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The Rise of Tax Risk as a Corporate Governance Issue 

Over the past several years, the fields of corporate governance and social responsibility have risen in importance, compelling boards and finance executives to take more interest in and responsibility for tax matters within an organization.

 

Today’s businesses face increasingly rigorous regulation and growing pressure from a variety of parties within and outside of the company to demonstrate that they’re well-run, responsible organizations. The management of tax is now one of the criteria by which corporate governance is judged by investors and other third parties, such as regulators, the media, and especially the tax authorities.

And the emphasis on tax risk and governance is expected to get stronger. Unified by the Organisation for Economic Co-operation and Development's (OECD) Forum of Tax Administrators, the CRA, the IRS, and their counterparts are linking a company’s approach to tax and its relations with tax collectors with the quality of its corporate governance. The tax authorities are also influencing governments to enact stricter laws against companies that are seen as shirking their civic duty through inappropriate tax plans.

Greg G. Wiebe

Greg G. Wiebe

Partner, Global Head of Tax

416-777-3271

For example:

  • In the United Kingdom, senior accounting officers of large companies must annually certify that their tax systems and controls are adequate
  • The United States requires companies to report “uncertain tax positions”—which are not certain to be upheld on audit—on their balance sheets and, in the future, on their tax returns.
  • Australia recently laid out a detailed tax risk management framework that socially responsible companies should adopt.

In Canada, Quebec has set up a new regime requiring companies to disclose “aggressive tax planning” transactions, and the federal government is developing rules to establish a similar regime nationally. The CRA is also set to embark on a project to evaluate the risk profile of large corporations: Companies that have a strong tax governance structure and a history of cooperation with the CRA will be assigned a lower risk score—and experience lighter CRA audit coverage as a result. To respond to this environment, businesses should strive to have a solid tax management foundation in place—a governance framework that helps the company reduce its effective tax rate responsibly while managing its tax risk.

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