KPMG’s TaxNewsFlash for Corporate Executives provide summaries intended for executives who need to be informed about tax developments—but without the technical details.
The changing global environment includes the complexities of operating in countries with often very different tax regimes, tougher documentation and other compliance requirements as a result of increased regulatory scrutiny, and constant uncertainty posed by changing tax laws and tax reform initiatives. It is therefore not surprising that tax risk is moving higher on audit committees’ agenda.
The steps audit committees are taking to strengthen their oversight of tax risk include improving their understanding of how the company’s tax position is determined, determining that the tax department has the resources and expertise it needs, and considering how tax risk fits into the company’s overall risk management framework.
Understanding the company’s tax position and risk profile
Audit committees need to understand—and help determine—the level of tax risk that is appropriate for the company. To do this effectively, they need to understand how management identifies, measures, and manages its tax risks. Questions to be addressed include:
- Do we understand our tax risk exposure?
- How does our effective tax rate compare to our peers?
- What are the key criteria when evaluating a tax position?
- When (and from whom) are opinions sought?
- How is reputational risk measured?
Focusing on tax-related accounting judgments and estimates
Audit committees also need to understand the key processes used to determine the company’s tax position by asking management:
- What are the most significant judgments and estimates used in accounting for income taxes?
- What is the process management uses to determine these judgments and estimates are reasonable?
- How is the judgment made as to what portion (if not all) of a tax benefit needs to be recorded?
- How does management determine whether a tax position is uncertain?
Understanding the company’s tax challenges and capabilities
Audit committees are spending more time with the tax director to stay abreast of tax developments and to learn more details in specific areas of tax risk—for example, requesting more detail concerning the company’s global transfer pricing policies. These discussions also focus on whether the tax department’s resources are sufficient, and whether they are properly aligned with the company’s tax planning objectives and risk profile.
- Is the tax department adding value beyond compliance?
- How do we measure the tax department’s performance?
Incorporating tax risk into the company’s broader risk management profile
To the extent the tax department is not responsible for managing all tax issues, integrating tax risk into the company’s broader risk management framework can help the company monitor compliance, identify gaps, and resolve issues.
- How are tax risks beyond income taxes managed—for example indirect taxes, sales, use, VAT, payroll, property, and franchise taxes?
- What are the internal controls in the tax function globally?
- To what extent is the adequacy of these controls dependent on the caliber of the people exercising them?
For more information, contact the Director of the Tax Governance Institute: