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The global nature of today’s economy elevates the tax function as an area of risk for organizations. At the same time, management increasingly looks to the tax function to add value to the organization, as evidenced by the 49% of respondents who identified an enhanced role of tax as a strategic partner in the 2021 BDO Tax Outlook Survey.

A tax control framework (TCF) provides the building blocks as to how tax operates within the company. Among other things, an effective TCF will foster a tax risk communication mechanism and clearly defined processes and controls to identify and manage operational tax risk. Key benefits of an effective TCF include:

• Provides clarity, confidence and transparency in an organization’s tax operations;
• Allows for an optimized tax delivery model through better use of people, processes and technology; and
• Provides a clear vision and mandate in meeting current and future tax requirements.

Essential components of an effective TCF are:

1. Establishment of a tax strategy – clearly documented vision of the tax function that sets out guiding principles.
2. Comprehensive application – implementation across all transactions and all tax matters in a consistent and predictable manner and embedded into the day-to-day actions and culture of the tax department.
3. Assignment of responsibility – availability of adequate resources and clear assignment of responsibilities.
4. Documentation of governance – mechanism in place for rules and reporting and understanding the consequences of noncompliance.
5. Testing – compliance with the policies is monitored and tested.
6. Assurance – assurance to internal and external stakeholders that the TCF is executed in a manner consistent with the organization’s “risk appetite.”

Why Should Controlling Tax Risk Matter?

There is no denying that the global tax landscape has become highly technical and complex in recent years. Rapidly proliferating changes to tax rules (both domestic and international), regulations and guidance, as well as heightened tax authority scrutiny driven by more effective information exchanges, are intensifying the pressure on tax departments. Concrete examples of recent initiatives that are requiring tax departments to revisit and rethink their approaches include the OECD’s BEPS project and the ambitious initiative that addresses the challenges of taxation of the digitalized economy, with a reallocation of profits to market countries and the introduction of a global minimum tax. Moreover, keeping current on legislative and regulatory requirements—combined with the pressure for the tax department to add value through planning opportunities—is no simple task. The costs of noncompliance can be severe—investigations, audits, tax assessments/adjustments, penalties, controversies, damage to corporate reputation, etc.

These types of challenges can potentially create heightened levels of operational tax risk within a company’s tax function. These risks associated with tax can be addressed by taking a holistic view of the tax function and adopting a total tax approach, which includes an effective TCF.

Tax risk management is not a new concept, but it has evolved over the years. Many companies have risk management policies in place, some in the form of TCFs. The OECD has previously outlined the features of a TCF and has provided guidance for businesses to design and implement a TCF tailored to their particular circumstances.

A TCF — as envisioned by the OECD — is a way for taxpayers, stakeholders and tax authorities to work cooperatively to ensure that an organization has proper controls in place to effectively comply with tax laws and regulations. While the U.S. does not mandate that companies implement a TCF or publish a formal tax policy or risk statement, other countries have trended in this direction. (However, there have been advances in tax risk management in the U.S. in more focused areas, such as internal controls for public companies, expanded disclosure requirements under U.S. GAAP and local tax regulations, etc.).

How Do I Know if My Organization Needs a TCF?

Organizations are realizing it may be time to implement a TCF. Anticipation of tax risk management and tax governance being fully embedded in their organization in two years’ time was identified by 52% of respondents to the BDO Regional Tax Outlook 2020, Americas Report.

The key starting point in determining whether a TCF is needed is understanding the current state of the tax function. Factors that may indicate your organization needs a TCF include:

• Significant or unexpected tax examination findings.
• High tax department turnover, leading to loss of institutional knowledge.
• Findings from auditors indicating internal controls around the tax provision may break down or fail.
• Rapid growth, either organically or through acquisition.
• Increasing board or stakeholder inquiries related to tax.
• Effective tax rate out of line with peer companies.
• Organizational transformation such as an initial public offering, process overhaul/efficiency initiatives, C-suite turnover or ERP system change.
• Changes to business operating model, supply chain or other significant business factors.

By creating or making enhancements to a TCF, a company can immediately minimize the potential that any of these would adversely impact the company.

Insight

An organization’s ability to demonstrate a clearly defined strategy for early and proactive tax risk management and how that strategy aligns with the risk approach of the organization overall can instill confidence in board members, senior management, tax authorities, regulators and other stakeholders.

It will also help ensure a culture of no surprises and will provide assurance to corporate stakeholders that a resilient and effective TCF exists within the company.

Written by Michael Williams. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com

In a joint statement released on November 17, 2021, the U.S. and Japan announced the formation of the U.S.-Japan Partnership on Trade, an initiative to facilitate regular discussions on trade issues, which both nations consider critical due to China’s continuing economic rise.
 
The announcement was made during the first visit to Japan by the U.S. Trade Representative (USTR) and underscores the importance both governments are placing on the long-running issue of “market-distorting practices,” such as industrial subsidies and overproduction.  According to the announcement, the intent of this trade initiative is to deepen cooperation between the U.S. and Japan and reaffirm their “shared commitment to strengthen this alliance through regular engagement on trade-related matters of importance to both countries.”
 
The initial areas of focus will include:

• Third-country concerns;
• Cooperation in regional and multilateral trade arenas;
• Labor- and environment-related priorities;
• Supportive digital ecosystems; and
• Trade facilitation.

 The first series of meetings under the U.S.-Japan Partnership on Trade are expected to occur in early 2022. Thereafter, periodic meetings will be held on a regular basis to advance a shared agenda of cooperation across a broad range of issue areas, as well as to address bilateral trade areas of concern.
 
Although USTR Katherine Tai provided no specifics with regard to what actions may be taken by the U.S. or Japan as a result of this initiative, she did state “[o]ur close collaboration will support the Biden-Harris administration’s economic framework for the Indo-Pacific and help create sustainable, resilient, inclusive, and competitive trade policies that lift up our people and economies.” Whether this may ultimately lead to additional trade sanctions or other actions against China due to its market-distorting practices, forced labor concerns, required technology transfers and other trade related issues is an open question.
 
It is also significant to note that USTR and the trade ministers of Japan and the European Union issued a joint statement also on November 17 announcing their agreement to “renew” their partnership to deal with the “global challenges posed by non-market policies and practices of third countries.” This may signal the start of a multilateral effort to curb the market disruptions believed to be caused by China’s non-commercial practices. How sustained these collaborative efforts may be and whether they will have any immediate or long-term impact on China’s behavior remain to be seen. However, the fact that various countries are entering into such agreements primarily due to the impact of Chinese trade policies should, at a minimum, alert China that its trade practices are of growing concern globally.
 
The U.S. and Japan also confirmed that they will work to resolve a dispute over additional U.S. tariffs on steel (25% ad valorem) and aluminum exports (10% ad valorem) to the U.S. imposed by the prior U.S. administration. Japan is seeking the normalization of trade in steel and aluminum similar to that recently resolved between the U.S. and the EU. Further, the U.S. and Japan will establish a new partnership to strengthen industrial competitiveness, supply chains for key components (including semiconductors and those linked to 5G networks) and economic security.