Tax Compliance Management System
The term Tax Compliance Management System (Tax CMS) is made up of the components compliance and management system and primarily refers to the area of taxes. Compliance stands for the observance of rules. A management system is understood to mean, among other things, procedures and measures introduced in a company to ensure the effectiveness and efficiency of its business activities, the prevention of asset misappropriation and compliance with authoritative legal regulations.
A CMS includes all reasonable measures taken by a company to ensure compliant behavior and to prevent violations by legal representatives and employees.
A compliant behavior was and is self-evident for all taxpayers. The reason for the increased importance of documenting this through the implementation of a Tax CMS is a passage in the letter of the Federal Ministry of Finance on Section 153 of the German Fiscal Code (AO) dated 23.5.2016. In a simplified form, the BMF expresses there that a Tax CMS is considered an important indication against intent or recklessness.
Why is tax compliance relevant for companies?
Whether price fixing, slush funds, unacceptable working conditions, discriminatory marketing campaigns, data and bribery scandals, or tax evasion and avoidance - in all recent cases, these compliance violations have led to high costs, damage to the company's image, and personal liability for those involved.
A documented tax control system not only reduces the risk of violating tax regulations, it also protects the company from damage to its image and the legal representatives from personal liability. It also creates opportunities and synergies for the company that can be exploited.
The PKF four-phase model
PKF has developed an approach specifically for the needs of medium-sized businesses in which, based on an analysis of the status of tax compliance, the tax risks are systematically identiﬁed and assessed. Subsequently, the standard or further special modules can be commissioned individually. Support is provided by the "PKF Tax CMS Tool", which is based on Excel and can be applied outside the ERP. The "PKF Tax CMS Tool" is used to control and document the four process phases outlined in the following overview.
Phase I: Tax Compliance Analysis
First, the company's tax compliance status must be determined on the basis of questions that determine the nature of seven compliance principles.
The analysis is realized by interviews and checklists. The PKF Tax CMS Tool can be used for documentation in the form of a short report. The risk situation is then assessed as part of the in-depth tax compliance analyses for standard modules (see Phase II).
- Tax compliance culture: Which corporate values are important?
- Tax compliance goals: Which target achievements should be ensured?
- Tax compliance organisation: How is the compliance structured and operated?
- Tax Compliance Risks: How is risk management organized?
- Tax compliance program: What methods are used to control tax compliance risks?
- Tax compliance communication: What regulations or reporting systems do exist?
- Tax compliance monitoring/improvement: What ongoing monitoring and improvement measures are planned?
The results will be presented and explained in a dashboard.
Phase II: Risk analysis
Based on the results of the tax compliance analysis developed in Phase I, the modules to be examined in detail (initially) are selected from the standard modules Income Tax, Value Added Tax, International Tax Law/Transfer Pricing, Wage Tax/Social Security and GoBD Procedure and Process Documentation. The following steps are processed via the PKF Tax CMS Tool in the dialog between client and consultant:
- Identiﬁcation of the risks of these processes
- Identiﬁcation of existing regulations and controls in these processes.
- Evaluation of risks with regard to the amount of damage and probability of occurrence
- Reporting on the risk situation
- Determination of need for action to reduce the risks
On this basis, risk indicators (as a product of loss amount and probability of occurrence) are calculated for the respective modules, which can be visualized graphically via the software.
Phase III: Management and control measures
In this phase, risks with high and very high indicator ratings - the so-called "red zone" - are prioritized. The following measures and controls could be deﬁned as examples in this phase and implemented with the help of the PKF Tax CMS Tool:
- Preparation of tax handbooks, organizational guidelines, work instructions, checklists (manual or electronic)
- Verification of the appropriateness of transfer prices
- Preparation of transfer pricing documentation
- Description of controls (manual or electronic)
- Determination of communication in case of deviations from requirements
The aim is to move the risks from the "red zone" to the yellow (medium risk) or green (low risk) zone.
Phase IV: Effectiveness and review
This phase follows phases I to III with a time lag. It involves so-called functional tests, i.e. whether the measures and controls established in phase III are actually put into practice.
PKF will be happy to support you in the optimal implementation of a customized Tax CMS for your business.