Indirect Tax And Managing Reputational Risks

See Sections Why Manage Indirect Taxes ? and A Roadmap to a sound 'Audit Defense' Strategy .

Managing Reputational Risk

Reputational risk is a key element in tax risk management as it is it not only considers individual tax risk but also sees how tax risk may influence the positions in other areas, negatively or positively. If a company is associated with unacceptable behaviour, the suppliers or vendors may choose to change contractual relationships and it could impact shareholders value.

For management purposes the objective is to predict the mindset of the public opinion.

Chris Needham, GE’s Global VAT and GST Director: "Look, for example, at the UK. There have been some abusive avoidance schemes in the UK over the years. Most advisers have left these behind them, but as a result, the tax authority has increasingly been addressing boards about controls and processes, asking: “Is this the kind of thing that you want your business to be seen to be doing?” They’re trying to change behavior at a board level by changing board attitudes." From EY Tmagazine Issue 8

A non-exhaustive overview of question to ask

1. Is the public opinion important for tax planning and the company’s business objectives?
2. What is the impact if due to lack of control measures the company is accepting (known or should have known) to be part of fraudulent activities
3. Has the public opinion changed due to economic climate?
4. What drives public opinion?
5. What is the impact on the reputation of the indirect tax functionif planning is implemented and becomes unforeseen public knowledge?
6. How important is the reputation of the tax professional to establish company’s tax objectives such as tax controversy (‘enhanced relationships’ with tax authorities).

VAT Fraud

Is it not realistic to state that the risk of a tax audit increases in those countries (see above) that have lost substantial tax revenue because of VAT fraud? Something to consider from an audit defense strategy perspective and could be a reason to challenge the company's current indirect tax priorities set.

One of the tasks of the indirect tax function is to timely identify changes in legislation and regulations potentially affecting the group and/or its business. There could be many other arguments why for example review of control measures to avoid such liability should be a top priority. Top on our list is managing reputational risk.