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An important issue for a board and CEO is to consciously decide the position they wish to take on tax planning, rather than have it made for them by others.
- Michael Carmody, Australian Commissioner on Taxation (January 2004).
The accounting and reporting of income taxes has received increased scrutiny by investors, analysts, Congress and others. Your auditor will be asking for more information, and you may have noticed an increased level of scrutiny from the SEC staff. That spotlight is likely to continue. Welcome to the new world.
- Donald T. Nicolaisen,
Chief Accountant, Securities and Exchange Commission (February 2004)
Three-fifths of CEOs believe 40% or more of their company's market capitalization is represented by brand|reputation.
- Voice of Leaders Survey, World Economic Forum (January 2004)
In today's business environment tax risk is one of the more challenging business risks presenting both monetary and reputation consequences for corporations. By its complicated and technical nature, tax risk may not be adequately understood and appreciated by corporate boards and senior management and may expose the company to unexpected outcomes. Yet, in the post-Enron world, it is imperative that strong corporate governance processes recognize this risk and that corporate boards and senior management deliberately decide how much tax risk is consistent with the overall corporate risk profile to satisfy shareholder expectations. This article provides an understanding of tax risk and its fundamental drivers, identifies potential gaps between tax departments and other stakeholders that may accentuate such risks, and offers suggestions on methods for quantifying and managing tax risk. The tax department of the future will be integrated in the firm's overall enterprise risk management and also help communicate and monitor for any gaps between the tax department's implementation of tax strategies and the firm's risk/return/reputation tradeoff.
Defining Tax Risk
The concept of risk can be broadly defined as the likelihood and magnitude of outcomes that are different than expected. It is important to make the distinction between certain or expected outcomes versus uncertain or unexpected "risky" outcomes. To illustrate this important point, the known tax depreciation that can be deducted from income next year is not risky since the outcome is expected with certainty (absent a change in the law applicable to property already in service-a...