Tax Risk Management From Risk To Opportunity

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Chapter 2

Tax Control Framework
Robbert Hoyng,* Sander Kloosterhof** and Alan Macpherson***

This chapter is based on information available up to 1 November 2009.

1. From risk management to opportunity management

This chapter describes the key elements of a tax control framework (TCF)
and how such a framework is to be built. In this respect one should realize
that there is no “one size fits all” TCF. Each TCF needs to be custom built
to the specific needs of the organization and taking into account the specif-
ic DNA of that organization. Nevertheless, when building a TCF there are
a number of generic elements both in process and building blocks that ap-
ply to each TCF.

In this chapter we will try to provide insight into the aspects of construct-
ing a TCF tailored to your organization and these “common elements” so
you can use this as a benchmark to your TCF or as a starting position for
building your own TCF. The first part will provide an overview of the
terms and definitions used, and a first introduction into the background of
tax control. Next, the construction of a TCF will be described. This part
provides an overview of the building blocks of a TCF. It provides a de-
scription on all the building blocks needed to build and construct a TCF
(see 3.). The following paragraph addresses the cultural and organization
context of tax control (see 4.). The last paragraph suggests how to get
started with the introduction of a TCF and to get in control of tax risks (see
5.).

* Partner Tax Management Consulting, Deloitte, the Netherlands.
** Partner Tax Assurance, Deloitte, the Netherlands.
*** Partner Tax Transformation, Risk and Co-sourcing, Deloitte, United Kingdom.

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Bestand: {3b2}IBFD/Boeken/2010/Tax Risk Management(TRM)/opmaak/binnenwerk/07_TRM_c02.3d – Pagina 19<19>72 [totaal: 54]


Chapter 2 - Tax Control Framework

2. Tax control framework

2.1. Terms and definitions
In this part the terms and definitions of this chapter will be described:

CoCo – Canadian Criteria of Control Board.

Control – A measure, agreed upon by those involved, to mitigate a risk, by
reducing the probability of occurrence (“probability”), by reducing the im-
pact (“impact”), or to reduce both the probability of occurrence and the im-
pact.

Control activities – Control activities are the policies and procedures that
help ensure that management directives are carried out. They help ensure
that necessary actions are taken to address risks to achieving objectives.
Control activities occur throughout the organization, at all levels, and in all
functions. They include a range of activities as diverse as approvals, au-
thorizations, verifications, reconciliations, reviews of operating perform-
ance, security of assets, and segregation of duties.

Control objective – Control objectives provide specific targets against
which to evaluate the effectiveness of internal control. Typically they are
stated in terms that describe the nature of the risk they are designed to help
manage or mitigate.

COSO – The Committee of Sponsoring Organizations of the Treadway
Commission (COSO) issued Internal Control – Integrated Framework to
help businesses and other entities assess and enhance their internal control
systems.

Decision table – A precise yet compact way to model complicated logic.
Decision tables, like if-then-else statements, associate conditions with ac-
tions to perform. Unlike the control structures found in traditional pro-
gramming languages, decision tables can associate many independent con-
ditions with several actions in an elegant way.

Earnings per share (EPS) – The portion of a company’s profit allocated to
each outstanding share of common stock. Earnings per share serves as an
indicator of a company’s profitability: (net income – dividend on preferred
stock) / average outstanding shares.

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Tax control framework

Effective tax rate (ETR) – The effective tax rate is calculated as the tax ex-
penses divided by the income before taxes.

Enterprise risk management – Enterprise risk management is a process, ef-
fected by an entity’s board of directors, management and other personnel,
applied in strategy setting and across the enterprise, designed to identify
potential events that may affect the entity, and manage risk to be within its
risk appetite, to provide reasonable assurance regarding the achievement of
entity objectives.

Key control – Key controls are those that are most important to monitor in
order to support a conclusion about the internal control system’s ability to
manage or mitigate meaningful risks.

Levers of control – A control model introduced by the Harvard Scholar
Robert Simon.

Risk – A potential event, which might have an adverse effect on the goals
of an entity. This also includes a missed opportunity.

Risk management process – A uniform process for a structured and consis-
tent approach to conduct risk management, with the aim to provide insight
into the key risks and controls of an entity.

Tax control framework (TCF) – A tax control framework is a system
(process) to identify, mitigate, control and report tax risks. A TCF forms
part of a business control framework, which is different for every organiza-
tion.

2.2. Building an effective, efﬁcient and transparent tax
function
The most important common element in each TCF is the ultimate goal of a
TCF: to build a tax function within an organization that is effective, efﬁ-
cient and transparent.

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Picture 1: Building a tax function

Effective
The tax function of an organization should support and contribute to its
overall strategy. There is more to tax than just making sure all the compli-
ance deadlines are met. Especially in the area of tax planning, it is key to
understand the overall strategy of an organization. Spending time on high-
tech tax planning is not effective if this means taking on risks without con-
tributing to the strategic direction of the organization. In 3.1. we will ad-
dress the various aspects that need to be considered when setting a tax
strategy.

Efficient
The tax function must be organized in such a way that the goals are
achieved as efficiently as possible. This means that based on the tax strat-
egy set, the organization should consider what resources are necessary to
take on the responsibilities. In this consideration, aspects such as location,
outsourcing, co-sourcing, budget etc. should be taken into account. Fur-
thermore, the tax function should be managed as an integral part of the or-
ganization, and not as a stand-alone function. For example, only as an inte-
gral part of the organization it is possible to implement a control
framework on tax from a single-audit point of view. Then the tax function
can efficiently use the control measures already in place in the organiza-
tion. Finally, the tax functions should address what kind of supporting
tools are necessary to carry out the responsibilities. Efficiency can be
achieved especially in the area of automation and integration of this into
daily processes.

Transparent
The transparency of the tax function applies on more than one level. First,
the various roles and responsibilities should be transparent. The tax func-
tion is broader than just the tax department. It should be clear to each per-
son that has a role in the tax function, what his or her responsibilities are

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and how they relate to the responsibilities of the other persons. Secondly,
when carrying out the tax function, each decision should be made transpar-
ent as to its effect in respect of the tax strategy – not only for the desired re-
sult, but also for the impact of the other possible outcomes of that decision.

Compliance
A TCF focuses on, and will contribute to, the effectiveness, efficiency and
transparency of a tax function. However, the more traditional role of a tax
function is to organize the filings in time and in a proper way. In this chap-
ter the compliance process in itself is seen as a resultant of the tax function
processes.

2.3. From risk to opportunity
The term “tax control framework” may give the impression that it is all to
do with avoiding tax risks. However, being exposed to risks is a part of
doing business. The key is not to take on risks that are serious threats to
the strategy of your business. In this respect, there are two kinds of risks.
First, there is the risk without any upside, e.g. failure to comply with ad-
ministrative requirements. Generally, an organization should try to mitigate
these kinds of risks to an efficient extent. The second risk is the risk that
comes with pursuing an opportunity. When an organization pursues an op-
portunity, there is always a risk that the opportunity will not be achieved,
or that additional costs are incurred to achieve that opportunity. An organi-
zation should not try to avoid these kinds of risks but make sure that when
an opportunity is pursued, the opportunity (measured against the strategic
objectives) outweighs the risk. In addition, appropriate measures should be
taken to mitigate the negative impact of this risk.

