Enterprise Tax Risk
Tax risk arises when a company operates in an uncertain or unsettled tax environment, such as when tax rules are unclear or in flux, inconsistent application of tax laws, or when a company commits a tax-related error or omission. Tax risk can be expensive and difficult to manage. Companies must employ effective risk management techniques and policies in order to effectively manage their tax risk.
Tax risk can arise from a number of different sources, including improper filing, non-payment or late payment of taxes, tax fraud, and tax evasion. Companies face tax risk when they enter a new jurisdiction, change their corporate structure, or enter into a new business venture. They also face tax risk when they fail to accurately and timely report their income, expenses, profits, or losses. Companies can also face tax risk when they are subject to audit by a tax authority and the audit results in additional taxes or penalties.
Tax risk can be managed by implementing a comprehensive risk management plan which should include an internal review and evaluation of all tax-related policies and procedures. Companies should also ensure they have internal controls in place to ensure accurate tax accounting and reporting. A thorough compliance program should also be in place to ensure the timely filing of all required tax returns and payment of all applicable taxes.
The cornerstone of a successful tax-risk management program is the identification and mitigation of risk before it occurs. Companies should regularly monitor local and foreign tax developments, audit their existing and proposed tax strategies, and update their policies and procedures to ensure continued compliance with local and foreign tax laws and regulations.
In order to minimize the risk of non-compliance, companies should also take steps to protect their interests. Companies should enter into agreements with their tax advisors in order to ensure appropriate and timely advice and should review the accuracy of all filings and information submitted to the tax authorities. Companies should also consider obtaining professional indemnity insurance to provide financial protection in the event of a successful audit action or claim.
In addition, companies should monitor the actions of their employees to ensure compliance with all relevant tax regulations, laws, and company policies. Companies should also consider implementing systems and procedures to monitor and review the activities of third parties such as contractors, vendors, and advisors. Such an approach can help to identify and address potential tax-related issues before they become problematic.
Tax risk can have a significant impact on companies’ bottom lines. Companies need to ensure they have the right internal processes and procedures in place to ensure they adhere to, and remain compliant with, all applicable tax laws and regulations. In addition, they should take steps to identify and mitigate tax-related issues before they occur in order to minimize potential liability and maximize profits. With the right risk management practices and policies, companies can significantly reduce their tax risk exposure.
