Tax health check: a basic process for CFOs or head of tax, but too often overlooked

After this, I have replicated the question every chance I had. Not surprisingly, answers were quite similar, as leaders usually put the entire tax responsibility to an internal or external (outsourced) resource and assume all processes are correct. A reality is that at C-level there is only limited knowledge (or interest) on tax risk awareness and the way taxes are filed; at least, until something bad happens.  

Manage tax risks

Top management worry about the importance of timely detect and manage tax risks in the organisation until they face relevant tax assessments affecting cash availability, encounter a tax situation associated with reputable damage or personal liability or deal with a situation impacting value of shareholders. A tax health check can be useful for these purposes.

A health check is an evaluation or assessment of an individual well-being, functionality, or condition. It is a way of determining whether something is operating properly or if there are potential issues in areas that require attention. It involves a series of medical tests, measurements and other examinations assessing a person’s overall health status. Likewise, a tax health check is a holistic approach to evaluate the tax operation and assess the overall tax position by identifying issues on the tax processes, errors and opportunities for improvement.

A tax health check involves a series of tests, examinations, and questions for operational level officers or participants in the tax process. It generally comprises all taxes (corporate income tax, indirect or sales tax, property tax or other relevant taxes) due by a legal entity in a determined country and the way tax returns were filed. Also, it includes the analysis on the way current and deferred taxes were computed, on the general transfer pricing approach and the tax structure set up. A tax health check report should describe tax attributes (e.g., utilisation of tax credits, tax exemptions or net operative losses), favorable balances, trends, and possible tax reforms affecting the organisation.

What is the added value of a tax health check?

• It provides tax health awareness to top management of the organisation by having an overall assessment of the items identified and the tax position. It is likely that the tax health check reports the likelihood of a tax authorities’ assessment in a specific topic and summarises the company tax risks.
• It can help to detect potential tax problems at an early stage, allowing a more effective reaction from management and the implementation of a safeguard mechanism, without the need of recording a tax provision and impacting financial statements.
• It can analyse new tax reforms or trends, to evaluate whether company is prepared for future changes, and whether the processes and the international structure are still acceptable.
• The tax health check report can contain an initial evaluation of how the information flows were performed, what processes and internal control procedures are in place or how company’s tax risks are known as well controlled (e.g., tax control framework) and provide recommendations to improve. This becomes relevant when the overall tax processes are performed by local teams or a third party (through outsourcing, co-sourcing, or nearshoring mechanism).
• It can provide an initial assessment on how technology is used to optimise and automate tax processes and provide recommendation for implementing innovative digital tax technology tools for processes, ensuring a good deliverable. Also, in those jurisdictions where electronic invoicing is mandatory, technology can be used during the tax health check process to detect discrepancies between accounting, tax, and statutory documentation, giving the chance for auto-correcting any mismatch before an assessment from the tax authorities is made.
• The tax health check outcome can highlight preventive mechanisms for day-to-day or future operations. One example of this can be implementation of permanent creating “defense files” on specific tax topics to keep contemporaneous documentation in order.
• It recommends healthy processes and habits to encourage companies to take responsibility of their tax well-being, such as clear methodologies or processes to have better tax accounting and reporting processes, determine uncertain tax positions and to improve tax compliance and transfer pricing methodologies.

Conclusion

If managed properly, a tax health check is a great tool to have better tax processes, minimising tax risks and point out a path to follow for a healthier tax function.

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Article written by Francisco Jose Zamora Valencia