Tax control framework and collaborative compliance
25/03/24
Essential fiscal risk management
Manage risk to seize opportunities
In Chinese, the word crisis is represented by two characters. One represents danger and the other represents opportunity.
- Tax risk management has an increasingly important role in corporate governance due to the financial and reputational consequences of tax violations. The Tax Control Framework (TCF) is an internal control tax risk system that allows its timely monitoring, control and evaluation.
- Fiscal issues and the approach to managing risks underlying the correct determination of taxes are part of ESG sustainability indicators. Having a tax risk management system in place is thus a key element in corporate governance.
- Taxation transparency is now a key part of ESG reporting and non-financial reporting, and with regard to the upcoming expansion of the related proposed EU Directive on sustainability communication.
- The tax authority’s control of larger taxpayers will be increasingly concentrated on entities who represent a greater tax risk, including those not undertaking collaborative and transparent behaviour.
- The TCF ensures a company is in collaborative compliance, which allows it to initiate a preventative dialogue with the tax authority on uncertain tax positions.
- The control of tax risk is a central theme for budgetary purposes, as IAS adopters are required to state uncertain tax positions as regards the representation of the tax burden (IFRIC 23). As regards customs legislation, to obtain authorised economic operator (AEO) status, suitable safeguards for import / export processes must be demonstrated. The use of procedures in taxation management, a basic feature of the TCF, allows compliance with these budgetary and customs requirements.
Risks
- Property and reputational damage
- Liability of entities
- Uncertainty of tax choices
- Lack of tax transparency
Opportunity
- Sustainability rating
- Control of fiscal risks
- Mitigation of liability and reduction of sanctions
- Preventative certainty on tax positions
The Tax Control Framework
The Tax Control Framework (TCF) is a set of rules, procedures, organisational structures and safeguards, to detect, measure, manage and control tax risks, ie the risk of non-compliance with tax regulation or conflict with legal principles.
Building blocks
Tax strategy established
Testing performed
Governance documentedablished
Responsibility assigned
Applied comprehensively
Assurance provided
Essential elements
- Control environment adoption of a tax strategy: approved by the board, useful for defining principles and limits as regards tax risk management.
- Risk assessment: identification of potential tax risk with an impact on the company and introduction of appropriate safeguards to mitigate their effects.
- Governance: identification of roles and responsibilities of the subject involved in tax management, definition of the information flows between these actors and of processes for effective and preventative control of tax risk.
- Monitoring: continuous verification activities to evaluate the adequacy and effectiveness of the tax control framework.
- Reporting: periodic reports to the board.
Integration into the internal control system (onion skin model)
To implement the Tax Control Framework, the adoption of an integrated approach to maximise synergies between internal control systems for corporate risk ensures the required interactions and better protection of the company (onion skin model) and avoids inefficiencies as regards control activities.
We can support you with:
Maturity assessment
- Preliminary analysis of degree of fiscal risk present in company.
Tax strategy and rules
- Definition and formalisation of fiscal strategy and governance rules.
Tax risk assessment and gap analysis
- Identification of main fiscal risks and related measures,
- Gap analysis and recommendations.
Implementation of recommendations
- Formalisation of procedural processes,
- Digitization of tax procedure design,
- Development of control and detection solutions.
On-going monitoring
- Adaquate and effective monitoring of controls,
- Regular updates.
Tax crimes and the liability of entities
Updating of organisational and TCF models
A significant proportion of the tax offences that constitute tax fraud have been added to the catalogue of offences as a result of the implementation of EU Directive 2017/1371 (PIF Directive). In addition to imprisonment (for natural persons), the sanctions applicable to subjects in connection with the commission of these offences may be of a financial nature or consist of a prohibition of certain activities.
In particular, sanctions of a prohibitory nature, such as prohibition of activities, prohibition to participate in public procurement and prohibition to receive EU funds, have a significant impact.
In this context, precautionary seizure and confiscation of assets also come into play.
