Executive summary Tax has always been a significant factor in the overall risk profile of a business: it can eat into the revenues, swell the expense base and erode one third or more of profitability, so you have to get it under control The growth in cross-border transactions, the tight focus of fiscal authorities around the world and the increasing sophistication of tax regimes have all made international taxation more complex in recent years In some shape or form, tax is embedded in almost every aspect of the key financial data which a company publishes. It is also an area where significant judgment is required- itself a generator of risk. But even though risk management is pervasive and tax is a key component, there is a historical tendency for tax to be viewed as a complex area which should be left to the tax professionals. This can lead to tax becoming isolated from the rest of the business. It has certainly not commonly been subject to independent review or oversight by Boards. Under the influence of new legislation like the Sarbanes-Oxley Act 2002, this approach is no longer tenable This poses interesting questions. How can senior management-and the business as a whole- ensure they are lear about what the tax function(Tax )is doing? And are the same standards of risk management applied to tax as to other material areas of the business? ax experts should now accept that their strategies and processes will have to be subject to the same rigor as every other area of business. Similarly Boards and tax directors should take charge of the tax risk assumed by their corporations, before they become aware of it for the wrong reasons Key themes from our survey Tax departments cannot afford to be isolated from the rest of the business. Tax is a function like any other it requires a strategy on risk that is well understood within the organization and takes into account the whole risk spectrum, rather than focusing solely on tax technical issues. Boards need a clear understanding of the work Tax is doing and its effect on overall risk. Boards must keep asking questions about controls and the tax consequences of major transactions, and ensure that reliable independent reviews are in place Tax directors need to re-focus their attention to ensure they do not remain rooted in corporate tax. A significant part of the overall tax function is often not under the control of tax directors, so they must be sure they are fully informed on all issues-at global, national and local level The Sarbanes-Oxley Act has been instrumental in increasing the level of attention paid to tax risk. Our survey revealed that the organizations directly affected by the Act have focused greater attention on controls relevant to tax not surprisingly, our results revealed the financial industry's innate conservatism. Nearly a half of ur respondents said that either they would not do anything to provoke the tax authorities in the first place, or alternatively that their organization would not go to court to defend its tax planning Respondents felt too much time was spent on compliance and not enough on planning. Better use of technology and other efficiencies would enable tax professionals to re-focus their efforts 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.1 © 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. Executive summary Tax has always been a significant factor in the overall risk profile of a business: it can eat into the revenues, swell the expense base and erode one third or more of profitability, so you have to get it under control. The growth in cross-border transactions, the tight focus of fiscal authorities around the world and the increasing sophistication of tax regimes have all made international taxation more complex in recent years. In some shape or form, tax is embedded in almost every aspect of the key financial data which a company publishes. It is also an area where significant judgment is required – itself a generator of risk. But even though risk management is pervasive and tax is a key component, there is a historical tendency for tax to be viewed as a complex area which should be left to the tax professionals. This can lead to tax becoming isolated from the rest of the business. It has certainly not commonly been subject to independent review or oversight by Boards. Under the influence of new legislation like the Sarbanes-Oxley Act 2002, this approach is no longer tenable. This poses interesting questions. How can senior management – and the business as a whole – ensure they are clear about what the tax function (‘Tax’) is doing? And are the same standards of risk management applied to tax as to other material areas of the business? Tax experts should now accept that their strategies and processes will have to be subject to the same rigor as every other area of business. Similarly Boards and tax directors should take charge of the tax risk assumed by their corporations, before they become aware of it for the wrong reasons. Key themes from our survey „ Tax departments cannot afford to be isolated from the rest of the business. Tax is a function like any other: it requires a strategy on risk that is well understood within the organization and takes into account the whole risk spectrum, rather than focusing solely on tax technical issues. „ Boards need a clear understanding of the work Tax is doing and its effect on overall risk. Boards must keep asking questions about controls and the tax consequences of major transactions, and ensure that reliable independent reviews are in place. „ Tax directors need to re-focus their attention to ensure they do not remain rooted in corporate tax. A significant part of the overall tax function is often not under the control of tax directors, so they must be sure they are fully informed on all issues – at global, national and local level. „ The Sarbanes-Oxley Act has been instrumental in increasing the level of attention paid to tax risk. Our survey revealed that the organizations directly affected by the Act have focused greater attention on internal controls relevant to tax. „ Perhaps not surprisingly, our results revealed the financial industry’s innate conservatism. Nearly a half of our respondents said that either they would not do anything to provoke the tax authorities in the first place, or alternatively that their organization would not go to court to defend its tax planning. „ Respondents felt too much time was spent on compliance and not enough on planning. Better use of technology and other efficiencies would enable tax professionals to re-focus their efforts