Why your organization needs a Tax Plan Implementation Review (“TPIR”)
A key control over income taxes should include any tax plan or strategy be approved by the appropriate level within an organization. Depending on the size, nature and impact of the tax plan; Board level approval may be required. This control should be formalized by having authorised management mandates and policies outlining when approval is required based on the tax plan’s monetary and reputational impact. For example, applying prior year’s tax losses to current taxable income may require the approval of the Vice-President of Taxation but plans requiring the creation and/or amalgamation of companies or off-shore financing may require the Board’s approval. The control should be evidenced by memorandums, printed email, minutes, and resolutions (appropriate to the tax plan and approval level required) to ensure proper is documentation exists for regulatory compliance requirements.
The tax plan as approved required a variety of parties to complete certain tasks over a period of time in order for the whole plan to work properly: domestic and foreign internal tax staff, internal counsel, outside lawyers and tax accountants, treasury staff and even taxing authorities. Whose responsibility is it to ensure all the steps have been completed as required? Strong controls would require the implementation process to be monitored itself. Moreover, the monitoring should be performed by a person that has full understanding of the plan.
Once the tax plan is implemented is it generally shelved and forgotten. There is however, on-going risk associated with the implemented tax plan. A company’s business and tax legislation are dynamic while the tax plan typically remains static. Implemented tax plans should be reviewed periodically to determine if there have been any legislative changes or administrative positions which impact the plan. Furthermore, the tax plan should be reviewed in conjunction with the company’s current and future business strategies. Tax plans implemented when it was solely a domestic company and before purchasing a foreign operation may not longer be appropriate or adequate. A written review is evidence of a strong internal control and is part of the overall tax plan documentation.
Benefits of completing a TPIR
- Strengthens internal controls over income taxes and sets a tone of responsibility.
- No surprises – preparing a written report for the review by senior management and/or the Board ensures they are informed on the status of tax plans they have previously approved.
- Facilitates discussion about income taxes at a senior level to ensure the tax department is included in strategic decisions rather than being an afterthought.
- Assists senior management in measuring the value of the tax function in the company. Furthermore, it can be a part of the performance measurement for senior individuals in the tax department. Performance could be base on whether the tax department has been (i) proactive in finding sound methods to minimize income taxes in line with the company’s risk appetite, and (ii) been able to manage the tax plan through to a successful implementation?