Tax Risk: External Change, Internal Challenge

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Tax Risk External Change, Internal
Challenge AMERICAN GAS ASSOCIATION and
INTERSTATE NATURAL GAS ASSOCIATION TAX ADVOCACY
WORKSHOP
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Agenda

• What We Are Hearing
• Changing Focus of Tax Risk Management
• Tax Risk Management Framework
• Teaming with Internal Audit
• Tax Risk and the Board

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What We Are HearingWhat is driving the tax risk
agenda?
Make Our Business Better
Keep Us Out of Trouble
Greater Transparency Accountability to Key
Stakeholders Regulators
Enhanced Business Processes
Goal
Coordinated Tax Risk Activities

• Increase in Material Weaknesses

Improving or Remediating Tax Internal Controls
Effective Use of Data and Technology
Expanding Global Internal Control Regimes

• Significant Accounting Developments (IFRS, FIN48,
  etc.)

New and Complex Tax Legislation
Improving the Performance of the Tax Department
Improved Tax Risk Reporting and Disclosure

• All too confusing and overdone Except when we
  get in trouble

• Must do it But how do we do it better?

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Growing Challenge Widening Gap of Expectations
TODAYSTAX FUNCTION
SOX 404 / RISK
FIN 48 UTP

• Critical Success Factors
• Governance
• People
• Infrastructure and Operations

FAS 123R
RESOURCE CAPACITY
RESTATEMENTS
IFRS
NEW REPORTING REGS
NEW TAX LAWS
YESTERDAYSTAX FUNCTION
GLOBAL OPERATIONS
100
ADMINISTRATION
EXAMINATION
PROVISION
PLANNING
COMPLIANCE
EXPECTATIONS AND DEMANDS
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Time Allocation

• Changes and added requirements since 2004
• Tax departments nearly tripled the time and
  effort to complete the quarterly and annual tax
  provision. The time will increase in applying FIN
  48.
• Time spent on compliance decreased yet the IRS
  estimates the time it takes to complete a tax
  return has increased 35 percent.

2004 Tax Department
Average time spent per activity
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2006 Global Tax Risk Survey

• Follow up to 2004 survey
• 474 respondents in 14 countries
• Included 83 senior financial executives and 392
  tax executives
• 25 with revenue over 5bn, 25 with revenue
  under 1bn, 50 in between
• Wide spread of sectors

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What We Are HearingTax Risk Market Insights
Can we do more to manage our tax risks?
Based upon EY Global Tax Risk Survey of 474
senior tax decision makers including 392 tax
directors.
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What We Are HearingTax Risk Management- Shift in
focus
Keep Us Out of Trouble
Customs
VAT/GST
Risk Identification Assessment
Misapplicationof law
TransferPricing
Tax DeptOperations
Operations
Tax Planning
Tax Financial Reporting
Process Controls Monitoring
Tax Risk Universe
Finance
Strategic
Tax Mgmt
Tax Internal ControlRpt
Teaming withInternal Audit
Merger Acquisition
Compliance
FinancialReportingInternalControls
Process and Controls Remediation Improvement
Tax Compliance
Tax Audits
Traditional View
Current Environment
Make Our Business Better
Key challenge Effectively Managing Tax Risk
Across the Enterprise
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Tax Risk Focus on Root Causes
Beyond tax technical issues and financial
reporting controls
Tax Risk - Any event, action, or inaction in tax
strategy, operations, financial reporting, or
compliance that adversely affects either the
company's tax or business objectives
Resulting in unanticipated or unacceptable level
of

• Penalties
• Assessments
• Additional Taxes
• Harm to Reputation
• Lost Opportunities
• Financial Statement Exposure

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Understanding Tax RiskTax Risk Examples
Strategic
Operational

• Inadequate involvement of tax department in
  enterprise business planning
• Failure to perform required business activities
  or changes in business operations in support of
  tax planning
• Tax department is not involved in determining
  transaction structure in a timely basis resulting
  in higher transaction taxes

• Failure to include regulated assets and
  liabilities related to income taxes in rate
  revenue base appropriately or timely.
• Failure to properly track or identify movement of
  assets or people across jurisdictions resulting
  nexus issues
• Failure to provide transparency in tax basis of
  fixed assets and reliable procedures to prove
  capital-oriented gross temporary differences.

