Tax services Managing global tax risks EY’s Global Tax Risk Tool provides businesses with visibility of how tax risks are managed around the world Ninety-four per cent of the largest companies think that global disclosure and transparency requirements will continue to grow in the next two years.1 Background The management of tax risk in the face of ever increasing complexity, globalisation, internal pressure on resources, more frequent tax authority audits and increased threat of penalties, is one of the biggest challenges facing tax departments today. Multinationals are recognising the need for greater visibility over tax risks globally. This is not just the risk that process and control failures lead to tax being underpaid in jurisdictions, but also the risk that tax is overpaid because there are not appropriate processes, controls and knowledge to identify all available reliefs and planning opportunities. Increasingly, senior management require a process that describes key risks and how they are being managed and monitored, together with details of any significant issues, remedial actions, and who is accountable. Sixty-eight per cent of the largest companies reported Global Tax Risk Tool that they feel tax audits have To address these issues we have developed a Global Tax Risk Tool ( GTRT) which uses a detailed risk become more aggressive in and control diagnostic assessment to collate and report objective findings. This application helps ‘kick start’ the process of evaluating an organisation’s global compliance and risk management activitthe last two years .1 1. 2014 EY Tax risk and controversy survey ies across all major tax types, including corporate income taxes, payroll taxes and indirect taxes. Without the investment of significant resources, it is designed to deliver; ►► A data collection platform to facilitate rapid collection, collation and analysis of data ►► An indicative assessment of inherent risk factors across the group ►► The identification and preliminary assessment of the key risks in each jurisdiction ► A standardised reporting dashboard in an easily updateable format for ease of classification ►► A prioritised plan of enhancement action ►► A blueprint for an ongoing tax risk management framework ► Tax services What we are seeing Internal pressures Issues External pressures ►►Rapidly expanding global footprint ►►Increased risk environment ►►Increased tax complexity ►►Greater internal focus on risk management and corporate governance ►►Inadequate visibility, control and risk management ►►Focus on headcount/cost reduction ►►Fire fighting ►►Increased regulation (i.e., FIN48, SAO, IRS uncertain tax positions reporting requirements, etc.) ►►Focus on delivering more value with less resource ►►Inability to match resource to risk ►►Information systems are not geared to tax needs ►►Increased reputational risk ►►Tax authorities’ increasingly rigorous approach: ►►Increased penalty exposure ►►More frequent audits ►►More intense audits ►►Financial loss from increased exposure to risks materialising ►►Targets to reduce ETR ►►Frequent risk assessment ►►Inability to deliver consistent standards of tax risk management ►►Focus on systems and governance ►►Inability to monitor performance against standards ►►Greater sharing of information and collaboration between tax authorities ►►Increased penalty threat ►►Tax reliefs not claimed Whilst organisations typically have ambitions to develop a global tax risk framework to address these issues, such an exercise can seem an enormous task, and difficulties can be experienced for some of the following reasons: ►► Resource constraints ►► A lack of knowledge about current risks and processes within the group ►► The group lacks a standard terminology to apply a common tax risk ‘language’. ►► The group has difficulty in converting information gathered into a prioritised remedial management action plan. ►► There is no template for future tax risk framework design and ongoing risk management activities. ►► There is no means to obtain the required information quickly and efficiently Figure 1: an extract from a report illustrating the percentage of controls present across the organisation Risk category UK US France Germany Russia Japan Australia India China Brazil 97 93 57 64 43 79 71 21 32 45 Data posting 91 98 57 57 29 86 71 29 45 52 Data collation 100 95 52 75 25 100 25 52 41 38 98 100 38 38 63 63 50 38 10 15 Tax compliance VAT return accuracy (process) Data set up Data review Specific risk areas (technical) Transfer pricing Transaction identification Transaction pricing Documentation 65 50 51 59 19 73 67 20 20 20 100 85 57 75 33 85 70 46 46 46 80 60 38 54 25 55 56 30 30 30 100 85 57 75 33 85 70 46 46 46 80 60 38 54 25 55 56 30 30 30 Payroll 90 80 60 80 20 80 40 60 82 72 Employee expenses 86 92 50 100 10 100 100 50 60 65 Employee benefits 78 80 60 80 60 60 80 20 35 50 Share schemes 95 100 57 71 43 86 57 57 20 35 Expatriates/short term visitors 80 60 38 54 25 55 56 30 30 30 Employee leaving/joining payments 96 100 90 95 90 90 100 75 80 85 Status of worker 65 72 62 72 55 68 68 52 50 45 