Demystifying the Tax Control Framework

The reality is that tax compliance obligations are becoming increasingly burdensome. In addition the tax function has to manage a never-ending array of tax disputes, while also being expected to identify opportunities for efficiency and savings.

It is little wonder that many heads of tax we engage with, describe feeling overwhelmed.

In our experience, this is largely driven by some common causes, such as a misalignment of wider business objectives with tax objectives, a lack of a clear set of guidelines for how the tax affairs of the business should be conducted, the constant threat of nasty tax surprises jumping out of the woodwork, and sometimes a lack of clarity regarding roles and responsibilities relating to the different tax types.

The implementation of a robust Tax Control Framework can be truly transformative in addressing these challenges, bringing about a renewed sense of purpose and confidence for the head of tax, the tax team, the wider business and its stakeholders.

At its core, a Tax Control Framework provides the critical building blocks to manage the tax affairs of a business, from both a strategic and an operational perspective. The OECD describes it as “…the part of the system of internal control that assures the accuracy and completeness of the tax returns and disclosures…” This can be broken down into various tangible areas:

· A documented Tax Strategy

This is the cornerstone of the framework. It requires an upfront understanding of the overall strategic objectives of the business, so that the strategic tax objectives can be defined and aligned. It articulates the overall tax risk appetite of the business and sets parameters for tax decision-making. It should be approved annually and communicated to all stakeholders.

· A documented Tax Policy

While the tax strategy defines what the business is seeking to achieve in relation to tax, the tax policy lays down the non-negotiable principles of how the business should conduct itself in relation to tax in order to give effect to the tax strategy. It is the overarching rulebook that provides clear guidance on matters such as tax resourcing, use of tax advisors, tax technology, and references key tax processes such as tax compliance and dispute resolution.

· Roles and responsibilities for tax

Clearly defining and documenting the accountability and responsibility for tax across the business. The Board is ultimately accountable for all aspects of the business including tax, but it typically devolves this accountability through the CFO to the head of tax. However, the head of tax is reliant on many other stakeholders in the business (across finance, operations, human resources, payroll, etc.), to help him / her to understand all the tax risks the business could be exposed to, and to ensure that the business is tax compliant. These stakeholders in turn have a responsibility to the head of tax.

· Tax processes and procedures

This is where the rubber hits the road. Robust, consistent and efficient processes and procedures ensure that the strategy and policy become embedded in the day-to-day operations of the business.

·  Tax risk management

Setting out a formal process for the ongoing identification, evaluation, management, reporting and monitoring of emerging tax risks across the business.

· Testing and assurance

The policies and processes in the framework should be subject to regular monitoring and testing. The framework should be capable of providing assurance to stakeholders, including external stakeholders, that tax risks are subject to proper controls and that outputs such as the tax returns, can be relied upon.

So, what then are the main advantages to developing a Tax Control Framework? There are many advantages but the most significant of these are highlighted below:

1. Compliance assurance: It helps ensure that the business complies with tax laws and regulations, reducing the risk of non-compliance penalties.
2. Risk management: A well-defined tax risk management framework helps to avoid nasty surprises. It identifies potential tax risks and implements controls to mitigate them, helping to avoid unexpected tax liabilities.
3. Improved accuracy and efficiency: Standardised processes and controls enhance the accuracy of tax calculations and reporting, while streamlined processes lead to greater efficiency and consistency in the execution of tax tasks.
4. Transparency: A structured tax control framework increases transparency in tax reporting and compliance. This also leads to greater stakeholder confidence in the management of the tax affairs of the organisation, which may allow it more room to engage in effective tax efficiency and optimisation.
5. Communication: It enhances communication between departments (e.g., finance, legal, and operations) regarding tax issues, ensuring a more coordinated approach to tax.
6. Audit preparation: A robust Tax Control Framework makes it easier to prepare for tax audits.
7. Adaptability: A Tax Control Framework can be adjusted over time to accommodate changes in tax legislation, business operations, or organisational structure.

Naturally, there is an upfront cost to developing, implementing and fully embedding a Tax Control Framework. Such costs should, however, not be seen as a sunk cost.

Rather, it should be seen as an investment in future-proofing the tax function where clarity, transparency, predictability and confidence are the new norm.

Author:
Graham Molyneux, Partner