The largest potential creditor of any taxpayer is the taxman. All Inland Revenue departments worldwide have extensive powers to investigate the business affairs of taxpayers to make sure they are getting their fair share of taxes.

Often the problem with this is that Inland Revenue departments will jump to conclusions in reassessing the taxes due to them, and then raise additional tax assessments that could run into the hundreds, if not, millions of dollars, with penalties and interest added.

A properly devised prevention strategy, as part of a tax risk management process, will assist in preventing this from happening. But it requires a guided and specifically planned approach by corporations, who are prepared to throw 'some light" on their tax affairs, in all FOUR corners of the organisation, and not just that which is exposed in the tax compliance department. Deloitte made an educated guess that most corporations only cover up to 40% of their tax risk in their tax compliance departments. You find this difficult to believe? Go to www.taxtalk.co.za and take a look at the tax survey that has been conducted over the past 2 years, and see for yourself what business taxpayers are saying anonymously in the summary of results. This is what they are saying iy you don't have the time to look up www.taxtalk.co.za and more specifically the RESULTS (Click Here):

• 52% of taxpayers are only 30% tax compliant or don't know;
• 79% DON'T have a tax strategy;
• 50 - 60% are NOT communicating properly with their tax compliance departments;
• 41% are NOT sure their source of information for tax compliance is reliable;
• 65 - 79% of taxpayers have NOT undergone a high risk tax audit in the last 2 years.

(43% of the survey participants are larger corporations)

Tax Risk Management is the broader based process designed to minimize the risks associated with Inland Revenue audits. It is designed to act as an early warning system to ensure minimal tax exposure if .

The project was developed with research done by Daniel into the TRM papers published by various professional bodies world wide, in response to the promulgation of the Sarbanes-Oxley Act in the USA. This research was then converted into seminar material when he started implementing a Tax Risk Management process for some of the largest corporate taxpayers in South Africa.

One of these corporations is the largest taxpayer in South Africa, and is a well known multinational corporation with businesses in more than 60 countries around the world. The TRM project was lauded as a resounding success by the CFO of this multi-national in London. Many of the practical processes and procedures followed with success in this TRM project have been applied in the system developed by Daniel.

The Tax Risk Management process implemented by Daniel and his Tax Team involves instilling the following principles in the corporations they consult to:

·         Become aware of regulatory changes.  In addition to keeping up with changes, it is important to know what approach peers are taking – in your industry and in your region.  Gather information about emerging practices to help form policy within your own company.  Organize this knowledge so it can be deciphered easily and used to create future plans;

·         List all prominent stakeholders.  From audit committees to operational department heads, stakeholders in tax risk will have their own agendas and issues.  Start with a list of those who will directly affect or be directly affected by tax risk management {TRM}.  Then review how you relate to each, planning for optimal communication and co-operation;

·         Confirm your understanding of the overall enterprise-wide risk management systems.  Talk to the Chief Risk Officer if there is one.  Read risk documents.  Reach out to Operations, IT, Finance and Treasury, regulatory/compliance and transactions departments, all of which have risk issues and profiles.  Review strategic documents:  tax strategy, risk strategy and overall business strategy.  Consider how they align and make appropriate adjustments to the tax strategy if necessary;

·         With every new calendar year, it makes sense to review and adjust tax department objectives.  Make sure that your tax department objectives reflect all changing demands – both external and within the organisation;

·         Initially, each Tax Manager should look at SOX 404 compliance requirements and create a list of to dos for proper documentation and testing.  In addition, best practices will go beyond the 404 work to incorporate other elements of risk, such as compliance and operations.  While SOX directly addresses financial reporting, other areas may indeed be the sources of risk;

·         Sit down the CFO/FD before each quarter closes to discuss challenges, opportunities and objectives.  This may seem obvious, but it is critical if your new direction is to be in line with expectations.  With proper direction, all tax activity will stay on focus;

·         Become involved in communicating with the audit committee, by getting yourself on the agenda to present the mission of the Tax Department on your own terms;

·         Upgrade the definition of “tax risk” to incorporate the company’s definition of risk.  This is also a time to make sure “risk” includes the potential to lose out on opportunities, such as making the tax function perform more efficiently;

·         Start early to review files of major transactions, which will need to be in an audit-ready condition.  An initial review of the file will help prepare you for any extra work required in that area;

·         Look at the Tax Department operating model and make sure activities are robust enough to meet the demands of compliance or financial reporting;

·         Tax Teams must not be isolated from the business divisions.  Tax is a function that requires a Tax Strategy, in line with the business objectives, rather than focussing on tax technical issues;

