|
One need only reference comments by Don Nicolaisen, former chief accountant of the SEC, to understand that risk reduction is the key issue facing tax directors today.
“Income tax issues are in the public spotlight and will continue to be in the spotlight in the future,” said Mr. Nicolaisen. “My educated guess is that, as the spotlight swivels, one of the areas where more focus can be expected is with regard to income taxes.
“Sunlight is said to be the best of disinfectants, and the area of income tax accounting could use more sunlight.”
As companies are forced by regulatory and corporate governance considerations to address all areas of risk in their businesses, the tax function is coming under increased scrutiny as an area of risk that needs to be understood and managed effectively. With boards of directors becoming more focused on enterprise-wide risk, and with tax becoming an increasingly important component of overall risk reduction, Tax Directors are reassessing the policies and procedures surrounding risk management as they consider how to respond in a rapidly changing environment. This reassessment will invariably require that the Tax Director, management, and the Board all agree on the level of acceptable risk, as well as on the implementation of appropriate processes and procedures to ensure that this risk is effectively managed.
The significantly increased scrutiny now being applied to the tax function, combined with the heightened pressures brought about by Sarbanes-Oxley, are compelling an evolution of the tax function from its traditional focus on efficiency (operating in a cost-effective manner) and effectiveness (value creation). In addition to balancing these traditional mandates, Tax Directors now have the added responsibility for tax risk management, which oftentimes seems to take precedence over their other responsibilities.
While a natural reaction to this added responsibility for tax risk might be to take a very conservative position regarding tax planning, this approach will likely not be the most favorable path for a company. The challenge for the Tax Director is to understand that risk aversion need not necessarily result in planning aversion. Risk needs to be understood, properly assessed pursuant to the company’s risk management processes, and then communicated effectively to the parties in the company’s decision chain.
One matter arising from the increased scrutiny on tax involves transparency and documentation. Knowing that any and all documents may be reviewed by a governmental or other third party, the Tax Director must focus on determining how to ensure that the benefits from documentation (more detailed and reviewed analyses; possibility of accelerated issues resolution with the IRS) are not outweighed by the costs associated with disclosure (providing the IRS with a roadmap). Achieving greater data transparency is an important ancillary consideration, as it can save Tax Directors time in gathering information for audit defense as well as improve the accuracy and defensibility of such a response.
Tax Directors must also become more accurate, thorough, and prompt with regards to communicating risk to a growing array of internal business partners. As tax is embedded throughout the corporate organization, the Tax Director needs to consider how to achieve effective coordination in tax risk management with business units and geographies that oftentimes lack an understanding and appreciation of the tax ramifications of their actions. So it is critical that the Tax Director strike an understanding with other areas in the company, to include:
- The C level with their discussions with analysts on tax issues.
- The HR group as regards overseas assignments and the hiring of foreign employees.
- The deal makers as they structure M&A transactions.
- The business units along the supply chain as relationships and contracts are negotiated.
Finally, Tax Directors must find ways to increase the accuracy and precision of their numbers. “Swags” and gross estimates simply won’t withstand the new emphasis on increased scrutiny and better communications. Existing desktop-based tools won’t suffice; spreadsheets in particular can be error-prone and cannot be easily shared by multiple stakeholders. Contemporary technology, however, can enable Tax Directors to rise to this challenge.
Technology that’s designed specifically with tax in mind — and that incorporates many tax department best practices — can help organizations improve the accuracy and transparency of their data and optimize tax positions, yet at the same time reduce operational risk and improve certainty. In addition, the ability to analyze tax impact alongside business and legislative changes all from a centralized data source that has been reconciled is a significant component in achieving these goals. Regulatory factors beyond the control of Tax Directors are driving the demand for greater scrutiny, better accuracy, and improved communication. But within the grasp of many tax departments are technology solutions that can help meet these demands, improve efficiency, and sharply reduce the risk of non-compliance.
David Millstein recently retired as a partner at PricewaterhouseCoopers LLP ("PwC"). During his 32-year career with PwC, Mr. Millstein held a number of roles as a tax partner, including Tax Partner-in-Charge of the New Jersey and the San Francisco Bay Area and West Coast business units. He was also National Real Estate Industry Chair. For the period 1998 through 2002, Mr. Millstein was a member of PwC's Global Tax Executive, where he had responsibility for the firm's global tax services and solutions in transfer pricing, international tax structuring, indirect taxes, human resources services, and corporate compliance. In this role, Mr. Millstein interfaced extensively with partners and business units throughout PwC's global tax business. He was also the tax leader for the firm's global e-business, middle market, and sustainability initiatives. For the past three years, Mr. Millstein served as the business development partner for the firm's San Francisco office. Mr. Millstein is a graduate of the Wharton School, the University of Pennsylvania School of Law, and New York University's Graduate School of Law. He is a CPA in California.
|
