How Managing Tax Risk Impacts Tax Compliance

A recent study by Dr Catriona Lavermicocca, in the Department of Accounting and Corporate Governance at Macquarie University, and Professor Margaret McKerchar from the University of NSW, provides insight into the tax risk decision-makers and the tax risk management practices of large Australian companies.

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The study is based on in-depth interviews and a survey of tax decision makers from large Australian companies (turnover exceeding $250 million). It finds that companies that identify and manage tax risk improve their compliance behaviour in several ways:

  • Management of tax risks reduces the company’s acceptable level of tax risk;
  • Directors and tax decision-makers, including the CEO, CFO and tax manager, are more informed concerning the tax risk to which the company is exposed; and
  • In a majority of large companies, a tax risk management system identifies both non-compliance with the income tax laws and new opportunities to minimise income tax. It ensures that companies act on the tax issues they identify, and place greater importance on income tax compliance.

Tax Management Systems

Although identifying and managing tax risks does improve the income tax compliance behaviour of large companies, the study finds that the effects of managing tax risk depends on the specific tax risk management system.

Effective systems of managing tax risk improve the flow of information about tax risks within a company. More precisely, the systematic consideration of tax risk throughout a large company assists the company to achieving the tax risk profile it seeks.

Ultimately numerous factors, including pressure from shareholders and other stakeholders, influence the board’s decision about an acceptable tax risk profile. Nonetheless, this research found that a tax risk management system tends to lower the level of tax risk that company decision-makers find acceptable.

Understanding – not eliminating – tax risk

Tax adjustments and amendments still occur despite having a tax risk management system in place. These arise for various reasons, including ATO audits or when companies identify their own errors and make a voluntary correction.

Large companies also indicate that they are increasingly required to obtain the advice of an external tax specialist in an effort to minimise the risks associated with uncertainty and complexity of tax laws, despite the additional cost.

Whilst a tax risk management system cannot identify or control all external risks, the study shows that a documented and operationalised tax risk management system ensures that decision-makers are at least more aware of the tax risks they face.

– Dr Catriona Lavermicocca and Professor Margaret McKerchar

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