The same applies to tax risks. When it comes to the first category of risks,
the organization should mitigate these risks to the extent that it is efficient.
A well designed and functioning TCF will have this effect. However, a
more important role for a TCF is in the relation to the combination of op-
portunity/risk. First, a good functioning TCF will enable an organization to
spot more opportunities as the tax function will not be a staff function but
embedded in the organization. Second, a TCF will enable the making of a
transparent choice whether or not to pursue an opportunity, weighing the
benefits against the risk. And third, because the organization has a good in-
sight in its portfolio of opportunities and associated risks, it will be able to

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pursue more opportunities as it can measure the impact against the portfo-
lio.

2.4. What is tax control?
Before introducing the elements of a TCF, tax control should first be iden-
tified. This part provides an introductory description of a TCF and the risk
areas.

Description of a TCF
As described above, a TCF should result in an effective, efficient and trans-
parent tax function. In this tax function, risks that are not the counterpart
of an opportunity are avoided to an efficient extent. All opportunities are
made transparent as to risk and reward (taking into account the strategy of
the organization) so that a reasoned decision can be made on which oppor-
tunities to pursue (and risks to take on) and which opportunities not to pur-
sue. In a TCF for each process in an organization, the roles and responsi-
bilities as to the tax aspects are set and procedures and tools are made
available. The allocation of roles and responsibilities should be made in
such a way that all opportunities and risks are spotted. Subsequently, in a
TCF all of the above is properly documented and reported.

Areas and risks
In setting up a TCF, an organization should make clear decisions as to
what the scope will be. First, the organization should decide which taxes
could potentially have a material impact on the organization. When meas-
uring this impact, an organization should not only look at the direct finan-
cial impact but also at indirect financial impact such as impact on reputa-
tion. For most organizations this will mean that corporate income tax
(CIT), value added tax (VAT) and wages taxes are relevant, or “in scope”.
However, depending on geography and industry other taxes can also be in
scope.

The second task is to determine in which processes the “in scope” taxes
can play a role. This is not limited to the tax reporting processes them-
selves, but also includes various business processes. Especially for transac-
tion taxes such as VAT, these business processes are very important. In 3.
this will be described in further detail.

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2.5. Overview of the building blocks

The tax function of an organization should consist of the following build-
ing blocks:

Picture 2: Building blocks of a tax function

This will be discussed in more detail in 3. The tax function should start
with a tax strategy. This strategy should contribute to and support the over-
all strategy of the organization. This means that not only financial goals
such as earnings per share but also non-financial goals such as corporate
social responsibility should be taken into account. Based on this tax strat-
egy, the organization should formulate a framework within which it man-
ages the opportunities and associated risks. Subsequently, it should make
sure that the decisions taken and the financial effects are properly docu-
mented in the administration and reported to the stakeholders. The final
step is the compliance towards the tax authorities. The accounting and re-
porting process should be organized in such a way that tax compliance is a
seamless exercise. These four pillars can only function if they are sup-
ported by the appropriate tools and resources.

2.6. Overview of the roles
The tax function is not just the tax department. Within an organization,
more persons play a role. For example, the M&A department of an organi-
zation has a role in the tax aspects of an acquisition, even if this role is just
limited to informing the tax department that an acquisition is being consid-
ered. This principle applies throughout an organization. It is a key point
that an organization gets a good understanding of these roles. It is tempting
to approach the TCF from the viewpoint of the tax department. However,
in this approach the organization runs the risk that the perception of the
roles and responsibilities of the tax department differ between the business

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and the tax department. If this difference in perception is not addressed,
the organization runs the risks that not all relevant tax opportunities and
risks are considered. In this respect it is important to note that the interpre-
tation of the tax law is in itself seldom a source of tax risks. In most cases,
the risks are triggered by either not realizing that tax may play a role in a
transaction (“insight”) or that an issue although spotted is not correctly ad-
dressed. This is often the result from incorrect factual information (“analy-
sis”) or incorrect follow-up (“follow-up”) on the tax technical advice
given. This is illustrated in the picture below:

Picture 3: Causes of potential tax risks: insight, analysis, follow-up

From this picture it is clear that communication is a key element to avoid
risks – making sure that the relevant persons understand the issue, the es-
sential facts and what is needed to resolve the issue, and, most importantly:
who takes ownership.

The picture below shows a responsibility matrix for corporate income tax
which can be used to facilitate the discussion on these roles and responsi-
bilities.

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Picture 4: Example of a tax responsibility matrix

Based on this matrix, the parties concerned (in this example, CFO, finance
department, tax department and the business) can discuss to which extent
each party is involved in the respective subjects. The CFO will have an ac-
tive role in setting the strategy but probably a very limited role, if any, in
local tax return compliance.

2.7. Stakeholders
There are various parties that have an interest in a good functioning TCF.
In this paragraph we will briefly address the “stakeholders” being:
(a) management;
(b) (supervisory) board;
(c) internal audit department;
(d) external auditors;
(e) tax authorities;
(f) public; and
(g) tax department.

(a) Management
The management of an organization (CEO, CFO) is ultimately responsible
for the (financial) performance of the organization. Tax can have a substan-

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tial impact on this performance, both positive and negative. Generally,
management does not consist of tax professionals and as a result need to
get assurance that all relevant tax risks are addressed and appropriate ac-
tion will be taken. Therefore, they benefit if, as result of a TCF, roles and
responsibilities as to identification (and follow-up) of risks are clearly set.
Moreover, if the tax technicalities of these risks are “translated” into im-
pact on the strategic goals of the company, they are in a position to decide
on what action is needed. It is therefore essential that management is in-
volved in building the TCF, especially where it covers strategy, operations
and risks.

(b) (Supervisory) board
In many jurisdictions, organizations have a (supervisory) board. This board
is generally not involved in the day-to-day business, but has a supervisory
role (e.g. on behalf of shareholders) towards management. Risk manage-
ment is one of the key areas where the supervisory board plays a role. Also
here, the tax position of an organization is an important element. The
supervisory board should be periodically updated as to the tax risk position
of the organization. Without being tax specialists themselves, members of
a supervisory board will be able to understand the impact of the tax risk
position to the organization, as in a TCF risks are addressed based on im-
pact on the overall strategy of the organization.

(c) Internal audit department
In the governance structure of an organization the internal audit department
(IAD) has an important role: having a TCF, takes tax out of the “black
box” and makes it auditable on the processes and relating control measures
which should be in place. An IAD will not audit the tax technical content
of the tax position of the organization, but can audit whether appropriate
persons were involved as set in the TCF. As a result, the IAD plays an im-
portant role in the operation of a TCF, because “what is being measured
will be done”. In this respect it works both ways: the IAD can function as
auditor of the tax function because of a TCF, and the TCF can be em-
bedded in the organization through the work of the IAD.

(d) External auditors
Where management is ultimately responsible for the financial performance
of an organization and the reflection thereof in the financial statements, the
external auditor needs to make sure that these financial statements do in-
deed paint a fair picture of the financial position of the organization. In the
audit of these financial statements, the external auditor cannot audit each

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and every transaction. For example, checking whether or not the organiza-
tion has applied the correct VAT percentage on each invoice is too cum-
bersome and inefficient. For many elements, the auditor will have to rely
on the internal processes and controls. In addition to auditing key transac-
tions, the auditor will therefore have to audit these processes and controls.
With respect to the example on VAT, the audit can be a check on the ad-
ministrative system and authorization as to changes. If an organization has
a TCF with clearly defined processes, responsibilities and controls, this fa-
cilitates the task of the auditor.

