In today's world, tax risk has substantial reputational and financial implications. Being unprepared is not an option for domestic and multinational companies and their executives.
High-profile challenges to aggressive tax avoidance, state aid investigations into "sweetheart" tax deals and criminal investigations against companies and individuals for tax planning are regularly making front-page news. Greater transparency and control is demanded by the media, politicians and revenue authorities. Companies must put in place procedures to manage their tax risk.
Tax rules are being rapidly rewritten given international pressure on tax avoidance. Complex new rules can result in unexpected taxes on existing arrangements or create impediments to commercial transactions and business operations. At the same time, increasingly onerous worldwide disclosure requirements are being introduced and revenue authorities are collaborating across borders. This complex and ever-changing legal landscape affects the way all organisations do business. Tax challenges may result in hefty monetary penalties, criminal sanctions on executives and severe reputational implications.
Clifford Chance can help you develop a proactive risk-based tax management strategy.
Be clear on tax risk
5 questions to ask yourself
How will new laws impact us?
Most countries' tax authorities are implementing several measures to ensure that domestic provisions are in line with international proposals, which seek to align the proper allocation of taxable profits to the locations where the actual business activity takes place and to curtail tax driven arrangements. These changes will affect the way you do business. Are you assessing the impact of these new laws on your business operations across jurisdictions? What worked before may no longer work today.
Do we have an effective umbrella tax framework for our strategy?
A robust tax risk management strategy, with coherent underlying policies, is essential to ensure tax risk is appropriately managed. What might have been considered routine tax planning a decade ago may now be labelled "unacceptable" or even "evasion" by revenue authorities or media commentators. Auditors are increasingly attentive to the way tax risks are reflected in financial statements.
In order to implement your strategy and policies, you will require industry-specific and country-sensitive legal input into arrangements that support these policies. Have you considered your strategy in light of the changing landscape? Have you implemented a tax compliance management system to ensure that you can effectively deal with tax risks? Do you have effective measures in place helping to anticipate and identify tax exposures and avoid assertions that you are non-compliant? Have you assessed and documented your arrangements to support the legality of your tax positions?
Do we deal robustly with requests and investigations from tax authorities?
Dealing with tax authorities in a manner that minimises reputational and financial risk has become a priority. You need to identify key risks that impact your organisation, be prepared for investigations by tax authorities and have the right people on hand to assess and escalate risk events as and when they occur. Do you have an effective "red flag" process embedded in your organisation and tailored to the specific jurisdictions where you operate? Are "red flag" tax issues escalated? Do you have a considered approach to dealing with requests, investigations, raids and disputes?
Are we prepared against tax-related criminal sanctions in every country in which we do business?
Tax authorities are increasingly relying on powers to pursue criminal activities. In jurisdictions such as Italy, Spain and Germany, senior individuals regularly face criminal sanctions, including prison sentences, as a result of investigations into their company's tax affairs. In some jurisdictions, financial institutions may face criminal liability (for example the UK offence of failing to prevent facilitation of tax evasion). Are you confident that you are prepared in each jurisdiction you operate in?
What is our response plan in the event of an incident?
Aggressive action by tax authorities is becoming more prevalent, and this can include high-profile, unannounced "dawn raids". The media also reports on these. Does your company have adequate, jurisdiction-specific procedures in place should these raids happen? Would your staff know how to manage the situation? Do you have an effective response ready?