board members are not expected to be experts in tax law and the use of external advisors would be an obvious recourse, this should not obviate the fact that the board should concern themselves with the management of tax risks particularly those associated with major transactions or arrangements.
Few organisations realise that around 30% of its tax risks are managed by its tax department. The majority of tax risks is embedded in transactions or activities undertaken in business units and functional areas where there is little or no oversight. Some examples are listed below:
What are the types of risk relevant to tax?
Tax risk can be part of financial risks (increased taxes and penalties); operational risks (routine daily operations); reputational risks (the perception of the company in the public domain) and personal risks (directors and the CEO are ultimately accountable).
Questions for boards
Among the more challenging tax issues which would confront a company’s board often relate to a transaction or structure which carries with it significant tax benefits with relatively less commercial rationale.
The question then is whether such an arrangement is likely to be viewed as a tax avoidance scheme, and if so, the consequences that will ensue if it is challenged.
The view of tax avoidance has changed dramatically over the years and it now has an ethical connotation requiring answers to questions such as “Is this something we should be doing” and not just “Is this legal”.
Boards would need to determine the extent to which they are prepared to accept such risks and decide how these should be managed. They would invariably require the use of external advisors but here they should be alert to any tendency for management to “shop around” for the desired opinion. This is less likely to occur if the tone has been set from the top.
The following are questions the answers to which will assist boards in evaluating the level of risks involved in a potential dispute situation:
1. How confident are you in the correctness of the advice provided to you?
2. How likely is it that the tax authorities will take a contrary view?
3. If litigation proceeds, what is the risk that the Courts will make a decision in favour of the authorities?
4. What are the potential costs (including penalties) to the company if litigation fails?
5. Has the factual basis on which the opinion is based been properly checked?
6. Is it possible or desirable to seek guidance from the authorities?
7. What is the risk of the case attracting negative attention in the public domain?
In today’s challenging business environment, it must be recognised that tax is one of the key costs and must be managed.
The benefits of tax risk management extend beyond governance to cost savings through more efficient working practices, fewer disputes and effective identification of opportunities all translating into improved effective tax rates and thus earnings per share.
Kang Beng Hoe is executive director of TAXAND Malaysia Sdn Bhd, a member firm of the TAXAND network of independent tax firms worldwide. He can be contacted at email@example.com