Policy implementation Change monitoring Employment Tax 2 | Managing global tax risks Tax services Global Tax Risk Tool: how does it work? Global Tax Risk Tool: the key advantages The GTRT uses our client portal as a platform to issue tax risk and control diagnostic assessments to the relevant responsible contacts within the organisation. The GTRT is very flexible, allowing the business to choose individual territories, entities and specific risk areas to ensure a bespoke approach which addresses any known concerns. It can also be customised to meet the very specific requirements an organisation may have. The GTRT is designed to provide the following key benefits; The risk areas addressed by the GTRT cover three broad areas; 1. Strategic — the risks associated with the business and tax strategy and their implementation. 2. Tax compliance — the risks related to the end-to-end process for the relevant tax filings. 3. Operations and management — the risks around how tax interacts with other parts of the business and how the tax function is managed. ►► It provides a rapid insight of how effectively tax risks are managed around the world ►► It facilitates a standardised approach with a common tax risk language ►► It leverages a wealth of knowledge and experience throughout EY to benchmark current state risk management practices and controls ►► It helps promote a tax risk aware culture by highlighting the areas where tax risk could arise across the group ►► It involves a relatively low investment to provide key insights ►► It is very flexible — the business can choose which territories to review, which taxes to cover, and which risks to focus on We collate the responses and analyse the results in a report. The report provides a ‘traffic light’ summary across all territories and, for the risk areas addressed, assesses the overall risk level. It also produces an exception report of controls not present. The GTRT assists businesses to quickly evaluate the status of the tax risk framework of the organisation around the world and assists in identifying where any actions should be focused to improve controls. Figure 2: a high level summary of controls across the organisation Entity: Turnover: Profit: Controls present: G Ltd $66,000,000 $30,000,000 40.80% UK Germany Russia Entity: Turnover: Profit: Controls present: C Ltd $10,000,000 $3,000,000 35.00% Entity: Turnover: Profit: Controls present: F Ltd $141,000,000 $57,000,000 37.44% China Entity: Turnover: Profit: Controls present: US Entity: Turnover: Profit: Controls present: D Ltd $75,000,000 $50,000,000 49.32% Japan J Ltd $110,000,000 $75,000,000 76.95% Entity: Turnover: Profit: Controls present: E Ltd $5,000,000 $1,000,000 75.60% Australia France Brazil Entity: Turnover: Profit: Controls present: I Ltd $3,000,000 $500,000 55.70% Entity: Turnover: Profit: Controls present: H Ltd $17,000,000 $10,000,000 47.84% India Entity: Turnover: Profit: Controls present: B Ltd $52,000,000 $40,000,000 29.00% Entity: Turnover: Profit: Controls present: A Ltd $100,000,000 $25,000,000 53.99% Managing global tax risks | 3 Global Tax Risk Tool: a typical project The findings of the GTRT can be delivered within weeks, providing rapid insight into how risks are being managed across the organisation. A typical project will involve the following activities. Step 1 Step 2 Step 3 We meet with the business to agree the territories to be included, select the categories from the GTRT database to be incorporated in the assessments, and identify the relevant persons within the organisation to respond. We provide online access and support to the relevant individuals in each jurisdiction to complete the assessment. We report the findings, setting out a ‘traffic light’ report of controls present across the organisation, an exceptions list detailing missing controls, and providing suggested remedial actions where required. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited. Ernst & Young LLP, 1 More London Place, London, SE1 2AF. Why EY? © 2013 Ernst & Young LLP. Published in the UK. All Rights Reserved. The GTRT is provided by the Tax Controversy and Risk Management practice within EY, a global team focused on the management of tax risks around the world with designated specialists in all major jurisdictions. The combination of our data collection technology and our tax risk methodology with local specialist knowledge enables us to deliver real insight for our global clients into how they are managing tax risk around the world. ED None 1374767.indd (UK) 09/13. Artwork by Creative Services Group Design. In line with EY’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young LLP accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. ey.com/uk Further information Please contact one of the following UK-based specialists for further information who would be happy to illustrate to you the benefits of the GTRT. Andrew Hinsley + 44 20 7951 1932 ahinsley@uk.ey.com Charles Brayne + 44 20 7951 6337 cbrayne@uk.ey.com Paul Dennis + 44 121 535 2611 pdennis@uk.ey.com Rakhim Mirzayev + 44 20 7951 6213 rmirzayev@uk.ey.com