Tax risk analysis blends legal knowledge with business acumen to minimize unnecessary tax charges and ensure compliance. Early incorporation of an effective risk management system is vital to avoid tax disputes and potential reputational damage.
Maintaining an up-to-date risk register and staying abreast of evolving global tax laws and reporting obligations are vitally important for businesses, enabling them to identify issues early, reduce costs and lessen the chance of lengthy tax audits.
Identifying Hidden Tax Liabilities
Tax risk analyses are an invaluable way to help businesses and individuals avoid paying unnecessary tax charges while remaining compliant with legal regulations. They identify potential areas of noncompliance, provide concrete suggestions on improving governance and controls and reduce external guidance needs.
Risk management can be complex and requires an effective strategy that addresses all aspects of a company’s tax profile – this may involve responding to rigorous audits, managing reputational risks, dealing with transfer pricing arrangements and reviewing current corporate structures.
Establishing an internal risk register gives teams greater insight into their operational environment and can enhance monitoring efforts in specific areas. Furthermore, creating one provides greater understanding of new legislation or regulatory changes; for instance sales tax laws have evolved to incorporate economic nexus rules, making it essential that businesses understand whether they have triggered sales tax obligations in each state where they sell; Avalara’s in-depth Sales Tax Risk Assessment can assist here.
Identifying Disputes
Recognizing and assessing tax risks is an integral component of tax risk management. This often includes conducting an in-depth examination of their potential financial, operational, and reputational consequences; then evaluating their likelihood helps prioritize mitigation efforts and allocate resources effectively.
Common sources of tax risks include failing to file returns on time; filing errors; having an average or below average tax burden compared with industry averages; or relations with countries or tax authorities with which there may be issues. Reputational harm can arise through public scrutiny of tax affairs or exposure of sensitive information in the media.
Businesses can reduce these risks by creating a governance structure, developing a tax risk function and designating an owner of this tax risk function. They should then take measures such as training sessions, internal audits and consulting experts for guidance to implement mitigation measures such as training courses or annual internal audits to detect issues quickly and resolve them efficiently as quickly as possible, which in turn helps businesses avoid penalties, interest charges or costly litigation disputes that might otherwise arise.
Identifying Regulatory Changes
Regulatory risks are an ever-present danger for businesses that operate across multiple jurisdictions. They can involve transfer pricing arrangements, local taxes and corporate tax matters as well as failing to meet international reporting obligations – managing these risks requires taking an enterprise-wide strategic approach.
A sound risk management system can help mitigate risks by creating an atmosphere of openness and transparency, including procedures for responding to requests from tax authorities and documenting internal controls and compliance activities.
Internal risks can be reduced through training employees and creating clear rules on how to approach complex tax issues. Furthermore, technology can assist businesses in better monitoring risk and assuring compliance – including internationally accessible platforms that allow tax and finance workers to document interactions with authorities from any location globally and systems which prioritise disputes for resolution.
Identifying Expenses
Tax costs and exposures – both financial and reputational – have long been at the top of boardroom, audit committee, and C-suite agendas. As governments battle budget deficits and reserve depletion, the importance of effective tax enforcement has only grown stronger.
As a result, more businesses are being audited, involved in disputes, and incurring additional expenses as a result of noncompliance penalties and indirect costs related to transfer pricing issues (identified by our survey as one of the major tax risks).
An effective tax risk evaluation framework enables businesses to identify and monitor internal risks to ensure they are responding appropriately to the business environment. Furthermore, it helps identify areas for improvements which could enhance control systems or lessen any potential consequences from risks that are identified. Furthermore, such an assessment helps companies develop an acceptable level of risk acceptance that can be expressed within policies and procedures.
