In last month’s article, the concept of Tax Risk Management (TaxRM) was introduced. TaxRM is an enterprisewide process that is affected by a company’s board of directors, management and/or other personnel, and is designed to minimize tax liabilities and maximize compliance, each within the guidelines of tax laws.
Having provided a definition of TaxRM, this article focuses on elements of TaxRM processes and how they can identify opportunities associated with an organization’s strategy, operations and processes.
“TaxRM is most effective when it is treated as a component of the organization’s overall enterprise risk management (ERM) process,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “TaxRM should be a key element of every business’s ERM process.”
Smart Business spoke with McGrail about the types of tax risks that exist and how TaxRM processes can help mitigate those risks.
What is the function of TaxRM processes?
When professionals think about tax risks, they generally think of audits and financial reporting issues. TaxRM is about much more than these elements. Among other things, a TaxRM process should quantify the impact and likelihood of tax risks, manage tax risks to a level commensurate with the organization’s stated TaxRM strategy and quantify the benefits associated with proper tax strategy implementation. The last point is a central element of TaxRM: Proper tax strategy implementation can assist an organization in maximizing its after-tax earnings available to shareholders.
What types of tax risks exist?
Profitable organizations pay numerous taxes, including corporate income, sales, excise, payroll and withholding taxes. These taxes arise from decisions made in accordance with an organization’s strategy, operations and processes.
Tax risks are present within each of these elements due to uncertainty in the decision-making process and tax law changes. Among other things, tax risks might pertain to uncertainties in the application of tax law to numerous areas of the business; financial reporting decisions; acquisitions and divestitures; and asset purchases and sales.
Nearly every decision made by a for-profit corporation involves tax implications, and hence, tax risk. With some corporations paying upward of 40 percent of their profits in income taxes, the ramifications of tax risks can be highly significant and can negatively affect a business’s after-tax cash flow.
However, mitigation of tax risks can present numerous benefits to businesses while maximizing tax compliance.
