Tax & Accounting Blog

The New Realities of Tax Risk Management

Corporate Income Tax, Cost-Basis Reporting, Forecasting, Global Tax Compliance, International Reporting & Compliance, ONESOURCE, Risk Assessment, Tax Provision, Transfer Pricing, Uncertain Tax Positions, US Income Tax Compliance, WorkFlow Manager February 22, 2012

The Tax Council Policy Institute (TCPI) tax risk conference that I attended on February 15 and 16 in Washington, DC brought together experts and stakeholders from across the industry. Over 280 professionals from corporate tax, trade, risk,and treasury groups met with tax lawyers, accounting firms, and revenue agencies to discuss policy and practice aroundcorporate tax risk.  The resounding themes echoed were: transparency, efficiency, clarity, consistency, and effectiveness in tax policy enforcement.

 

From a Regulatory Perspective

IRS Commissioner Doug Shulman opened the conference with guidance on how the Federal government views tax risk. His argument is that the topic aligns well with the IRS’s goals, as they have been on a multi-year initiative to reduce uncertainty for corporations, individuals, and the agency.  He highlighted the steps they’ve already taken, introducing: the CAP program (Compliance Assurance Program), Schedule UTP, the Fast-track settlement program, and increased tax information reporting (viz FATCA and, on the individual side, equities cost basis reporting.)  All of these programs are designed to find potential risk and controversy items earlier and/or resolve them sooner. Commissioner Shulman talked about how the agency has been working hand-in-hand with corporations.  He noted that the CAP initiative for large corporate taxpayers, which involves identification and resolution of concerns before the return has been filed, had gone from 17 voluntary participants in 2005 to 160 today.

From a Corporate Perspective

Participants focused on the range of risks they face – from disparate transfer pricing standards globally, audits, and policy changes, to systems risk, currency issues, and staff turnover. One of the biggest areas highlighted by participants was the risk associated with turnover of key staff.  Without easy access to process maps; data at specific points in time;  and key tax, valuation and accounting technical knowledge, the tax function in a corporation will continue to face even greater internal risk, in addition to the external risk around changing tax regimes. 

    • Matt Frank, Senior Tax Counsel at General Electric, pointed out that while APA’s (Advance Pricing Agreements) can be an answer to large or risky inter-company transactions for large multinationals, they cannot cover the volume and range of transactions that occur across a huge number of entities in scores of countries. He also noted that more than 30% of exports are to related parties. Other solutions must be employed.
    • Victoria McInnis, Chief Tax Officer at General Motors, mentioned the potential risk of changing upstream financials.  She also highlighted a positive of SOX and FIN 48:  that tax risks and issues reached a broader audience, increasing understanding and forging important relationships.  In that vein, she pointed out how important it is that memoranda start in non-tax language, so that broader audience was able to better comprehend and deal with tax issues.
    • Bill Curry, Chief Tax Officer at The Dow Chemical Company, talked about the difficulty corporations sometimes face in getting legal entity results, which in turn impacts the already challenging task of properly forecasting deferred tax assets. 

 What’s clear is that every large taxpayer is likely to face significant external and internal risks. It’s all in how we address them.  One of my favorite aspects to the conference was a way to think of the risks once we uncover them.  The following questions were some of those proposed as a way of assessing many of these risks: 

    • What could happen?
    • How bad could it be?
    • How likely is it?
    • What can be done in advance?
    • Who “owns” the risk?
    • Does the boss know?

As for uncovering the risk, one panelist perhaps had the best suggestion when it comes to tax risk:  ‘try to have a healthy sense of paranoia.’

How is your company handling risk? Share your comments below.