·         Boards must be kept informed and agree to the work Tax Teams are doing, and it’s affect on overall risk.  Boards must question controls and tax consequences of major transactions, ensuring proper independent reviews;

·         Tax Teams must focus not only on corporate tax issues, but broader business issues to identify broader tax issues on operational and transactional aspects;

·         The Sarbanes –Oxley Act has increased the level of attention to be paid to corporate governance and tax risk;

·         The typical attitude of Tax Teams world-wide is conservative – they will do nothing to provoke tax authorities, or go to court to defend tax structures, hence the necessity to form a good relationship with the Inland Revenue Representative and to attempt to settle tax disputes;

·         Do not spend too much time on compliance and not enough time on Tax Planning.  Tax Teams must refocus their efforts, through the use of information and technology properly;

·         Agree the appetite for tax risk with the board;

·         Ensure independent review of tax risk by the Tax Steering Committee and the Tax Team outside the tax department;

·         Include a consideration of the customer position when signing-off a transaction;

·         Ensure:

o        Tax processes have been identified;

o        Tax risks associated with tax processes have been identified;

o        Appropriate controls are in place;

o        Post-implementation review is conducted on each transaction;

o        Repeat transactions can only be carried out once new tax opinions obtained;

o        Adequate measures are taken to document all tax planning;

o        The external advisors are aware of the Tax Strategy as part of the Tax Team;

o        A high degree of tax awareness in the business, starting at board level through to key managers.  A checklist for communication will include (emanating from the Tax Strategy):

§         understanding the corporation’s philosophy on tax risk;

§         explaining the corporation’s tax strategic objectives;

§         discussing the effective tax rate and how it relates to the tax strategy;

§         explain how the Tax Team functions with external advisors;

§         showing tax issues relating to corporate events and functions – transactional and operational;

§         Review transactions in light of legislative and regulatory changes and consistency of legal arguments and concentration of risk;

§         Set key performance indicators that are aligned with business objectives;

§         Tax should be seen as a business partner with the rest of the business and integrate.

In order to give effect to a world class tax team within your organisation the following four pronged approach is recommended:

·         The formation of a solid, experienced and knowledgeable tax team, including both in-house and outside participants (e.g. FD, Tax Manager, in-house tax team, legal team, auditor representative, and outside tax advisors, with access at certain times to both transactional advisors (internal team handling mergers, acquisitions, MBO’s, unbundling etc., i.e. big transactions), operational managers (managing key and strategic components or divisions of the business) and financial accounting managers, involved in reporting transactions and operations, and participating in the tax pack compilation.  This tax team will be fed with key business information generated by the {TRM} System, designed to act as an early warning system in highlighting key risk areas identified by SARS in respect of your business, and from the current tax risk assessment and compliance project (Ivan) you have just completed;

·         The installation and implementation of the {TRM} System through key ‘tax hot spots’ is designed to monitor the following areas in the business through constant information exchange:

·         Transactional areas – any new expenditure/income?

·         Operational areas – any new expenditure/income?

·         Financial Accounting areas – any new income/expenditure?

·         Compliance areas – monitoring tax returns/SARS queries/basis of gathering information through in-house tax audits.

All of the above can be done through a web driven instrument to ensure broad-based communication.   Each participant must complete a survey document once a month, which will highlight areas to investigate.

The retention of a “response team” that will be comprised of the outside advisors and the legal team.

The creation and maintenance of a tax planning forum to investigate and propose on an on-going basis, tax planning opportunities.

The practical implementation of the Tax Risk Management  process can be summarised as follows, involving a fully integrated approach between advisors, the audit committee and the board, and internal representatives responsible for tax compliance, giving the required level of security to the board that the corporation is tax compliant, or in the process of becoming fully tax compliant:

The Tax Risk Management Project (“the TRM Project”) involves actively engaging with the Inland Revenue department in an effort to:

·         Establish a sound corporate tax relationship with the Inland Revenue; and

·         Attend to and resolve all The Taxpayer’s outstanding tax issues.

The Primary objectives are:

• Take control of the process with the Inland Revenue.
• Conduct a full review of all risk areas and clarify probability, likelihood of occurrence and exposure.
• Make recommendations to the Tax Steercom on plans to resolve these.
• Interact with the Inland Revenue to ensure successful resolution/closure of each agreed item.

The Secondary objectives are:

• Establish an effective working relationship with the Inland Revenue.
• Maintain an effective tax department which is equipped with the knowledge and skill of how to interact with the Inland Revenue and address past and future issues.