(e) Tax authorities
One of the responsibilities of an organization is to meet its periodic obliga-
tions under the tax compliance. With respect to the various taxes, returns
will have to be filed and payments made. In the situation of a tax authority
that has the role of reviewer of these returns, a well organized tax compli-
ance process, where all relevant information is easily accessible, is of ob-
vious benefit to the tax authorities. In this respect tax authorities have an
interest in the functioning of an organization’s TCF. This is even more the
case where there is a more proactive relationship between organizations
and the tax authorities such as in the Netherlands. In this situation, where
organizations and tax authorities have an open dialogue on the material un-
certain tax positions, it is key for the tax authorities that the organization is
indeed able to bring all material positions to the table and can provide the
tax authorities will all relevant information.

(f) Public
As result of the developments around corporate social responsibility
(CSR), the general public is also interested in (part of) the TCF. Many or-
ganizations already disclose information on tax and CSR in their financial
statements. This tax policy, which is linked to the overall strategy, is part
of the TCF.

(g) Tax department
Last, but not least, the tax department also benefits from a TCF. First, a
TCF will facilitate the day-to-day operations of the tax department. It will
be involved early on in important business transactions and surprises can
therefore be kept to a minimum. But second, a TCF provides a common
language for the tax professional in the tax department when communicat-
ing with the other stakeholders. Tax planning can be translated into impact
on strategic objectives such as cash flow management, earning per share,
etc. In this way the tax department can demonstrate how it adds value to

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the organization. Another aspect of that common language is the transpar-
ent link between tasks (strategy, operations and risks, etc.) and the need for
supporting technology and resources. So when the budget meeting is being
held, the head of tax department can support his budget demands by ulti-
mately linking these to the ultimate strategy of the organization.

3. Building the tax control framework

3.1. Introduction
How do we build a TCF which maximizes the beneﬁts of tax opportunities
and mitigates the risks? This question can only be answered by under-
standing the causes of potential risks and the business areas they originate
from. In this section, where we refer to risks, a missed opportunity is also
seen as a risk.

Picture 5: Causes of potential tax risks

As described in our earlier analysis on tax risks, the main sources are lack
of tax oversight, tax analysis (both analysis of the facts and tax technical
analysis) and the follow-up.

Effective risk management should focus on an integral approach towards
tax risk management. As a start, COSO Enterprise Risk Management
(COSO ERM) could be used to identify the key areas of tax risk manage-
ment.

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Building the tax control framework

Additionally, this must be embedded into an automated system and into
the existing organization. This all adds up to the following key areas of the
TCF approach:

– Tax strategy. Relating to high-level goals, aligned with and supporting
the entity’s mission (see 3.2.).

– Tax operations and risk. Relating to effective and efﬁcient use of the
entity’s resources (see 3.3.).

– Tax accounting and reporting. Relating to the reliability of the entity’s
reporting (see 3.4.).

– Tax compliance. Relating to the entity’s compliance with applicable
laws and regulations (see 3.5.).

– Automation and technology integration. Relating to the IT system of
the organization (see 3.6.).

– Organization and resources. Relating to the resources and competen-
ces of the organization (see 3.7.).

Combined, these areas form an integral approach to become, and stay in
control of tax risks. This is schematically depicted in the picture below:

Picture 6: Building blocks of a tax function

3.2. Tax strategy
By considering the tax strategy, an organization should consider its tax ac-
tivities in relation to the vision, mission and strategy of the organization.
Vision articulates and legitimizes the existence of the company; it de-

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scribes the reason for the company’s existence (raison d’être). The mission
relates to what the company will do in the context of its vision. It formu-
lates what activities the company will do. Finally, strategy is about how
these activities will be executed. In this context, tax strategy is about how
the tax function will contribute to the overall goals of the organization.

Historically, the tax function has been a separate part of the organization
which operated in a solitary manner. In that position it has always func-
tioned on the sideline of the organization. From a financial perspective, the
tax function has always been regarded as a cost centre, to deliver services
to the organization at minimal costs. This is in contrast to a profit or invest-
ment centre which is measured against sales and return on investment
(ROI). To make the shift from a cost, to a profit or investment centre, the
fiscal department should formulate a fiscal strategy, execute effectively
and clearly communicate its priorities towards other departments. By doing
this, the role of the tax department changes and it becomes a business part-
ner in the decision making process. It no longer operates as in a silo, in-
stead it is interdisciplinary and involved with other parts of the organiza-
tion, where the tax expertise offers added value for the organization.

This part is dedicated to the high-level goals of the organization and is the
starting point of the TCF. With respect to the tax strategy, the following
will be addressed:
(a) goals;
(b) communication and involvement;
(c) organizational life cycle;
(d) regulation; and
(e) tax governance and social responsibility.

(a) Goals
In general, organizational goals can be divided in (i) qualitative and (ii)
quantitative goals. Qualitative goals are topics related to continuity of op-
erations, transparency, ability to provide information and good corporate
citizenship. Quantitative goals are about earnings per share, tax cash flows
and effective tax rate (ETR).

(i) Qualitative goals
How can the tax function contribute to the organization?

A first step in the discussion on taxes is to formulate a tax strategy. Tax
strategy should be an extension of the overall strategy to align tax activities

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with organizational goals and activities. Mainly, tax should contribute to
the strategy of the organization.

Continuity of operations. Continuity of operations is another topic which
many companies regard as their strategy. By understanding and monitoring
the tax position of the organization, pending issues with the tax authorities
and fiscal disputes, the organization is able to plan ahead.

Transparency. Transparency is a goal shared by many companies. In the
context of tax strategy, this means the organization has an up-to-date
awareness of its tax position. It is able to measure this by setting up a re-
porting structure which provides this information. By doing this, the organ-
ization is able to take informed decisions and steer actively on activities
which create value after tax.

Able to report and inform stakeholders in a timely manner. Another com-
pany strategy might be to be able to respond to information requests to
stakeholders in a timely and appropriate manner. To be able to do this,
companies should be able to generate the required information and decide
on what to report. From a tax perspective, the organization should be
aware of its outstanding tax issues with the authorities and be able to quan-
tify those positions. Only then is it able to report to stakeholders in a timely
manner.

Good corporate citizenship. Corporate citizenship is about the social posi-
tion an organization has within society. It implies a good governance and
responsible behaviour of the company. Next to the strategy of profit opti-
mization, a company is considered to have a social function and should
therefore act as a reliable actor within society. In the domain of tax man-
agement and tax strategy, this implies a responsible position as a taxpaying
entity towards the tax authorities. If a company identifies itself as a good
corporate citizen, it should make its contribution to society by paying a de-
cent percentage of taxes. It also implies a good, trusting relationship with
the tax authorities.

(ii) Quantitative goals
How can the tax function add value to the organization?

To visualize the added value of the tax function, one could make a value
pyramid describing how tax activities contribute to quantitative goals like
EPS and ETR.

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Building the value pyramid begins with the understanding of the overall
quantitative goals of the organization. In many proﬁt oriented organiza-
tions, this is maximizing shareholder value by maximizing EPS.

