Tax risk assessment
Tax risk assessment is the direction of the tax consultant of the law firm AGTL Kharkiv, Kyiv, Odessa.
Tax risks are the probability of adverse consequences for the taxpayer as a result of committing (or not committing) any action. This is not just a theoretical category – a full assessment of tax risks is always quantitative: the level of probability and the amount of money that will be lost. Assessment and optimization of tax risks is an important management tool that allows the taxpayer to predict their tax responsibilities in advance and to consciously conduct tax planning.
The notion of tax risks
The very definition of tax risk has appeared relatively recently.
Tax risk is the possibility of an adverse event in which a company, organization or individual who has made a tax decision may or may not receive resources, lose the intended benefit or incur additional financial or image losses. Simply put, tax risks threaten the organization with fines, penalties, loss of reputation in the market, and in some cases criminal liability.
This definition implies the existence of tax risks not only for taxpayers, but also for the state in the face of the executive branch. In this case, the tax risks consist in a possible reduction in the amount of taxes, which are the main component of the budget.
Tax risks that can be assessed in monetary terms fall into the category of financial, as the tax relations themselves are part of the financial relationship. Non-financial risks that are associated with criminal liability, as it cannot be assessed in monetary terms, at least legally.
On the note
In the Netherlands, the company’s own formalized system of internal control of tax processes, the correctness of which is confirmed by an independent auditor, is a good reason for exemption from tax audit.
The main characteristics of tax risk are:
- Lack of a favorable outcome;
- a high level of subjective assessment and the possibility of new risks, which were difficult or impossible to foresee at the time of the decision;
- A close relationship with the uncertainties of economic and legal information;
- negative nature for all participants in tax relations, as opposed to other types of risk;
- different manifestation for each participant in the tax relationship.
Types of tax risks
There are several types of tax risks caused by certain reasons. The most common among them is the risk of additional taxation as a result of the detection of violations during the tax audit. But in addition to it there are also risks of inefficient taxation, risks of increasing the tax burden, risks of criminal liability.
Tax risks come in two fundamentally different types:
“Direct” risks are the tax risks of an organization or an individual associated with the possible future application of sanctions against it for violation of tax laws or additional tax and penalties. Any taxpayer faces these risks by will or captivity: among them are risks such as the risks of denial of tax deductions and in tax reimbursement, a ban on the use of tax benefits, application of tax penalties to the person or even criminal prosecution for tax crimes.
“Reverse” risks are the risks of lack of effective tax optimization, when the taxpayer pays excessive taxes because of ignorance of their rights and opportunities or because of their ineffective protection. This is a more practical aspect of the issue, but cannot be ignored. Of course, the state does not punish excessive tax payment, but the consequences of the reverse risks can be no less devastating than the consequences of direct: the lack of tax optimization bled the business itself, leaving no money for development, on payments to shareholders and investors, and often on the very existence.
Tax optimization allows you to minimize these risks or eliminate them altogether. Ultimately, analyzing tax risks and minimizing them are tools to get additional benefits out of your situation, finding hidden business reserves and saving money.
Tax risk factors
Two groups of factors influence the occurrence of tax risks: external and internal.
External factors:
Information: tax problems of counterparties, change of position of tax, judicial and financial bodies on taxation issues, late receipt of information from state agencies.
Economic: financial and economic activity of the taxpayer, changes in the composition of taxpayers, changes in the list of taxes, changes in tax rates or other elements of taxation, change of penalties.
Social: social policy, corruption.
Political: conflict with the authorities.
Internal factors:
Organizational: insufficient qualifications of employees of tax departments of companies, interaction of structural units with each other and with tax authorities in the tax accrual process, low awareness of management about tax risks.
Technical: lack of tax planning, imperfect information accounting and processing technology when calculating and paying taxes.
Economic: the cost of maintaining the tax unit or using the services of audit and consulting companies, the deterioration of the financial and economic activity of the firm.
Social: conflict of interests of the owner and management of the organization.
Usually tax risks arise where there is uncertainty. But if with other types of risks domestic businessmen have already learned to fight more or less effectively, the attitude to tax risks in Ukraine, unlike the rest of the civilized world, is not too serious. Often the management of the company learns about the onerous tax consequences of a transaction after its completion, when it is too late to take measures to reduce them.
Why risks need to be managed
As a rule, entrepreneurs who actively develop their business, with this reproduce and tax risks, so the most forward-thinking and experienced companies, especially medium and large, began to create separate divisions, which are engaged in the management of tax risks.
Despite the general urgency of the problem of tax risk management, Ukrainian and foreign risk managers see these risks differently. For Ukrainian companies, the most important thing is to reduce the threat of claims from the tax office and taxation, as well as the imposition of fines. Foreign companies also understand the risk of overpayment of taxes. It is this, a broader understanding of tax risk that stimulates the introduction of a full-fledged internal control system in the organization, aimed not only at avoiding additional charges, but also at choosing the optimal tax system.
Tax Risk Assessment Tool
Any taxpayer tends to benefit more from transactions with less taxation. There is nothing reprehensible about this – in many cases substantial tax optimization can be achieved within the framework of the law and with respect for its norms. However, how to answer the question: where is the boundary between permissible tax planning and illegal tax evasion?
