Tax-Related Reputational Risk:
Reputational risk is the risk that a business will lose revenue or incur significant costs as a result of damages to its public image. The assessment of reputational risk is constantly developing and depends on a variety factors at any point in time such as: Counterparty Profile, Business Purpose/Economic Substance, Nature of the Transaction or Product, Structure and Terms of the Transaction or Product, Environmental and/or Social considerations. In a recent joint study by Deloitte and Forbes Insights that surveyed 300 executives, mostly C-suite and board directors, reputation is considered the highest impact risk area to business strategy. A tax-related example could be a corporate headquarters relocation characterized in the media as a tax avoidance move, such as the scandal of Ikea being accused of avoiding in excess of 1 billion in taxes, moving its money from high taxation countries such as the U.K., France and Germany into subsidiaries and undisclosed recipients in tax havens. This scandal, followed by similar investigations of both Apple and Amazon in 2017, lead to news and social media running rampant, doing damage to revenue and share value; with some customers even threatening a boycott of the firms.
Companies at the forefront of technology are looking to develop ways in which they link their risk management software with strategy and innovation to gather data and interpret market analytics in identifying threats to their reputations. Additionally, firms are pre-emptively preparing leaders of their firms in order to respond and recover quickly and effectively in the event of crisis. Transparency is also a key strategy that all firms should implement internally, with shareholder & board members, as well as externally, with relevant tax authorities and media outlets. Some countries governments, such as Australia and Norway, even favoring a full public disclosure of all corporate tax information.
In the digitalised era, it is increasingly important to monitor the firm’s presence both in the media and social networks, tax-related and otherwise as any news could be detrimental to a firm’s business proceedings. Its also wise to utilise reporting protocols and software to track and effectively detect potential threats spreading online along with gauging stakeholder confidence as a response to these threats.
Tax-Related Legislative Risk:
Legislative risk is the potential that regulations or legislation by the government could significantly alter the business prospects of one or more companies. These legislative risks will relate to tax regulations, for example the UK government is at a point of severe contention regarding Brexit and any potential deals it may have upon its exit. A question for corporations trading globally is how VAT and duties will change when importing/exporting goods as well potential cash flow issues that could arise with traders.
But traders also have to try to anticipate and adapt for the uncertain future of the tax landscape, for example the release of BEPS (base erosion and profit shifting) report in February 2013. Introduced by the Organisation for Economic Co-operation and Development (OECD), the report reflected that current international tax standards may not have kept pace with changes in global business practices, particularly in the areas of intangible assets and e-commerce. The BEPS Action Plan was released shortly after, setting out that there were gaps in the coherency and communication of both domestic tax rules and international tax treaties. Combine these apparent gaps with the rise of e-commerce and digital business, and it is clear that they have led to faults in the international tax system.
Businesses will have no say or vote in the implementation of new tax legislation and laws, all they can do is prepare. Firstly, the firm must identify if they will be affected by any newly implemented legislation, after this they should see if their products fall under the crosshairs of the new tax. If they are, the business should adapt the product to see if they can minimise their exposure to the new tax or minimise production costs to counteract the effects of the new tax.
Tax-Related Operational Risk:
Operational tax risk can be defined as those risks arising internally within an organisation from people, processes and technology. It concerns the underlying risks of applying the tax laws, regulations and decisions to the routine every day business operations of a company. Even small control failures and minimised issues can lead down a rabbit hole risk and potential firm-wide failures. Its a chain reaction that can be fatal to a companys existence. Rather than simply being a product of the misunderstanding of tax laws, its more a function of the organisations nature, including its primary economic activities as well as their management. Many organisations now treat operational risk management as an obligation rather than a choice.
Its reported that more than 60% of VAT errors leading to adjustments being due to mistakes such as incomplete invoices and receipts, or tax rate application errors, these errors can be attributed to human mistakes and a lack of use of technology to automate these procedures. Addressing operational tax risk is not only done by ensuring compliance to relevant tax regulations, but must also be controlled by instilling communication across all the firms operations, as well as using carefully constructed controls for all processes. Operational risk is also affected by the extent to which an organisation is able to make use of its controls; these controls and communications must work in order to provide accurate and complete information of each and every transaction in the business.
As the digital era continues to prevail, it’s also important to remember that automation by technology can negatively affect businesses, with one incorrect transaction causing a wave of problems in an organisations tax calculations. However, firms are always seeking easier and more effective ways to manage and control processes undertaken in the course of business, with data integrity being a core operational risk factor for any and all. Firms can install and use specialised software to reduce any mistakes that may occur with human interference. Its wise to think of operational risk management as a central function in the firm’s processes, to encourage an understanding throughout the entire firm of the risk management programs responsibilities.
Tax-Related Enforcement Risk:
Enforcement risk relates to ensuring that firms meet compliance guidelines and rules. More specifically, any exposure to penalties, financial forfeiture and material losses faced by a firm when it doesnt act in accordance with laws and regulations or specified policies. From a tax perspective, enforcement risk would primarily relate to the preparation, completion and review of the firms tax returns (assuming full disclosure and review of the businesses activities by tax authorities).
One measure in which regulating bodies, for example HM Revenue & Customs (HMRC), can govern and enforce tax regulations is by investigations or inspections. In this case, if the HMRC suspect that an organisation is evading tax payment in any way they can launch an investigation into the entity. If the investigation finds that tax has been underpaid, the firm will be ordered to pay an amount determined by HMRC totalling to the unpaid tax due.
In the era of e-commerce its also becoming increasingly difficult for regulatory bodies to track and identify those who dont declare their self-employment when trading on platforms such as eBay, Play.com, Amazon and more. For example in 2014 John Woolfeden was charged with fraud and money laundering totalling ?299,753.17 after not declaring his self-employment for tax purposes, not paying any of the VAT owed for his trading online.. As a result he was sentenced to two years in jail. It is also noted that Since 2007, HMRC campaigns have collected over ?596 million in tax, and over ?338 million from follow-up activity. These campaigns have been targetting professionals suh as tutors, coaches, plumbers, online traders and electricians.
In the case of larger firms, a way to counteract and manage enforcement risk is to have frequent and rigorous internal or external audits of all the companies financial statements and all transactional information, to ensure that all due taxes are paid. There is always going to be a cost implication in implementing these measures for a zero tolerance of errors; the trade off between costs incurred and risks taken regarding enforcement risk is unavoidable.