EPS. An overall goal of the organization could be to maximize the EPS of
the organization because it is directly related to maximizing shareholder
value. This quantitative goal consists of net income attributable to share-
holders and the weighted average number of shares outstanding. Building
our pyramid further, the net income attributable to shareholders consists of
income before taxes and tax expenses. Dividing the two gives the ETR.

ETR. The ETR consists of the income before taxes and the tax expenses.
Tax expenses in a year consist of the current year tax expenses, the tax ex-
penses for previous years and the outcome of deferred tax assets and liabil-
ities combined.

The relationship between these drivers can be visualized in the following
picture:

Picture 7: The value drivers of earnings per share, related to the tax function

From this picture it can be seen that the tax function has three key drivers
to contribute to the ultimate goal of EPS:

– Current year tax expense. The current year tax expense is calculated
on the proﬁt before tax adjusted for permanent items. Deferring tax ex-
penses through timing differences has no direct impact on the ETR

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(see below). If EPS is an important key performance indicator (KPI)
for the organization, the focus of the tax function should be on tax
planning in relation to permanent items and not in relation to timing
differences.

– Tax expenses previous years. A second element is the “true-up” for
previous tax years. A true-up can have various causes. It can be a re-
sult of the fact that in the tax ﬁling, more accurate numbers are used
compared to the tax accounting process. Another possibility is the
movement in the contingent tax positions as result of tax audits, statute
of limitations, etc. Where the organization strives for a stable ETR,
these kinds of true-ups can have a negative effect.

– Movement in deferred tax position. The same applies to the deferred
tax position. Although the timing differences in themselves do not
have an impact on the ETR, rate changes can have a substantial impact
on the ETR if there is a net deferred tax asset (DTA) or deferred tax li-
ability (DTL). A reduction in statutory tax rate has an increasing effect
on the ETR in the case of a net DTA position. Another element that
can have a substantial impact is the (de)recognition of DTA for tax
loss carry-forwards.

(b) Communication and involvement
To work as an integrated part within the organization, all parties should
change their approach in the way they involve the tax function in the pri-
mary activities. This also requires the tax department to consider its added
value to the organization, bearing in mind the life phase of the organiza-
tion.

Considering the tax function as an integral part of the organization will
help to identify tax risks at an earlier stage so that they can be taken into
account during regular decision making. The tax function as an integral
part of the organization is, besides involvement, about communication be-
tween departments. Communicating business issues, during commercial
decision making processes, with the tax function will improve the decision
making process as a whole. In many cases risks can be identiﬁed in an
early stage, which otherwise could have a strong effect on the business
case itself. This requires the tax function to develop as a strategic business
partner in providing management with adequate information. Furthermore,
the tax function should proactively suggest improvements where value
could be added. By transforming itself into a strategic partner, the tax func-

35




tion will add more value and have a more prominent role in the organiza-
tion.

The tax department should organize and work from a process perspective
to create a stronger connection with the rest of the organization.

(c) Organizational life cycle
Is lowering the ETR a smart decision?

The answer to this question largely depends on the life phase the company
is in. For a start-up company, tax improvement programmes have less im-
portance compared to more mature organizations. In a start-up company,
growth is of the essence and profit and taxes payments are relatively low.
After further growth, the organization stabilizes and profit becomes more
prominent. Effectively, well managed taxes become more important to the
organization to create value. The further the nominal tax payments (profit
before taxes multiplied by nominal tax rate) increase, the more interesting
it gets to look into the tax structure of the organization.

During the lifetime of a company, three main phases can be identified: the
start-up phase, the stabilization phase and the control phase.

Phase I: Start-up phase
In the early phase of the company, all the energy, time and resources are
focused on building the company. Revenue from operations is predomi-
nantly directly reinvested in the company to facilitate this process. Conse-
quently the taxes paid in this phase are relatively low. Another advantage
of this phase is the possibility for the company to be eligible for subsidies
from the government. It could be beneficial to the organization to assess
these possibilities.

Phase II: Growth and stabilization
After the start-up phase, the company shows strong growth. Growth accel-
erates during this phase. The company transforms into a mature company
and at the end of the phase starts to stabilize. At the end of this phase the
products and/or services are better crystallized and accelerating growth
comes to an end. This provides the opportunity to the company to start
paying dividends to the investors and shareholders. This increases the im-
portance of a sound tax planning.

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Phase III: Control
After the stabilizing phase we see the control phase. During this phase the
company focuses more on cost efficiencies and allocating its resources effi-
ciently to create value. Tax planning has become an important way to limit
costs and to operate efficiently.

Picture 8: Organizational life cycle phases

(d) Regulation
Another factor in the assessment on how a tax function could contribute to
the overall strategy of the company is the intensity of regulation in its in-
dustry. There are significant differences between industries, especially
when considering industries which pay high duties on their products (oil
and gas, alcohol and cigarettes, etc.). In an industry where taxes form a big
part of sales, it will be more likely that companies will involve the tax de-
partment in their commercial decision making process.

To identify the elements which contribute to the tax position, the organiza-
tion should identify the value drivers of their business and overall goals.
Generally, the strategy of the company is articulated in financial terms
(e.g. revenue, profit after taxes, EBITDA). The relationship between these
drivers and the potential tax effects can be identified by creating a value
driver pyramid. This way the interrelationship between all drivers can be
identified and the tax effects visualized.

37




(e) Tax governance and social responsibility
Although tax strategy has always historically been focused on minimizing
tax cash outflows, it also involves communication with its tax stakeholders.
These stakeholders demand transparency on how the company will con-
tribute to the greater good and that it will show sound corporate (tax) citi-
zenship.

Apart from minimizing the tax payments, building a good working rela-
tionship with the tax authorities has long-term benefits and should be part
of an overall tax strategy. Potential disputes can be solved in a shorter time
period and the organization has more clarity and assurance about its tax po-
sitions.

3.3. Tax operations and risk
After addressing tax strategy, the execution of the tax strategy will now be
described. This part will address the following:
(a) tax operations;
(b) risk; and
(c) tax decision management.

(a) Tax operations
The approach taken by organizations to tax risk is constantly evolving.
Historically, the way organizations dealt with tax risk was to define how
risk adverse they were and list out their main areas of concern, often focus-
ing on standard tax issues such as transfer pricing and other cross-border
concerns. Today, companies are approaching tax risk less in terms of mon-
ey lost and instead are focusing on where there may be opportunities
missed for tax optimization, and where there could be reputational dam-
age.

In measuring and reporting tax risk, transparency is key, and organizations
are using a variety of tools to make tax risk more accessible to those with-
out a tax, or indeed, a risk background. An example of such tools would be
a risk register with the results displayed in a “map”. Such an approach is
based on established risk consulting techniques that are familiar to both
audit committees and the board. The methodology behind it is designed to
combine the expertise of the tax director with a wider insight into the
causes of risk within the wider business. Done properly, the tax risk pro-

38




cess will look beyond specific tax technical issues and examine the activ-
ities of the organization as a whole.

Leading companies regularly assess their tax risks using this risk method-
ology. By plotting identified risks according to the likelihood of occur-
rence against the potential impact of the risk being realized – its signifi-
cance – a company can develop a view of which risks need to be
prioritized. In most cases, the organization’s risk appetite is determined
prior to this exercise, so that an acceptable level of risk can be pre-plotted
on the risk map, e.g. as red, amber and green lines.

