Ton Krol, Horlings Tax Advisors Tax Risk Management

Tax risk management in companies Trends in the Netherlands Trends in the USA

Changing appetite for risk  Recent corporate scandals in North America & Europe  General concern government and public  More control by regulators  More focus on internal control  Tax assurance  Accounting for tax  More accounting than tax  Tax professionals have a special role

In control of risks Internal Audit –Limited interest below EBIT External Audit –Substantial materiality levels

In control of risks 2 SOX, ISO 9001 –Smaller countries/business units not material –Does not cover all taxes, f.e. VAT/GST FIN48 Dutch “Covenant” –Only covers the Netherlands

In control of risks 3 FIN48 Take tax position Is tax Position uncertain More likely than not it will be sustained Measure >50% likely to be realized Record liability 0 – 100% Record full tax liability Disclose & monitorMonitorDisclose & monitor No Yes

Tax control framework Corporate Strategy Tax Strategy Tax Risk Management Global Tax Planning Tax Accounting Tax Compliance True-ups

What is a tax risk To: –a Tax director –Tax authorities

Tax risks for a tax director Unexpected tax cost –Provided / not provided FIN48? more likely than not + >50% –“Hard” issues Interpretation of legislation –Amount at risk can be determined

Tax risks for a tax director Unexpected tax cost –“Soft” issues Transfer pricing PE’s –More difficult to determine extent and amount

Tax risks for a tax director Unexpected tax cost Cash flow (timing) Reputation risk Relationship risk Change of law risk Change of forecast risk Implementation risk Maintenance risk

Tax risks for tax authorities Not paying right tax at right time Taxpayers following wording instead of intention –Form over substance jurisdictions Tax gap –Evasion or unacceptable avoidance –Forecasted versus actual collection Compliant taxpayer versus avoider

Consequence for tax advisors? Change in attitude of clients Involvement with financial accounts In short: extra work!

Trend in the Netherlands Tax authorities –From vertical supervision & distrust –To horizontal supervision & trust Why? –Manpower –More focus on real problems Research: 80%-90% wants to be compliant!

Shift in tax audit process Tax Adm.Org./ Internal control Internal audit External audit Tax Filing Tax audit Focus

How many tax paying entities? Big Multinational Entities: 2,000 Medium-sized MNE’s: 11,000 SME’s: 1,200,000

Horizontal supervision Pilot –Big MNE’s: covenants since 2005 –MNE’s & SME’s: Covenants with intermediaries for clients Covenants with intermediaries themselves 2008: start of pilot

Covenant Pilots: no blueprint yet Design tax control framework –To comply with law, etcetera –Basis: trust & transparency Advance rulings much quicker –with different attitude by tax inspector Agree to disagree: going to court still possible

Covenant Shift from past to current issues –Need to solve the past Zero audit –Discuss risks –Discuss tax framework

Covenant: MNE & SME’s Client acceptance procedure Client tax control framework Which taxes & materiality How much extra work and will client pay for that?