The tax role today: assessing and managing risk

January 15, 2013

Businesses run serious non-compliance tax risks unless they’ve clearly identified their process owners, excellent communication co-exists with the rest of the organization and gaps are addressed.

By Andrew Sawers

Complete the tax returns and pay the tax on time. Getting those two things right probably feels like 80% of the risk has been taken out of tax, but it is rarely that simple.

“It’s one thing to say, yes, I’m filing the return on time,” says Giles Parsons, Caterpillar’s UK-based Director for European Tax and Global Indirect Tax and Customs. “It’s a much more significant thing to say, I’ve got confidence that the right information is being collected for that return and the right process is being followed to put all the right numbers in the returns.”

Several years ago, Parsons identified a significant risk with regard to Caterpillar’s indirect taxes and customs: no one actually had ownership of the processes. This was a dangerous position for the company to find itself in.

“As they are transactional taxes, if you get it wrong, you get it wrong multiple times. The costs can be enormous,” says Parsons who, having identified the process ownership gap, was promptly given responsibility for it by his CFO.

Aside from the penalties, which can be up to 100% or more of the unpaid tax, Parsons notes that getting indirect taxes – and, in particular, customs wrong isn’t always just a misdemeanour in the eyes of the authorities: “It can be a criminal offense. Potentially, somebody goes to jail.”

Today, a global set of requirements has been put in place for all Caterpillar facilities to follow:

  • A very clear framework of what the local processes need to deliver
  • Identify the global process owner for each major area, and the local process owner
  • Set up guidelines for what the processes actually have to deliver
  • Require the local process owner to certify annually that they understand what they’re supposed to do and that they have actually done it

Most of the people who now have responsibility for some of the company’s tax affairs aren’t tax people. They are often finance staff, but, in the case of customs, they may even be “traffic,” or logistics people.

“The controls over customs tend to take place when that good arrives at a location or leaves a location. That process is managed by traffic, so the customs process is typically deeply embedded in the traffic department,” Parsons says.

The shadow tax team

All this draws attention to the problem of having to rely on a “shadow tax team” – people for whom tax isn’t their specialization, but they may have responsibility for tax matters. This isn’t just for administration and compliance, either, but for getting the information flows needed to build tax strategy and more effectively influence business decisions.

John Whiting, Tax Policy Director at the UK’s Chartered Institute of Taxation, says, “One of the biggest risks is not having a mechanism in place to keep you posted on legislative and practice developments in the various countries in which your organization operates. One of the things a tax director needs is a good network and a good team of people. Typically, the tax director only has a relatively small team of direct reports so they are very dependent on the ‘shadow’ tax department.”

Christine Oates, EMEIA Leader of Quantitative Services at Ernst & Young, works with large multinationals to find cash tax savings that arise from their having too much data. Using fast, sophisticated technology, her team is able to search millions of lines of data and identify items of expenditure that haven’t been accounted for properly in the tax returns.

While that can cut both ways, “99% of the time the net result is the company has been under-claiming,” she says. Why? “Finance people that have been handed responsibility for tax just want to get a tax return in on time and not get a massive penalty from the tax authorities or have them come and ask lots of questions.”

It doesn’t help in workflow or risk terms that financial information systems often aren’t geared up for tax purposes. A chart of accounts may make no distinction between a beer and a gin and tonic, for example, but only the former is deductible as a lunch expense in Norway, explains Oates.

Getting relevant information flowing both ways across this shadow tax team is critical, as Whiting explains. “It’s not just about asking your person in Ruritania to let you know what’s happening there, it’s also making sure that they are aware of head office developments that might have a knock-on effect out there.”

Putting tax in the loop

Tax usually doesn’t drive business decisions, but if the tax people and the rest of the business don’t collaborate appropriately, the firm can be exposed to major risks, including missed opportunities and expensive mistakes. For example, as Michael Nelson, Senior Director for Global Tax Audits and Controversies at Pfizer, explains, it is vital to make the right decisions about where to locate his firm’s critical business activities.

“Those decisions involve allocations of capital: physical, intangible and human capital.I view tax as one of those thought-points that go into making a particular decision. It’s very difficult to do your tax planning after a certain set of decisions has been made, after a certain set of activities has begun, after a certain physical location has been stablished. You’re often a little late at the table from that point of view.”

To get those communication flows at Pfizer, the company has made a considerable effort at business partnering, Nelson says, which goes right across the group, at all levels.

“We, in tax, have established relationships with the business, with finance, legal, R&D, logistics, global supply and others. And they’re not just senior leader relationships but also the operational relationships, peer-to-peer across disciplines. I think this has been very helpful in inserting tax into the discussions and into the teams that go through these types of decision-making processes.”

About Giles Parsons

At Caterpillar, the construction equipment and diesel engine manufacturer, Parsons’s responsibilities range from direct and indirect tax in Europe to global strategy for indirect taxes and customs duties. At the core of his role is risk management: avoiding problems before they occur.

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