Therefore, the model of organisation, management and control (MOGC) at companies needs to be updated to include the tax risks associated with tax offences covered by the Directive. The MOGC must map out processes aimed at defining roles, responsibilities, principles of conduct, methods of operation as well as behavioural criteria to be followed by entities in order to limit the risk of committing criminal offences, including tax fraud.
TCF for tax fraud prevention purposes
This is the opportunity to start the implementation of the TCF an internal control system significantly dedicated to tax risk, starting from the mapping of the cases that fall within the catalog of tax fraud crimes.
Integrated TCF
For companies that have already equipped themselves with the TCF, to monitor tax risk areas other than fraud, it is appropriate to carry out the integration of the risk map, as the revenue agency requires:
Mapping the safeguards that belong in the tax fraud catalogue.
The reporting, in the context of preventative discussions, of all cases connected to the risks of tax fraud, regardless of the agreed materiality thresholds.
Collaborative fulfilment
In case of access to collaborative compliance, the positive opinion expressed by the revenue agency for the purposes of admission to collaborative compliance may constitute a useful element of evaluation of the exemption effectiveness of the model.
PwC’s digital services for managing tax risk.
The complexity deriving from legislation and the need to guarantee the monitoring of current operations makes the identification of digitalisation initiatives to support the effectiveness and efficiency of the Tax function essential.
PwC teams have extensive digital skills to support clients in identifying and implementing the most suitable technologies for the Tax function. PwC implements pre-packages created on primary proprietary and third-party technologies and implements proprietary technological solutions to provide advanced digital services based on the most advanced technological solutions (e.g. Data Analytics, Robotic Process Automation, Artificial Intelligence) for the analysis, automation, and representation of data managed within tax processes.
Some of the existing solutions developed by PwC
PwC, based on the know-how gained in the field of tax consultancy, has developed a set of standard application functions on the main market-leading third party platforms.
Risk and control matrix
PwC services oriented on risk supports uses in assessing compliance risk through a process based on a logical workflow that originates from the mapping and preparation of the customers process and continues with the assessment of associated risks and control and with the formalisation of any mediation activities.
Interpretive risk
The interpretive risk services supports users in the assessment of interpretive risks in operations that originated from regulatory updates coming from the various relevant sources of law, requests for consultancy formulated by the business functions to the tax function and management of non-compliant operations in order to enable constant risk assessment and provide users with an always updated version of fiscal risk.
Third party risk
PwC KYPB process supports users in screening the customer’s counterparties, to intercept any risks connected to them. This process accesses various information sources, reconstructing the corporate structure of the targets, governance, membership of the main sanctions/PEP lists, judicial background and reputations profile through the search for adverse news.
Corporate income tax
We prepare the tax returns in Corporate Tax Flow - our software solution for CIT return preparation. Corporate Tax Flow is a web application which uses a single user friendly environment during the whole CIT compliance process. Corporate Tax Flow collects all information on source data, tax adjustments, comments, approvals and outputs in one package.
Transfer pricing
The transfer pricing services enables a centralised management of transfer pricing policies at group level with reference to the analysis and monitoring of the margins, budgeting and finalisation of intercompany operations (e.g. sale/purchase of products).
Advanced digital services - automation of tax processes
PwC teams provide advanced digital services using the most advanced technological solutions, for the analysis and representation of data managed by tax processes and for the automation of the operational activities of the Tax function.
Data analytics
Anti-fraud analytics allow you to avoid risky transactions and identify tax fraud patterns in real time.
Data processing for management and analysis of the largest databases via the use of repeatable workflows that allow for cleaning, modification and enrichment of the data.
Visual analytics which allow intuitive navigation of data using graphic representations.
Robotic process automation
Technologies that allow the standardised activities carried out manually by users to be replicated in the system, imitating their behaviour and interacting with applications as a user would.
Artificial intelligence
Advanced technological solutions that simulate cognitive functions similar to human ones such as learning and problem solving.
