Page 6 of 7: Managing reputational risk
Reputational risk is a key element in tax risk management, as it considers individual tax risk and how it may influence positions in other areas, negatively or positively. If a company is associated with unacceptable behavior, suppliers or vendors may choose to change contractual relationships, which could impact shareholders' value. Management's objective is to predict the mindset of the public opinion.
A recent European Union study (2013) says the bloc's 28 member nations may lose almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement.
EU Tax Commissioner Algirdas Semeta said the number of revenues slipping through the governments' nets is "unacceptable, particularly given the impact such sums could have in bolstering public finances."
The study for the European Commission, the bloc's executive arm, found that member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU's economic output.
The European Commission and local governments actively prioritize combating VAT fraud. New measures are being taken, such as introducing individual liability for not remitting VAT if the buyer knew or should have known that he was buying from a fraudster. Demonstrating that sufficient control measures have been taken is essential to preventing this condition of liability.
It is reasonable to assert that the likelihood of a tax audit increases in countries that have experienced significant tax revenue losses due to VAT fraud. This should be considered when developing an audit defense strategy and could justify reassessing the company's indirect tax priorities.
One of the indirect tax function's responsibilities is promptly identifying legislation and regulation changes that may impact the group or its business. Several compelling reasons exist for prioritizing reviewing control measures to prevent such liabilities. Additionally, it’s essential to consider estimates of the VAT gap for each member state.