Risk maps which plot risks in this way can be easily adjusted in response
to subsequent reassessments of the likelihood and significance of risks
once they have been mitigated through remediation plans or agreed ac-
tions. The risk map is an important tool in risk management, and many or-
ganizations are using it as a clear and effective method of communicating
the importance and ongoing status of tax risk to the rest of the business.
An example is shown below where the horizontal axis depicts the impact
of a risk and the vertical axis represents the preparedness of the organiza-
tion.

Picture 9: Risk map: identifying your tax risks by using a risk map

Technology is also playing a large part in demonstrating sound tax risk
management and good governance. Increasingly, there is an alignment of
tax and financial systems to provide standardized tax processes on a group-

39




wide level. This is complemented by the use of global data warehouses,
tax “dashboards” (as discussed further below) – that can measure KPIs and
risks in real time – and enhanced data analysis for tax planning. In many
cases, organizations are leveraging off existing systems such as bespoke
tax risk management software or business-wide risk solutions, for example
the governance, risk and compliance (GRC) modules within their enter-
prise resource planning (ERP) system (e.g. SAP or Oracle). These tools
provide a structured platform for defining, maintaining and monitoring
governance, risk and compliance for tax. Identifying and understanding
the current position and formulating a value added strategy with key tech-
nology objectives is where many organizations currently are in their adop-
tion of good governance and risk management.

Improving tax processes as a way of managing risk
A first step in improving tax processes is to undertake a current state analy-
sis of the tax function. This often involves carrying out benchmarking and
tax risk reviews to better understand the existing tax processes and deter-
mine where the tax function wants to be in the future. Organizations are es-
tablishing KPIs that will help identify gaps. These KPIs often have a clear
link with the objectives of the wider business and many include ETR, cash
tax, demand management, key risks, key controls, internal resources and
control activities.

The use of KPIs will help define an end-state – where the tax function
wants to be in say 5 years time. Organizations that are planning ahead in
this way are setting up overarching systems that benefit multiple tax proc-
esses. This requires the formalization of key objectives around how they
think their tax function should operate. These tax objectives should cover
every aspect of tax management. As an example, typical tax objectives
could include:
– reducing the resources spent on compliance by 25% by 2012;
– cutting the tax financial close process by 1 week;
– more resource allocated to tax-effective business planning; and
– improved level of standardization and consistency across tax to en-
hance governance across all tax processes.

Many organizations are undertaking exercises to map their end-to-end
processes and the systems that support them. Such process maps should
highlight the volume and value of transactions flowing through different
elements of the process and key interfaces between different processes and
systems. These exercises help businesses identify areas of key tax risk and

40




how they are currently controlled. Documentation of the process is particu-
larly key where tax activities are undertaken by non-tax specialists, either
because the activity is diffused throughout the organization (as is fre-
quently the case with indirect tax reporting) or has been moved into a
shared services environment. Maintaining the quality of tax compliance in
these circumstances is paramount and less reliance can be placed on the in-
formal understanding of a closely knit tax team as perhaps was the way in
the past. Tax authorities are often keen to carry out this kind of work to
build their understanding of a large corporate’s processes and systems, and
this is particularly true where they see tax compliance activities moving
into shared services centres. As a rule, many companies are uncomfortable
providing this kind of access to tax authorities in the absence of a formal
enquiry and so would often share their own documentation to provide the
necessary assurance.

The organizations which can convince their stakeholders (including tax au-
thorities) that their tax systems and processes are robust will be able to
communicate their tax risk more conﬁdently, and will be better placed to
cope in a constantly changing regulatory and risk environment through
greater certainty, improved efﬁciencies and a stronger basis to defend tax
planning and reporting.

(b) Risk
(i) Insight, analysis and follow-up
Tax risks do not only arise from an incorrect analysis of the technical facts.
Many tax specialists assume that technical analysis is the main cause for
errors and a potential source of risk. Considering taxes from a broader per-
spective reveals that many risks arise from a lack of communication.

41




Picture 10: Causes of potential tax risks

For all tax areas, causes of potential risk are insight, analysis and follow-
up. In most of these cases communication between the tax function and
other departments is a cause of potential risk.

(ii) Business departments
Tax risks arise everywhere in the organization; it is a misconception to
think these risks only originate within the ﬁscal or ﬁnance department of
the organization.

Picture 11: Business departments of an organization

In a case where the R&D department develops a new product, it is not
common to consult the tax department about potential tax risks, altering
the pricing of the product itself or changing the tax position of the entire
company. This situation could very well be a cause for potential risk.

42




For a tax department, it is valuable to be informed about important changes
in the business. If potential tax risks can be identiﬁed at an early stage,
small adjustments can have a strong positive effect on the overall tax expo-
sure. This can protect a company from high potential losses. This also
works for actors outside the tax department. For them it is valuable to
understand how potential initiatives will translate into tax effects so that
they can adjust at an early stage.

Therefore, one could imagine a grid where the several departments are all
analysed on tax risks in terms of insight, analysis and follow-up. This is
the ﬁrst step towards a new model to approach tax risks in an integral way.

(iii) Organizational context
A common misconception is to think of a TCF as a stand-alone frame-
work.

Picture 12: Integrated elements of the TCF

A TCF should be embedded in the organization together with other means
to provide assurance about tax processes. The tax professional has a set of
tools available to document processes and secure a way of working which
provides assurance. Another means to embed the TCF in the organization
is to formulate a tax strategy to support the TCF. Examples of tools which
could secure the assurance on tax processes are, for example, a responsibil-

43




ity framework or a risk paragraph in the annual report. This all should be
continuously tested with business practice.

(iv) The audit cycles
A TCF is an integrated framework and should build on the internal con-
trols which already exist within the organization. In most organizations,
departments already have internal controls in place based on the audit
cycles of the auditor.

Picture 13: Integration of business processes and the audit cycles

Therefore, a central question should be: What controls do we already
have?

(v) Integration and measurement
All variables considered will result in an integrated approach towards risk
management. The implementation of the TCF will result in a grid that in-
cludes the tax areas and potential causes for tax risks (insight, analysis and
follow-up), articulates the inclusion of all departments and acknowledges
the organizational context in which a tax strategy and the tax organization
play an important role. This is depicted in the TCF model shown below.

44




Picture 14: TCF model: integration of all elements of a TCF

45




(c) Tax decision management
Tax decision management describes the analysis of scenarios and possible
outcomes and the analysis of the likelihood of these scenarios. It builds on
the identification of the value drivers described in the paragraph about tax
strategy.

The tax pyramid starts with the overall financial goal of the organization
and breaks this goal down into several value drivers. Some are directly in
the domain of tax and tax management; others have an indirect link to
taxes. The value pyramid can be visualized using the technique of a pyra-
midal chart which links key ratios and the underlying value drivers of the
business. When key variables are identified, one can use decision tables to
get insight into different scenarios and the actions to be taken.

Picture 15: Decision table: a structured way to make tax decisions

The next example shows the link between the tax strategy and the deci-
sions made on the various options within the strategy, using a five-step ap-
proach.

Example
To identify the tax strategy, one should start with the overall strategy of the or-
ganization.

Step 0: Identify the corporate strategy
From a financial perspective, an overall strategy could be “to maximize share-
holder value”. More specifically we could identify EPS as the overall strategic
goal of the organization. Taking a closer look, EPS depends on net income (at-
tributable to shareholders) and the number of shares (weighted average num-
ber of shares) outstanding. Net income could be split into income before tax
and the tax expenses. The combination of these two variables provides the
ETR. This is schematically presented in the pyramid below.