The only, in our opinion, a full-fledged tool for assessing the legality of tax decisions and risk planning is a comprehensive legal analysis of the norms of law and law enforcement – decisions of courts of all instances, generalizations of judicial practice, interpretations of the law enforcement agencies.
Based on practice, we can reliably assess how risky you are in your tax planning or, on the contrary, how many opportunities for it you miss. We look forward to helping you form a position and protect yourself from risks based on the latest trends and mechanisms of law.
Tax risk management methods
Reducing risk is a reduction in the likelihood and volume of possible losses. To do this, a range of methods of assessing tax risks, each of which can bring real benefits to the company:
Diversification.
It is a process of making similar transactions in different options, which vary in the degree of tax risk from zero to the level permissible in the company. One type of diversification may be to expand the presence in territories with different tax conditions, for example, offshore. But it is impossible to reduce tax risks to zero by means of diversification.
Limiting the amount of trades.
It refers to the imposition of limits on the amount for which tax-risky transactions can be made. Limitation is one of the most important and most effective methods of reducing tax risks, usually it is used by companies in case of significant portfolio risks.
Creating a system of internal monitoring of tax-related processes.
Such a system involves tracking all tax calculation and payment activities. To do this, all the company’s structural units develop and put into effect regulations on this process: internal regulations, methodological guidelines, formalized procedures for calculating taxes, job descriptions, KPI system.
Formalization of tax processes within the company.
It allows you to effectively identify, collect and analyze information about possible tax risks in order to make the necessary decisions to minimize them. Building a risk management format depends on the specifics of business processes in a particular company. Most organizations implement it through internal orders, regulations, specific procedures, while tightening the requirements for internal control documents.
Automation of processes, including paperwork.
To do this, software that is responsible for automating the company’s business processes, including tax procedures, is used or updated.
Raising awareness of professionals and management.
This method is constantly monitored by tax legislation, including consultations with tax authorities or with experts from audit and consulting firms. Another way to raise awareness is to conduct a du diridges of counterparties, in order to obtain exhaustive information about their reliability in terms of tax risks.
Improving the skills of tax department employees and optimizing staffing in this area.
In order to improve the skills of the staff responsible for calculating and paying taxes, it is necessary to ensure that all changes in the law, study and application of the latest computer programs are tracked. To optimize the staffing, the company may be allocated a tax accounting unit or a tax specialist.
Creating an internal tax risk audit system or involving external auditors
(tax initiative internal and external audit). An effective method of tax risk management, which is to create a service in the company responsible for compliance with the established order of calculating and paying taxes. Internal tax audits are carried out in the interests of the company and regulated by its internal documentation, all inspections of this kind are carried out by the organization’s own forces. It is advisable to create an internal audit department only in large firms, so small and medium-sized organizations usually attract external auditors to minimize tax risks.
Tax consulting.
Continuous cooperation with tax consulting firms can also be an effective method of reducing risks, as experts have information on the latest changes in legislation and have extensive practical experience in the field of taxation.
Self-insurance.
This method is that the company prefers to insure itself rather than buy insurance, thus saving funds. Self-insurance is a form of creation of reserve funds directly at the enterprises themselves.
Insurance.
The essence of this method is to give the company a part of the income in order to mitigate the risk. In fact, the organization is willing to pay for reducing its degree to zero by purchasing insurance. Risk-seeking firms try to insure themselves to ensure the maximum compensation for financial losses they may only incur.
When choosing a method to reduce tax risk, the taxpayer should assess its possible consequences in advance. Reducing tax risks to an acceptable level requires a high level of professionalism in taxation, accounting and judicial practice. It often turns out that a company, especially a small one, is only able to do so with the help of outside specialists.
Our services
We offer our clients both a legal assessment of the tax risks of the organization as a whole, and an analysis of tax risks for individual transactions. We also work with such a specific category of risks as tax risks of individuals. All our specialists are highly qualified and have extensive experience in tax law.
Tax risk assessments can be carried out for a variety of purposes and methods, but it should always provide answers to the following questions:
- Is there a risk of a dispute with the tax authority over a particular transaction, benefit or in general activity? What is its probability?
- if there was a risk, was it possible to defend a position that was beneficial to the taxpayer in court? What is its probability?
- what should be done to reduce the risks identified? how much will these actions reduce the likelihood of negative events for the taxpayer?
- What steps can be taken to optimize the tax effect of the operation or from the activity? Is it possible?
- What are the possible economic benefits of tax optimization, the real and planned tax burden?
Result
As a result of the assessment of tax risks of the organization or individual by our experts, you can get a full analysis of the risks available, as well as possible options for minimizing them. Conducting such an assessment will allow the taxpayer not only to be prepared for possible consequences, but also guarantees the ability to defend his position before the tax authorities in any disputed situation.
We will advise you, help you organize accounting support, choose a tax system, and if necessary – check the processes of organizing your business on legal, accounting, tax, as well as financial issues. And believe me, your money will certainly come back to you.
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