What is Tax compliance?

Within the framework of risk management, an internal compliance management system (CMS) and compliance officers are intended to ensure and control that the company and its employees behave in a desirable manner.

What does tax compliance involve?

Tax compliance includes all organizational measures that are necessary to ensure compliance with tax laws and regulations, including tax-relevant internal guidelines, rules and standards. This applies to all taxes, customs duties, levies as well as ancillary services under tax law, such as interest or late payment surcharges. In brief, tax compliance is intended to increase the tax honesty of private individuals and companies.

Tax compliance in the company

In a company, the tasks related to tax compliance are usually attributed to the board of directors. In practice, however, the responsibility is often passed on to the CFO and the associated team. The tasks include the implementation of a system that ensures tax compliance. For this system to work effectively, it needs to generate structural incentives for the individuals and areas involved to comply with tax obligations. The exact form of these incentives within the company varies from company to company.

When implementing an internal compliance system, the following questions arise: Are the responsible employees aware of and able to control the compliance with all tax laws, guidelines and other requirements? How are changes in the law incorporated into the control system and is it ensured that these changes are communicated to the responsible employee? What qualifications are needed for employees and executive bodies in order to ensure tax compliance requirements? How are opportunities for sanctions and error management integrated into the control processes?

Furthermore, companies must become more aware of the internal treatment of tax issues and the process description of the core tasks in the field of taxes. Only in this way can internal control objectives, qualification requirements and efficient processes for analysing risk factors be established. To be able to implement these in a targeted manner, training opportunities, specialised professionals in tax functions and standard documents regarding the current status of the internal financial and external legal situation are needed.

In order to ensure the efficiency of tax compliance, it is not only necessary to implement a system but also to monitor and document it. This is important as to ensure that these is sufficient information and data available to relieve the company if needed. In addition to the avoidance of infringements, the the avoidance of financial and reputational risks and the prevention of criminal prosecution of the company and its employees are critical. For the sake of tax efficiency it is thus important for the company to make use of the scope for tax optimisation while avoiding the risks mentioned above.

Consequences of disregarding the law or rules

Whether the tax rules and guidelines have been deliberately disregarded or whether there is simply insufficient information to prove otherwise makes little difference in terms of the consequences. Financial consequences in the form of fines, tax estimates or tax backpayments and additional expenses for consultancy and court costs can arise. In addition to the financial risks, other essential factors such as the reputation can suffer enormously from such lawsuits.

Conclusion

The use of a tax compliance system is a worthwhile investment for companies. Although the implementation initially involves costs, once the system is up and running, it will be able to protect the company from heavy financial and reputational losses. Through the consistent control and documentation of the internal processes, a company can avert possible charges or threatened fines by relying on this documentation in the event of a lawsuit. In this way, the costs of implementing tax compliance become a negligible part compared to the advantage resulting from it, i.e. ensuring progress for the company and its activities.