The tax practices of an organisation

Categories: Taxation

Essay, Pages 6 (1444 words)

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Introduction

Tax related reputational risk

Reputational risk is concerned with the tax practices of an organisation posing a threat to its credibility as a legitimate institution, It is also concerned with wider impact that the organisations tax related actions may have if they become public CITATION Elg04 l 2057 (Elgood, Paroissien, & Quimby, 2004). For example, if a business's aggressive tax practices become public, an organisation can be perceived as conducting business recklessly, without regard for fairness within their structure that are mindful of the interests of their stakeholders CITATION Sta04 l 2057 (Stamm, 2004).

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An example of this is Starbucks, in 2012 they announced that they would willingly pay more tax in the UK than they were legally obligated to after they received negative media coverage, as well as threats of customer boycotts CITATION PWC13 l 2057 (PWC, 2013).

With social networking and other rapid peer-to-peer information sharing, consumer activism can do a lot of damage before a business has a chance to react. One of the key principles companies need to follow in order to mitigate reputation risk is transparency.

This includes closely monitoring media coverage of their company and tracking social media as this may not have been in the interest to the tax faction because of a changing landscape. After assessing readiness to respond to any reputation risk, companies need to communicate effectively about their total tax picture and policies to its internal and external stakeholders. This includes Preparing a total tax picture that consists of four important areas; location, investment, governance and taxes paid CITATION Ern15 l 2057 (Ernst and Young, 2015).

However, one of the may responses a business can have to reduce tax related reputation risk is embed reputation into its core business strategy. A benefit of this is that open dialogue will be initiated and sustained its tax function in the long term which will properly asses risks associated with tax reputation in the long term.

In terms of the digital world it is important to analyse and anticipate any trends which may lead to threats. This can be enhanced by implementing reporting mechanisms so that quick detection of threats can help news spreading via online and confidence of the stakeholders will withstand these threats CITATION Del18 l 2057 (Deloitte, 2018).

Tax related operational risk

Operational tax risk can often be defined as those risks arising internally within an organisation from people, processes and technology CITATION Ern14 l 2057 (Ernst and Young, 2014). Operational risk is similar to compliance risk in that it is concerned with adherence to the tax laws and decisions about the management of the final tax charge CITATION Elg04 l 2057 (Elgood, Paroissien, & Quimby, 2004). Operational risk is, however, a function of the nature of the organisation, including the characteristics of its primary economic activities (part of transactional risk) and how these are managed, rather than simply a product of misapplication of tax laws.

Consequently, operational risk is addressed, not simply by focusing on adherence to the letter of tax regulations, but by making use of adequate information and control systems that can provide CITATION Sta04 l 2057 (Stamm, 2004). Therefore, operational risk is also affected by the extent to which an organisation makes use of a sound system of internal controls designed to provide assurance about the accuracy, completeness and validity of individual transactions.

This can include challenges companies face in achieving accurate reporting processes for their tax, for example, more than 60% of VAT errors leading to adjustments are due to mistakes such as incomplete invoices or receipts, or errors in applying tax rates CITATION Ern14 l 2057 (Ernst and Young, 2014). Errors in recording tax can occur because of human mistakes and the lack of technology used to record such data. Data integrity is a core operational risk factor for every business because transactions that have occurred may not be properly sensitised for tax purposes, For companies with multiple products and departments the problem of data integrity can grow at an exponential rate.

Introduction of technology can decrease the cost of sales of a businessCITATION CBE17 l 2057 (Mitha, 2017). However, the introduction of technology in the form of automation can negatively affect businesses as one wrongful transaction can have a rippling effect into a business's tax calculations.

Tax related legislation risk

Legislative risk refers to risk that arises from changes in regulations and legislations by the government that can have a significant impact on a business's prospects CITATION Ada19 l 2057 (Hayes, 2019). As a result of legislative changes the over-complex and constantly changing tax laws and regulations, particularly in the UK can increase the risk of a compliance. In a recent EY article it was stated that "The rapidly changing tax environment can be driving higher risks, a higher compliance burden and higher levels of overall uncertainty" CITATION Ern18 l 2057 (Ernst and young, 2018).

To overcome this, the base erosion and profit sharing (BEPS) recommendations were created by the organisation for Economic co-operation and development (OECD). The main aims of the BEPS initiative were to reduce tax avoidance by making each country's tax laws internationally coherent, taxing profits where value is creates focusing on more comprehensive reporting standards and restricting the access of businesses gaining from multiple tax treaties that can be gained from the growing popularity of digital international trading and hybrid financing because of different international rules CITATION OEC13 l 2057 (OECD, 2013). The BEPS is scheme able to look into the direct and indirect taxes of businesses.

An example of why new legislations are important is the Digital tax being introduced in 2020. This is important because in the digital economy, companies can make high profits without having a significant physical presence. Examples of such companies include, Uber and Alibaba. Both of these companies gain from mass profits and e-commerce but pay low taxes because they don't carry physical assets and stocks of their own. One of the main benefits of the digital tax is that a set of new regulations will be established for determining when a digital company will be liable to paying tax CITATION Seu16 l 2057 (Adu, 2016).

Another example of where legislative changes have increased the risk of certain businesses is the introduction of sugar tax in 2016, with its finalisation in 2018. A change in the government's tax laws resulted in one of the biggest industries facing the biggest risk it have ever faced. Since its introduction the tax has raised ?153.8m within a period of 8 months CITATION BBC18 l 2057 (BBC, 2018).

A difficulty that businesses face when legislations change is that they cannot prevent the authoritative body from implementing the new legislations, as a business you can only prepare. One way in which a business can determine if it will be effected by legislative risk is to see if they are making a taxable supply. After businesses have determined if the new legislations would apply to them it is important to see if their products are within the scope of the new tax. If they are, it is important for businesses to see if they could make any changes to their product with may reduce or even give exemptions to their products. Businesses can also get aid in the form of financial planners or government intervention to help comply with the administrative requirements of the new legislation CITATION PWC18 l 2057 (PWC, 2018).

Enforcement related tax risk

Enforcement risk is the risk related to compliance, it is what businesses face when tax authorities try to make businesses comply. In today's society tax authorities are taking a tougher stance when it comes to enforcement, especially focusing on the digital market and e-commerce businesses with cross-border activity. With the rise in digitalization and the introduction of digital tax collection, sharing information amongst tax authorities has become easier. Companies that have discrepancies in their data could face controversy because of indirect taxes, effecting their reputation CITATION Ern17 l 2057 (Ernst and Young, 2017).

Tougher investigations and audits by tax authorities have led to an increased fear within businesses. In a survey conducted by EY, 56% said the number of countries subject to an active audit has increased, up by seven points from 2015. A direct result from an increase in audits was the rising number of jurisdictions occurring . As a result 72% of respondents in the same survey said that the enforcement tactics of tax authorities had become vigorous CITATION Ger17 l 2057 (Chanel, 2017). An example of where enforcement took place is Apple, they were fined ?11 billion in back taxes to Ireland CITATION Far16 l 2057 (Farrell & McDonald, 2016).

Firms can prevent enforcement risk by simply complying with tax authorities and if they believe there might be errors in their tax bookkeeping, intentionally or not: they can conduct internal audits and try to resolve the matter with as much transparency possible before external authorities get involved and large penalties are enforced.