Tax Internal Control Framework

Where negligence occurs in a company’s organisation of tax processes, this could lead to penalties. If tax obligations are breached, the management board, executive board and the management of the tax department are held – sometimes even personally – liable. The people involved are, however, often unaware of this risk.

With the publication of the application order to Section 153 of the German Fiscal Code (Abgabeordnung, AO) (23/05/2016), the German Federal Ministry of Finance assists companies and their representatives in protecting themselves from legal consequences. Accordingly, the introduction of a Tax Internal Control Framework (Tax ICF), which serves to fulfil tax obligations, can minimise liability risks for companies and their management and provide protection against possible reputation risks.

By digitising processes, in addition to the described preventative functions, the Tax ICF also ensures increased efficiency of business processes and provides the opportunity to better integrate the tax department in company processes.

A prerequisite for a Tax ICF to succeed is a Cooperative Compliance approach, i.e. a cooperative and trusting working relationship between the company and the tax authorities that allows processes and systems to be tested and “simulated tax audits” to be performed in advance.

WTS supports you in all steps of the requirement analysis, design, implementation, and continuous development of your tax internal control framework, as well as in communications with the relevant tax authorities.

Cooperative Compliance

Analysis

Concept

Certificate-oriented implementation

Test of adequacy/efficiency

Continuous development

Identifying weak points and loopholes; documenting and deducing recommendations for action
Takes place by means of document analysis and workshops in the individual tax areas requested by the client; however, this also extends to cover tax governance, in particular
Completing the analysis phase: Reporting to the client on the current status quo; identifying strengths and weaknesses along with recommendations for action

About the scope of implementation and incorporation of internal tax control systems in the company-wide risk management system
About the level of detail of risks and controls
Relating to the geographical relevance of internal tax control systems (e.g. for domestic and foreign subsidiaries as well)
Relating to the recommendations for action in cross-departmental measures and any required partial restructuring of processes (including risks and controls)
the implementation of measures (if applicable, it may also be that only step-by-step implementation is requested)

The structure of an internal tax control system is based on seven basic elements that must be firmly embedded in the entire company

Culture

Awareness across the entire company of the importance of tax laws

Objectives

Minimum objective: “Compliance with tax laws” within individual sub-areas

Organisation

Definition of roles and responsibilities

Risks

Identification & evaluation of major tax compliance risks

Programme

Documentation e.g. risk & control matrix

Communication

Communication with and between all employees who perform tax-relevant functions, and reporting of compliance breaches, if applicable

Monitoring and improvement

Continuous monitoring of adequacy and effectiveness
Reporting of weak points and breaches

The implementation is based on the only auditing standard of the IDW PS 980 currently available as a guidelines for comprehensive auditing possibilities with regard to the design of the internal tax control system
Continuous alignment with other guidelines
Certification is not essential, but can be carried out by WTS

An effective internal tax control system is tailored to the needs of the company and should be appropriate, and above all else, effective.
This requires process transparency and clear presentation of the interfaces
The adequacy review should also cover the needs and/or expectations of the tax authorities
The internal tax control system is only effective if it is actively used and monitored accordingly, and this is also documented

A permanently effective internal tax control system needs to be developed continuously,

both in the event of changes to tax circumstances
and, in particular, in the event of changes within the company (changes to the company structure, as well as to the value-added contributions and reporting lines)

Cooperative Compliance

Increased efficiency and preventive minimisation of liability risks

Liability risks can only be minimised for companies or their senior management if, prior to the start of a tax audit, a common understanding is reached between the tax authorities and the company about the tax, ICS, its processes and, in particular, the effectiveness of the defined controls.

Cooperative compliance is reflected in the following measures:

Enabling system and process testing at the beginning of the tax audit
Checking the effectiveness of the imported controls together with the tax auditors
Carrying out "simulated" tax audits in advance and discussing the results with the tax auditors
Concentrating on focussed/weighting issues (in particular, income tax and VAT)

Create process transparency, particularly with regard to incorporating information from the tax department into operational business decisions and tax-relevant data flows up to the preparation of tax statements and tax returns
Create transparency of responsibilities: Clear separation of responsibilities for data quality and/or processing by the tax department
Through a cooperative compliance approach: Acceleration of the entire taxation process by integrating efficient tax audit and joint audit arrangements to shorten audit times and achieve final legal certainty as soon as possible