Tax Compliance Management System
The term ‘Tax Compliance Management System’ (Tax CMS) is made up of ‘compliance’ and ‘management system’ and primarily refers to the area of taxes. Compliance stands for adherence to rules. A management system is understood to mean, among other things, procedures and measures that are introduced in a company in order to ensure the effectiveness and efficiency of its business activities, to prevent financial losses and to comply with relevant legal regulations.
A CMS includes all reasonable measures taken by a company in order to ensure compliant conduct and to prevent violations by legal representatives and employees.
Rule-compliant conduct was and is a matter of course for all taxpayers. The trigger for the increased importance of documenting this by implementing a Tax CMS is a section in the letter from the Federal Ministry of Finance regarding section 153 of the Fiscal Code of Germany (AO, Abgabenordnung) dated 23 May 2016. In simplified terms, the Federal Ministry of Finance states there that a Tax CMS is regarded as important evidence of no intent or negligence.
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 led to high costs, reputation damage 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 reputation and its legal representatives from personal liability. It also taps opportunities and synergies that the company can use.
PKF’s four-phase model
PKF has developed an approach specifically for the needs of SMEs that is designed to systematically identify and assess tax risks on the basis of an analysis of the tax compliance status. Subsequently, the standard or additional special modules can be ordered individually. The ‘PKF Tax CMS Tool’, which is based on Excel and can be used outside the ERP, provides support. The four process phases outlined below are managed and documented using the ‘PKF Tax CMS Tool’.
Phase I: Tax compliance analysis
First of all, the company’s tax compliance status must be determined on the basis of essential questions for seven compliance pillars.
The analysis is carried out using interviews and checklists. The PKF Tax CMS Tool can be used to prepare 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 company values are important?
- Tax compliance targets: Which target achievements are to be ensured?
- Tax compliance organisation: What is the structure and process of the compliance system?
- Tax compliance risks: How is risk management organised?
- Tax compliance programme: What measures are used to manage tax compliance risks?
- Tax compliance communication: What regulations or reporting systems are in place?
- Tax compliance monitoring/improvement: What ongoing monitoring and improvement measures are planned?
The results are presented and explained in a dashboard.
Phase II: Risk analysis
Based on the results of the tax compliance analysis obtained 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 as well as from the procedure and process documentation for adherence to the principles for property maintaining and storing books, records and documents in electronic form and for data access (Grundsätze zur ordnungsmäßigen Führung und Aufbewahrung von Büchern, Aufzeichnungen und Unterlagen in elektronischer Form sowie zum Datenzugriff (GoBD). The PKF Tax CMS Tool is used to process the following steps in dialogue between client and advisor:
- Identiﬁcation of the risks of these processes
- Identiﬁcation of existing rules and controls in these processes
- Assessment of risks with regard to the amount of damage and probability of occurrence
- Reporting on the risk situation
- Identification of the need for action in order to reduce risks
Based on this, risk indicators (as the product of loss amount and probability of occurrence) are formed for the respective modules, which can be graphically illustrated using the software.
Phase III: Management and control measures
In this phase, risks with high and very high indicator values – the so-called ‘red zone’ – are prioritised. The following measures and controls could be exemplarily deﬁned in this phase and implemented using the PKF Tax CMS Tool
- Preparation of tax manuals, organisational 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)
- Rules for communication in the event of deviations from specifications
The objective here is to bring risks out of the ‘red zone’ and into the yellow (medium risk) or green (low risk) zone.
Phase IV: Effectiveness and review
This phase follows phases I to III with a certain time delay. These are so-called functional tests, i.e. tests to determine whether the measures and controls established in Phase III are in fact applied.
PKF will be happy to support you in order to ensure the best possible implementation of a tailor-made Tax CMS for your company.