tat Boards should actively Observation of the industry does suggest that some who profess a very conservative line on taking tax an interest in setting will, in reality, undertake transactions which appear more aggressive. While not tested in the survey ut acceptable parameters for the adoption of observation suggests either a degree of difficulty in judging the level of aggression that a transaction i ax risk. and should or a failure to adhere to the corporate principles laid down In either event, it reaffirms the suggestion made monitor compliance earlier that Boards should actively take an interest in setting out acceptable parameters for the adoption of tax risk, and should monitor compliance Front office more aggressive on risk Many financial institutions, in particular the banks with global coverage, have a front office tax function developing or selling tax-efficient transactions to customers. Another feature of the responses on risk appetite is that those groups with a front office tax function(41 out of the 96 responses)take a more aggressive stance than those without; 58 percent of those without would not go to the courts to defend their position, against Of course it might be natural to anticipate this to some because the front office might be expected to stand behind transactions it is entering into with third parties; however, note that the responses deal with the organization's own position rather than covering any intent to defend the counterparty's position. In the same vein, of those tax departments who get involved in signing off front office transactions, only half claim to consider the counterparty's risk, in addition to their own. Conflicts on sign-off? Many suppose that front office tax functions would always have to liaise with the tax department, either in terms of the design of the financial products they sell, or to obtain a risk sign-off. Sign-off is a good idea because the tax department is normally in a better position to judge the element of compliance risk that the transaction might originate However,it appears(figS)that only 29 of the front office tax functions out of 4l ask Tax to sign-off. typically in the larger institutions. 19 of those 29 tax departments are put in the potentially invidious position of being involved in both the design of the transaction and the sign- off, which clearly gives rise to a potential conflict of interest. One hopes these organizations reduce this conflict by using different personnel for each of the two stages Figure 8: Involvement of the tax department in th design and sign-off of 17 Not involved at all front office transaction Only involved in design 47% 109 Only involved in sign-off Involved in design and sign-off 24% Unknown Base: Respondents with front office tax Also with a view to avoiding conflicts of interest, it is comforting to note that nearly 90 percent of groups with front office functions do not reward their tax staff by reference to the success of their transactions 0 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to client Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved.7 © 2004 KPMG International. KPMG International is a Swiss cooperative of which all KPMG firms are members. KPMG International provides no services to clients. Each member firm is a separate and independent legal entity and each describes itself as such. All rights reserved. Observation of the industry does suggest that some who profess a very conservative line on taking tax risk will, in reality, undertake transactions which appear more aggressive. While not tested in the survey, this observation suggests either a degree of difficulty in judging the level of aggression that a transaction implies, or a failure to adhere to the corporate principles laid down. In either event, it reaffirms the suggestion made earlier that Boards should actively take an interest in setting out acceptable parameters for the adoption of tax risk, and should monitor compliance. Front office more aggressive on risk Many financial institutions, in particular the banks with global coverage, have a front office tax function developing or selling tax-efficient transactions to customers. Another feature of the responses on risk appetite is that those groups with a front office tax function (41 out of the 96 responses) take a more aggressive stance than those without; 58 percent of those ‘without’ would not go to the courts to defend their position, against only 34 percent of those ‘with’. Of course it might be natural to anticipate this to some extent, because the front office might be expected to stand behind transactions it is entering into with third parties; however, note that the responses deal with the organization’s own position rather than covering any intent to defend the counterparty’s position. In the same vein, of those tax departments who get involved in signing off front office transactions, only half claim to consider the counterparty’s risk, in addition to their own. Conflicts on sign-off? Many suppose that front office tax functions would always have to liaise with the tax department, either in terms of the design of the financial products they sell, or to obtain a risk sign-off. Sign-off is a good idea because the tax department is normally in a better position to judge the element of compliance risk that the transaction might originate. However, it appears (fig 8) that only 29 of the front office tax functions out of 41 ask Tax to sign-off – typically in the larger institutions. 19 of those 29 tax departments are put in the potentially invidious position of being involved in both the design of the transaction and the sign-off, which clearly gives rise to a potential conflict of interest. One hopes these organizations reduce this conflict by using different personnel for each of the two stages. Also with a view to avoiding conflicts of interest, it is comforting to note that nearly 90 percent of groups with front office functions do not reward their tax staff by reference to the success of their transactions. Figure 8: Involvement of the tax department in the design and sign-off of ‘front office’ transactions Boards should actively take an interest in setting out acceptable parameters for the adoption of tax risk, and should monitor compliance