46




Picture 16: Effective tax rate pyramid

Step 1: Define the tax strategy of the organization
As a first step in making your decision you should define your objectives in this
decision context and the way you measure them. Suppose that your financial
objective in this decision context is to minimize the corporate tax cash outflow
for the organization, measured in euros, for the current financial year (FY1) and
the next 2 financial years (FY2-3). You may also have other non-financial objec-
tives, such as “keeping a good relationship with the tax inspector” or “being a
good corporate citizen”, but we do not analyse these in the context of this ar-
ticle.

Step 2: Analyse variables influencing the objectives
After defining the objectives and their measurement, you analyse which (groups
of) variables influence the objective(s). In this decision context, the objective is
financial and is dependent on three variables, i.e. interest deduction, liquidation
loss deduction and the tax rate against which the deductions, if available, can
be made. This can be graphically shown in a variables-objectives pyramidal
model as in the picture below.

47




Picture 17: Variables-objectives pyramidal model for reduction of tax cash
outflow

Step 3: Analyse scenarios and possible outcomes
As a next step, you analyse the scenarios for each option. It then becomes
clear that “accepting” has just a single scenario: the corporate tax bill will be re-
duced by 30% to EUR 16.5 million in FY1 and with 30% to EUR 4.5 million in
FY2-3 each. Hence, the total nominal reduction of tax cash outflow of the option
“accepting” for the period of 3 years (FY1-3) would be EUR 25.5 million. “Re-
jecting”, however, provides at least four scenarios with possible outcomes
ranging from zero to EUR 52.5 million, analysed in the decision table below.

Picture 18: Reduction of tax cash outflow for the option “rejecting”

After this analysis, many decision makers have sufficient information to make a
sensible decision. Suppose you do not want to accept the risk of scenario R1,
in which the organization would end up with no reduction of tax cash outflow at
all. It is then irrelevant what the likelihood of scenario R1 is. The option “accept-
ing” then always outweighs “rejecting”, as the first does not have a scenario in
which the organization ends up with no reduction of tax cash outflow at all.

Step 4: Analyse likelihood of scenarios
Before starting the probability assessment, we should first examine what new
insights we gain by analysing the likelihood of each scenario. The answer is
that probability quantification allows you to compare the options “accepting”
and “rejecting” in terms of expected value and risk distribution. Suppose that
the tax director estimates the likelihood that liquidation loss deduction will be
upheld by a tax court at 70% and the likelihood of interest deduction at 60%.

48




Decision Table 2 shows how these two estimations result in the likelihood of
each possible outcome in terms of reduction of tax cash outflow, given “reject-
ing”.

Picture 19: Reduction of tax cash outflow in the option “rejecting” with
probabilities

The expected monetary value of the option “accepting” is simply EUR 25.5 mil-
lion, because it has just one possible outcome. The expected monetary value of
the option “rejecting’ is the weighted average of each possible outcome calcu-
lated to EUR 34.5 million. The risk distribution is visualized in the histogram in
the following graph:

Picture 20: Risk distribution for reduction of tax cash outflow

The decision whether to accept or reject the tax inspector’s offer may still be dif-
ficult, for example, because you may find it difficult to balance the certainty of
the lower value “accepting” option against the higher value, but more volatile
“rejecting” option. There may be more objectives than just the monetary impli-
cations that are relevant in this decision context, but the valuation of both op-
tions should at least have facilitated a sensible decision.

49




Step 5: Assess the probability
Now that we have discussed the use of probability assessment, we can start to
examine how we should make the assessment. This step comprises two sub-
steps:

– Step 5.1: Analyse which variables influence each of the scenarios.

– Step 5.2: Assess the inductive and deductive uncertainties.

Step 5.1: Analyse the influencing variables
When focusing on the probability that the liquidation loss will be deductible, the
tax director analyses the legislation and determines that loss deduction is de-
pendent on the fulfilment of a number of conditions, i.e. that:
– the liquidated company must be incorporated or resident in the European
Union;
– the liquidating company must hold the shares in the liquidated company
for 3 years or more; and
– the liquidated company must have completely ceased its activities.

The variables-objectives pyramid shows how the new information is modelled:

Picture 21: Including variables for liquidation loss

The following decision table analyses the rules around liquidation losses:

50




Picture 22: Liquidation losses

Step 5.2: Assess the inductive and deductive uncertainty
To provide a full analysis of the inductive and deductive uncertainties extends
beyond the scope of this chapter. However, we will briefly address what these
uncertainties are in this perspective:

– Deductive uncertainty: the probability that the general rule in an analysis is
correct. In a decision table, the deductive probability is the probability that
the value of a certain rule (R1 or R2, etc.) is as given as an answer in that
specific rule.

– Inductive uncertainty: the probability that the observations about a specific
situation in an analysis are correct. In a decision table, the inductive proba-
bility is the probability that a given situation will arrive at a certain rule.

Both uncertainties are part of problem solving by using a decision table. Tax
professionals should take this into account when they solve problems using this
method.

3.4. Tax accounting and reporting
Traditionally, tax accounting issues are raised at the end of the fiscal year,
and this takes place after the statutory reporting processes are finished. Be-
cause all tax accounting activities are postponed until the end of the year,
the company does not have any insight into the outcome of this process
and might encounter unexpected results. This part will address the follow-
ing:
(a) tax accounting: a proactive approach; and
(b) tax reporting: the tax dashboard.

(a) Tax accounting: a proactive approach
A way to anticipate uncertainties at year-end is to implement a system of
continuous monitoring of the tax position. By monitoring the tax position
throughout the year, the organization is able to take corrective actions be-
fore it is too late, and have assurance about its fiscal results at year-end.

51




During the year, commercial events take place which might also have an
effect on the tax position of the company. For example, changes in the fis-
cal structure of the entity could have an effect on the total CIT of the or-
ganization but not be taken into account until year-end. This means the in-
formation is readily available and the company could identify the changes
in the CIT well before year-end.

The same applies to positions where the organization is eligible for VAT
deduction. In the situation where the company is no longer eligible for pre-
allowance, it will have a direct effect on the results of the company. In
theory, an organization is a non-consuming entity and should therefore
have no remaining VAT positions at year-end. However, in practice most
companies have VAT positions in their chart of accounts at year-end,
mainly because the organization does not have a monitoring and control
system in place which covers this area.

On wage taxes, many organizations do not fully utilize the available gov-
ernment subsidy programmes which could benefit the organization. In
most of these cases the HR or tax department is not aware of existing pro-
grammes and does not have a control system which monitors this topic
during this year.

Once tax accounting is executed during the fiscal year, it provides two ad-
vantages to the organization. First, the organization is aware of the taxes to
be paid at the end of the year. Secondly, most of the activities involved in
filing taxes are already completed. Therefore it improves the efficiency of
the tax filing process at the end of the year, increases the speed of the filing
process and reduces adverse effects at year-end.

