Troopti Naik, PricewaterhouseCoopers Leader - India desk, says a recent PricewaterhouseCoopers India survey on Tax Risks in India reveals that corporates consider tax risk to be the fourth most important risk in the entire spectrum of business risks, coming after the risks of data security, fraud and product failure. “Damage to reputation, loss of investor confidence and financial penalties due to tax non- compliance were the key reasons cited by Indian firms for wanting to manage their tax risk” says Naik.
The survey is based on the responses of over 80 corporates in various industries, including those in services, manufacturing, and banking and financial services. It profiles the tax risk management trends and perceptions amongst businesses in India and provides insight for lawmakers, taxpayers and advisors on how to strengthen their own practices of managing and dealing with tax risk.
Ine-Lize Terblanche, PwC SA tax manager says that in India, as in other developing countries including South Africa, the complexity of tax issues have been heightened by complex domestic and international tax systems, onerous procedural compliance requirements and evolving industries.
“Taking cognisance of these factors, it has become increasingly important for chief financial officers, board members, audit committees, tax managers and business unit leaders to understand the magnitude and significance of tax risk as a risk factor to an entity’s operations, management, corporate reputation and business as a whole. There is a strong responsibility to implement a suitable methodology and approach to mitigate tax risk, implement tax risk management policies and create transparent tax practices leading to better corporate governance.”
Various strategic and legislative events in the Indian fiscal environment, as also seen in SA, have prompted Indian businesses to revisit their tax risk policies and procedures. These include weak accounting controls, high regulatory and disclosure requirements, inconsistent interpretation of tax laws by tax authorities and keeping track of changes in legislation. Transfer pricing and cross border operations were also cited as possible areas of concern due to the added risk profile created in foreign tax jurisdictions.
“A significant conclusion from the survey” says Terblanche “is that Corporate India is concerned about its public image and profile relative to its tax risk status. This clearly indicates that tax management is not just a passing opportunity, but part of the clean image corporates wish to portray to shareholders and stakeholders, and tax risk management therefore needs to be more integrally linked with a company’s overall business and growth strategy.”
The survey indicates several areas of concern - tax risk management is currently a decentralised process, which is not always the optimal approach; most companies do not have a well documented tax risk management policy and effective operative controls in place; and companies still seem to have a reactive approach to identifying and managing tax risk, resulting in most tax departments only being responsible for tax compliance and tax accounting, instead of being actively involved in strategic issues, policy formulation and longer term planning.
Terblanche says that South African companies are now seeking to apply best practice methods to enable them to achieve their objectives and execute their tax strategy. “South African corporates have acknowledged the importance of tax risk management and begun implementing strategic policies to profile their internal risk management processes. The PwC India Tax Risk survey suggests that Indian corporates have also recognised the benefits of effective tax risk management policies and procedures and are following suit in implementing internal measures.”
Terblanche says that PwC South Africa is currently conducting a business analysis of the specific challenges faced by Indian companies investing into South Africa, which will include concerns on managing tax risk and measures taken to mitigate those risks.