Financial
Compliance

• Optimized tax accounting methods not considered
  for new transactionsfailure to alert tax
  department
• Failure to establish sustainable processes to
  meet new and existing accounting standards
• Tax department not aware of changes to accounting
  and regulatory rules that impact tax reporting or
  disclosures

• Changes in existing or new systems do not enable
  or support tax department regulatory compliance
  requirements
• Roles and responsibilities of third party service
  providers are not clearly understood or
  documented resulting in improper/ inaccurate tax
  filing/ reports
• Insufficient awareness of tax laws and accounting
  regulations resulting in failure to comply with
  tax obligations in all jurisdictions where the
  company operates

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Tax Risk ManagementA Logical Coordinated Process
Example of Processes
Identify and Prioritize Tax Risks

• Planning and transactions

• Transfer pricing
• Indirect taxes

Improve
Strategic
People, Processes, Controls, Technology

• Tax provision process
• Internal Control documentation

Achieve Business Objectives
Assess
Monitor
Executive Management

• Tax compliance process
• Controversy management

Foreign and Domestic Direct and Indirect Taxes
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Tax Risk AssessmentThe cornerstone of tax risk
management
Methodology
Plan the Tax Risk Assessment
Understand the Business
Report Results of Tax Risk Assessment
Understand Key Tax Risks and Processes
Scope Tax Risk Assessment
Assess Key Tax Risks
Develop High-Level Improve Monitor Plan
Sample Output

• Evaluate the likelihood/impact of company tax
  risks
• Identify and analyze risks and place them within
  a heat map
• Achieve consensus on the prioritization of tax
  risks
• Develop a plan to Improve tax risk profile and
  Monitor controls
• Provide confidence to stakeholders

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Role of Internal Audit

• Provide independent assurance to the audit
  committee on internal controls and compliance
• Enhance risk focus within the organization
  through involvement in risk management activities
• Assist in identification of processes and
  controls improvement opportunities

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Tax/IA Interaction to Date

• Tax Risk is generally not widely understood or
  ignored by Internal Audit
• Tax previously operated in black box
• Perceived lack of competence by internal audit
• Technical rules perceived as barrier
• Tax directors generally are hesitant to work with
  IA in helping to manage tax risk
• Most tax departments are facing staffing
  shortages at a time of significant increases in
  workloads and dont need additional projects at
  this time
• Lack of understanding of assistance IA can
  provide
• Lack of understanding of IA role

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Teaming with Internal AuditHow can IA help the
Tax Function?
Review Validation
CompetitiveAdvantage
Some examples
Document review transfer pricing cost
allocation policy
Review monitorFIN 48 process control
assertions
Tax IT documentation, controls and security
Review Validation
Determine document companys legal entities
Investigate monitor expatriates other
business activities to determine PE
Post tax planning implementation - Monitor
planning dos and donts
Continuous Monitoring
Assisting in imbedding risk and controls in tax
performance improvement projects
Build tax functional risks into business
locations/ operations audits
Develop document tax risk policy
Process Improvement
Increase organizations tax risk awareness as
part of annual IA location audits
Evaluate internal controls of targets tax
function as part of due diligence process
Data analytics to provide statistical sampling
e.g. to support deductions and credits
Competitive Advantage
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Audit Committee-Tax Focus Areas

• Operating Strategy/
• Organization
• Personnel
• Department Initiatives
• Benchmarking
• Performance Management

• Governance
• Mission
• Risk Tolerance
• Policies Procedures

• Risk Management
• Risk Identification
• Risk Monitoring
• Risk Mitigation

• Regulatory Reporting
• Tax Financial Reporting
• SOX 404

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Board/Audit Committee Tax Risk Policy

• Risk Management
• Tax Risk Objectives
• Tax Risk Management Guiding Principles
• Tax Risk Tolerance
• Roles and Responsibilities
• Reporting and Communication
• Tax Risk Plan

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Questions?