Zero tax risk: Where is your Financial Services firm on the tax risk curve?

Pippa Booth Tax Transformation Partner, PwC United Kingdom 03/02/20

A firm’s governance culture has a direct impact on the efficacy of its tax control framework. Tax risk is often created by business decisions that don’t involve tax people and goes far beyond a firm’s annual compliance obligations. Given that, it’s increasingly important that financial services leadership understands all the elements of the business that can affect tax risk. Regulations are constantly changing, and new technology is making it easier for tax authorities to monitor business behaviour.

Where does your company sit on the tax risk curve? It may not be possible or even desirable to reduce tax risk to zero, given the changing landscape, but businesses need to understand their exposure and ensure that all tax governance and risk management frameworks are aligned with the wider governance framework and embedded in the culture.

There are three key reasons for this. First, more tax authorities globally are embedding the concept of tax control frameworks in their regulations and using them in their auditing. If you are not prepared, an audit can be more time-consuming and potentially costly.

Second, there is growing public and regulatory pressure to increase transparency in tax affairs. Having transparency built into the in-house tax control framework helps a business spot red flags and mitigates damage to its reputation.

Third, tax authorities are becoming increasingly digital and operating in real time with regard to their assessment of data, and thus are able to find anomalies and errors across large data sets. Businesses should have that capability, too.

In addition to this ‘perfect storm’ of events, the financial services industry often needs to address all these elements as they pertain to their clients’ business or tax risk, in addition to their impact on their own tax affairs.

Tax control frameworks and transparency

Tax authorities today are focussed on identifying control weaknesses that highlight a systemic problem in tax data or processes. They now have the real-time data and analytics tool kit to help them identify these issues even before you do.

Having a strong tax control framework is the main defence for financial services organisations. The day-to-day reality of being fully compliant in today’s world, however, can be challenging. The data you need, for example, is not always in the format it should be, and standardised processes often must be tweaked to make exceptions that the tax guidelines may not cover. 

If organisations have strong tax controls in place, they are in a better position to accurately assess their level of compliance. And if these controls are based on a strong governance culture, it will be easier for leadership to navigate the areas of law that are open to interpretation.

In parallel to this is greater pressure for organisations to be more transparent about their business models and tax affairs. The increased call for transparency is forcing organisations to state publicly that they are fully compliant with laws and regulations. A tax control framework may be the key to ensuring that you can feel comfortable that you are giving an aligned message across your transparency statements and in your tax reporting. 

Prioritising key areas

When businesses develop their governance frameworks, they often have to make choices and prioritise what they can do in house and what can be outsourced. Developing a clear sourcing strategy can help manage risk and ensure that the right work is done by the right people with the right skill sets. Depending on your tax and finance function, this might mean leveraging your shared service centres to take on tax as well as other more commonly outsourced functions. It may also require upskilling staff or transferring compliance and risk management to a managed service contract.

Any change in strategy needs to come with improved processes and controls. To make this work, teams usually need training or upskilling, and old processes and controls must be reviewed so the company knows what to keep in house and what to outsource. 

Technology, however, is not simply a means of freeing up staff by automating manual tasks that are repetitive or subject to human error. It is also a way to embed tax controls into your processes. Any technology solution will also need to be robust, and staff will need to have the skills to ensure it works consistently and securely. 

Even implementing all these strategies may not result in zero tax risk, given how much interpretation there is regarding tax rules and the way in which tax laws are updated and amended. It does not make strong commercial sense to invest in technology to keep track of every change in tax rules or to assign people to keep on top of every tax law twist, even taking into account the impact of tax risk on capital costs. 

Managing and minimising the key risks should, therefore, be the goal. This involves understanding where the risks currently are and where the risk tolerance of the organisation should require them to be.

A heatmap approach for prioritising tax risk and its impact on the organisation can highlight to internal stakeholders the risk areas that require investment to reduce exposure. Upgrading the tax governance and control framework with a view towards transparency and technology will help bridge any maturity gap. There is never a zero-tax-risk position, but your organisation can manage risk to the level that fits within the bounds of its culture.

Contact us

Pippa Booth

Pippa Booth

Tax Transformation Partner, PwC United Kingdom

Colin Graham

Colin Graham

Global Financial Services Tax Leader, PwC United Kingdom

Follow us