52




Picture 23: The annual tax accounting process

(b) Tax reporting: the tax dashboard
Within the regular periodic reporting process of an organization, taxes
have always played a minor role. Recently, tax specialists and specialists
within the finance function of organizations have found this area to be of
increased significance in the total value creation process of the organiza-
tion. Efficient tax processes create value when maintained and monitored
closely. The means through which the monitoring takes place is by imple-
mentation of a monitoring system. A way to monitor the tax objectives for
the organization is by the use of a tax dashboard. The tax dashboard pro-
vides valuable insight to enable effective decision making and the ability
to stay “in control” of the overall tax position.

53




Picture 24: Tax dashboard to enable continuous tax monitoring

54




An effective tax dashboard contains all the tax elements relevant to the or-
ganization and is largely dependent on the nature and industry of the busi-
ness. For instance, a highly regulated industry with heavy taxation (e.g.
liquor and tobacco) has other monitoring elements compared to a less
heavily taxed industry. The final set-up and configuration of the tax dash-
board are largely dependent on these industry characteristics and also the
overall strategy of the organization which formulates the KPIs on a tactical
level. To provide insight and an overview of performance metrics widely
used throughout all industry, we identified the following generic metrics:

(i) Deferred and current tax positions
As part of the financial statements of an organization, deferred tax liabil-
ities, deferred tax assets and current tax assets are important elements on
which the organization should steer. Because these line items are a direct
part of the financial statement, they have a direct impact on the bottom line
result of the organization.

(ii) Effective tax rate
The ETR calculates the taxes due, both current and deferred, compared to
the profit before taxes. From a theoretical point of view, the ETR should
be equal to the nominal tax rate, which is the corporate income tax rate of
the geographic and fiscal jurisdiction in which the organization operates.
In practice, however, these rates show variations over time. It is the duty of
the fiscal and financial actors within the organization to provide insight
into these deviations.

(iii) Tax compliance
Tax compliance is about filing the tax return and making the actual pay-
ments. A complete tax dashboard should include these elements for each
tax area to identify whether the organization is still on track with its tax
processes. The presentation of this progress could be shown with a dash-
board light in red, yellow and green.

(iv) Tax risk provisioning
Tax provisioning is about all outstanding tax issues which have yet to be
discussed with the tax authorities, but are likely to be a point of discussion
in the future. Tax provisions are measured on impact and likelihood. The
product of these two factors provides the estimated amount of money to be
provisioned for the tax risk. Underlying assumptions on the impact should
be formulated by the fiscal department in cooperation with the financial de-

55




partment. The likelihood of the issue occurring should be estimated by the
risk owner who has the most inside knowledge of the issue.

(v) Tax litigation
Similar to tax risk provisioning, tax litigation is measured on impact and
likelihood, although tax litigation is about issues already under discussion
with the tax authorities.

(vi) Tax opportunities
Tax opportunities are the ability of the organization and the tax function to
create value from the existing tax structure and future tax planning pro-
posals. It has the same elements as tax litigation and tax risk provisioning,
although it solely focuses on value creation instead of the mitigation of tax
destruction.

(vii) Tax control
The last element in the tax dashboard is about tax control. It is an overview
of the key risks which are identified by the organization. It provides an
overall sense of the risks which could affect the overall goals of the organi-
zation and displays the control activities action(s) taken to mitigate the
risk. It provides top management with a list of priorities and the status of
the counter measures taken, displayed in red, yellow and green.

3.5. Tax compliance: a global scope
The scope of tax compliance nowadays has reached beyond borders and
fiscal jurisdictions. Therefore a company should approach tax compliance
with an international vision.

Compliance in a global perspective means integration with accounting and
reporting, automation of processes and the ability to organize tax processes
around it. In this respect compliance is an integral part of a TCF. To be
able to live up to those challenges, the organization should ask itself the
following questions:

– Did we organize our tax accounting processes in an efficient and effec-
tive manner to live up to the challenges that lie ahead?

– Are we in control of our tax filing processes?

56




– Have we organized our tax processes in an effective manner?

– Are we able to comply in a timely manner with the demands of the tax
authorities?

Once the organization is able to construct a clear picture of its ability to be
compliant with the rules and regulations which apply, it will also be aware
of the areas which need additional attention and effort.

3.6. Automation
This section will be dedicated to the automation of processes to facilitate
the tax processes in an organization. This part will address the following:
(a) lessons to be learned from finance transformation;
(b) new approach;
(c) transform the tax professional;
(d) start the transformation journey; and
(e) questions to ask.

Introduction
Ensuring underlying accounting systems are tax sensitized is an important
step towards managing risk and improving efficiencies in the tax reporting
and compliance processes. Many organizations review their chart of ac-
counts and ledger codes in an attempt to ensure that the financial data they
receive during the tax compliance process and for quarterly reporting is in
a form that will enable them to better understand what the numbers mean
and more accurately and efficiently report their tax figures.

For example, the British tax authorities have indicated that companies that
fail to appropriately configure their underlying systems to track tax sensi-
tive expenditure may be regarded as having committed a deliberate error
rather than being simply careless, and thus face a significant increase in
penalty exposure.

Probing into the underlying accounting systems such as SAP and Oracle
can be disruptive, costly and require specialist help. The tax director will
have to weigh up the cost benefits of doing so and determine whether a
lack of granularity and quality of information being received by the tax
function could risk failure of compliance with current legislation.

57




While sometimes triggered by tax authorities some organizations are using
this as a way of identifying cash flow opportunities. While some under-
statements will undeniably be found as part of the focus on process and
systems, there will be a similar (and potentially larger) number of over-
statements identified, with higher claims for relief and more rapid repay-
ments of tax achievable. To find these, organizations will need improved
access to information to improve their claims – this can include, for exam-
ple, better granularity of information relating to capital expenditure (to im-
prove tax depreciation claims), and increased detail relating to certain ex-
penses (such as legal and professional fees and client entertaining which
could be classed as marketing).

So how can improving technology systems in this area offer realizable
cash savings? Typically, there are three barriers facing tax functions that
are seeking to make claims more accurately and earlier, getting the disal-
lowances right and reducing reliance on estimates. These are:
– the data required to improve claims is in the accounting system or
ERP but is not easily accessible;
– the data is not in the accounting system or ERP but is actually main-
tained elsewhere in the organization and not easily accessible to the
tax department; or
– the data does not currently exist within the organization.

Overcoming these technology barriers to the underlying accounting data
will allow companies to analyse, segregate and manage their assets, liabil-
ities, income and expenditure more accurately. This will enable them to
get a better tax outcome and thus the opportunity to enjoy cash savings.

Understanding these issues will offer the organization the opportunity to
determine the quantum of enhanced claims and whether this justifies the
cost and upheaval of improvement. If such activities are undertaken at the
same time as the work required to comply with the requirements of the tax
authorities, these benefits can be maximized.

(a) Lessons to be learned from finance transformation
Finance transformation has been a major theme for most large corpora-
tions, as well as the focus of significant investment. However, we rarely
see tax included as an integral element of those change programmes. But
changes in tax technology and the visibility of benefits arising from trans-
forming the finance function mean that tax can and must become an inte-
gral part of the programme for change in the finance function.

58




Count the cost of tax exile. When, for example, tax is not part of the scope
for a major ERP implementation or finance system consolidation, major
benefits are missed and the full improvement potential of a change pro-
gramme is not reached. The omission of tax has a number of implications.
Much tax activity is executed as manual and inefficient processes outside
the core system – in fact as much as 80% of tax compliance and reporting
time may consist of gathering data. This creates a drag on the entire finan-
cial organization as the tax reporting – and the data underpinning it – are
handled on a range of separate systems. Demands for accelerated reporting
mean that tax needs to work with the finance function to satisfy regulators
and investors. So including tax as an upfront element of a wider finance
transformation is not only just possible, it is essential.

