Wednesday, June 18, 2008

What is Tax Risk? Extracts from the book 7 Habitual Tax Mistakes

“Tax risk” includes the meaning of “risk”. Risk means “expose to hazard; endanger; to expose to the chance of injury or loss; to take the chances of” in accordance with the meaning ascribed to it in the compact edition of the Oxford English Dictionary.

For the purposes of this book it means identifying those areas in the business that give rise to potential financial loss when tax principles are applied to them, which must be quantified and managed to minimize that financial loss as any person would in the case of medical insurance, life insurance, trauma insurance and property insurance.

Most people are willing to pay for “insurance” to help minimize any financial loss that may emanate from the previously mentioned risks. For some unknown reason, businesses do not budget or make allowance for spending funds on buying “insurance” in planning and implementing a {TRM} process in order to manage and minimize any financial loss that may flow from tax risk. Tax risk is the concept that must be recognized by business organizations in response to internal and external stakeholder demands, whilst continuing to meet business objectives and goals.

Primarily it is a cautionary measure to avoid possibly serious adverse financial consequences. It can be divided into two broad areas: internal and external tax risk.

External tax risk occurs through on-going legislative and regulatory changes and new case law, giving rise to changes in application and interpretation of tax laws. Often businesses fail to keep abreast of these changes.

Internal tax risk can be classified as follows: -transactional tax risk; -operational tax risk; -compliance tax risk; -financial accounting tax risk; -management tax risk; and -reputational tax risk. By failing to effectively and efficiently manage transactional, operational, compliance and financial accounting tax risk, management and reputational tax risk is also created.

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