Focus on the upside. Automation and standardization of processes can cre-
ate a major change in the efficiency of compliance and reporting. They
also open up new possibilities for how tax compliance and reporting are
executed as well as where and how tax resources are organized. There is
no reason, for example, why some tax resources cannot be co-located in
shared services centres to maximize the efficiency and improvement gains
from creating centres of excellence under one (real or virtual) roof. Out-
sourcing, co-sourcing and offshoring – common practice today in the fi-
nance function – are equally applicable to tax.

The benefits of automation and standardization are best shown through a
comparison of how many companies still operate their tax reporting and
compliance today and how those adopting greater automation are achiev-
ing a more efficient, timely and effective process. For many organizations
today, in–country finance directors retain responsibility for preparing the
local tax pack in readiness for filing a return. Typically, this is a largely
manual process whereby information is extracted from financial systems
and repurposed for tax locally before submission to an adviser who gener-
ates and submits the tax return. Some companies are now beginning to use
shared services centres to remove some of the burden from local finance
directors, reducing the complexity of what is presently a multi-staged pro-
cess. Others are poised to go even further. Automation is helping them
drive these separate stages into a seamless process in which data flows di-
rectly from the financial system into the appropriate points in the tax re-
turn. A “review-ready” return can then be assessed by suitably trained re-
sources in a shared services centre before local filing.

There are of course variables that drive the feasibility of this approach
across an international organization. An appropriate accounting system,

59




such as SAP or Oracle, needs to be in place – which is likely at present to
be restricted to a company’s larger territories – as well as tax return soft-
ware.

(b) New approach
As the availability of appropriate systems continues to broaden, more and
more of a company’s tax requirements around the globe will be candidates
for automation.

We already see some companies that are embracing outsourcing options
within tax realize these benefits, and more. One company is outsourcing
the whole process of corporate income tax compliance and accounting
over 5 years. In so doing the company expects total process cost savings of
between 20%-30%, an improvement in standardization, control and visibil-
ity, and an increase in the automation of process, leading to a liberation of
tax professionals in each country to focus on value adding work.

We see three major areas of benefit arising from this new approach:
– improvement in the effectiveness and reduction in the cost of man-
aging tax compliance and reporting on a global basis;
– enhanced ability to reduce the total amount of tax paid through greater
visibility of the tax position and tax drivers; and
– release of time and resource to focus on value adding work elsewhere
in the business and creating the ability to support business strategy and
manage risks better.

By automating tax processes, higher levels of assurance around the accu-
racy of direct and indirect tax source data are gained which will provide
greater confidence in compliance, reporting and planning activities in the
future.

(c) Transform the tax professional
These improvements mean that tax professionals within the organization
will be able to change the way that they approach their work. They will be
able to offer greater support to the business, providing insight for decision
making and helping the business to make sure that it can report to the mar-
ket accurately and quickly. Tax work will no longer need to be carried out
in jurisdictional silos and so “transferable” tax skills – rather than the mas-
tery of a specific country’s regulatory content – will come to the fore. Just
as finance professionals routinely work on a global basis, so too will tax

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professionals be able to focus their expertise to best serve the needs of the
organization.

(d) Start the transformation journey
There is no need to reinvent the wheel for tax. Instead, tax should take the
maximum advantage from the work already carried out in finance. Tax
needs to build on those achievements, working with finance and IT to artic-
ulate what is needed and how to work together to achieve it.

Tax reporting “at the touch of a button” may seem a distant aspiration for
many, but we believe that it is a destination that tax should be travelling to-
wards. There are some companies adopting new approaches that deliver
major improvements.

There is of course no single route to improvement. The degree of standard-
ization and automation that is either desirable or possible will vary from
organization to organization and will reflect the broader business strategy
and environment. However, the investments that companies have made in
their financial systems need to be taken up by tax so that they too can re-
ceive the benefits that the finance function has already seen.

(e) Questions to ask

– Is the process of managing tax going to give the same benefits that we
see arising in other areas of the organization?

– Are our tax processes as automated as they could be?

– Is tax an integral part of the way we collect, manage and report our fi-
nancial data?

– Is tax executed as a workaround?

– Do we have tax reporting at the touch of a button?

3.7. Organization and resources
This part will address the following topics:
(a) organizational resources; and
(b) questions to ask.

61




(a) Organizational resources
People are the cornerstone of any tax function and ensuring they have the
right skills, knowledge, motivation and tools is fundamental to the man-
agement of tax and minimizing risk.

The challenge for organizations is to ensure the right level and balance of
resources given the available budget. To enable effective resource manage-
ment, some tax departments are focusing on the following four elements to
achieve the required levels of performance and quality while balancing
cost constraints:

– Management. Tax directors need to focus on giving the right work to
the right people. This will enable a balanced workload that should be
consistent with the wider organization’s operating strategy.

– Skills utilization. Allocate specific tax work to those staff that have the
necessary tax technical background and skills to undertake that work.
Often, tax directors fail to recognize the extent of areas where an activ-
ity requires technical skills or experience that is not tax-related. Where
this is the case, tax directors can benefit from contracting that work
outside of the tax function.

– Incentivize. Tax personnel should have clear job descriptions, attain-
able opportunities for career progression, and a development and train-
ing plan. Of course, remuneration is also important and these attributes
will ensure that the organization can attract and retain the best tax peo-
ple.

– Motivate. Ownership and pride in the work carried out by tax person-
nel is important. A main risk area for the tax director is to unwittingly
create a working environment which engenders monotony, career stag-
nation or a sense of unrewarded effort. This can readily be resolved by
including staff in meetings, providing clear communication channels
for feedback and discussion, providing achievable goals that challenge
the individual, delegating effectively and building trust.

Of course, many tax directors also look outside their immediate function
for skills and resources. Equal benefits can be leveraged by alternative re-
sourcing options such as outsourcing, use of shared services centres and
external technical consultants.

62



Culture

The important issue for the tax director however is to try and ensure there
is a consistency in the skills and resources used to manage tax in the organ-
ization. Loss of knowledge and expertise of a company’s tax processes and
controls (especially when these may be opaque) is a significant risk.

(b) Questions to ask
– Do we have the right tax competencies in the organization?

– Do we have enough skilled tax personnel in our organization?

– Do we have assurance on the continuity of our tax department?

– Do we have access to external expertise in a timely manner?

– Do we have enough budget to reach our tax goals, considering the
tasks and responsibilities assigned to our tax department?

4. Culture

This part will cover the element of culture in the organization. The follow-
ing will be addressed:

– How can sustainable compliance be achieved without losing flexibility
and creativity? (see 4.1.).

– Alternatives to COSO (see 4.2.).

– Levers of control (see 4.3.).

Culture – “Balancing creativity and control”
An organization is a place where people work together and use their intel-
lect and creativity to create output. The governance structure of an organi-
zation always has to balance the stimulation of creativity and the extent to
which it is in control of this process. Too much creativity could lead to in-
efficient allocation of resources and losing sight of the overall goal of the
organization.

At the other end of the spectrum there is an organization where all pro-
cesses are regulated, checks are in place, but creativity and flexibility are

63


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