What Is a Tax Control Framework? A Comprehensive Guide

Taxes are getting more complex; this isn’t news – ever-changing tax regulations, key personnel retirements, and tight budgets are challenges many tax leaders are navigating. Understanding and managing emerging tax risk requires a paradigm shift from tax being seen as a cost center and compliance check box to an integral part of proactive strategic business planning. To facilitate this shift, businesses need two things: trusted expertise and a well-structured Tax Control Framework (TCF) driving effective change.

Learn what a Tax Control Framework (TCF) is, why it is an indispensable tax risk management tool, and how organizations can use TCF to optimize compliance operations, enhance efficiency, and build stakeholder trust. Implementing a TCF empowers tax executives and C-Suite leaders to integrate tax operations with business goals, safeguard their organization’s financial health,  and enhance your business’s reputation and standing with stakeholders.

Understanding the need for a tax control framework

Over the past decade, scrutiny of tax operations increased dramatically.  According to tax and finance executives, the next two years will likely bring more complex and prolonged engagements with tax authorities.

According to EY, An alarming 24% anticipate warnings or even criminal penalties and prosecution from tax authorities. Additionally, 29% express concerns about the potential reputational damage a tax dispute could inflict on their business. These statistics demonstrate a shifting landscape that underscores the existential need for effective tax governance in mitigating risk.

Businesses that adopt a Tax Control Framework are better equipped to:

• Proactively align tax strategies with the organization’s overall initiatives.
• Identify and manage tax risks proactively.
• Streamline compliance processes.
• Enhance corporate governance and stakeholder confidence.

Key elements of a tax control framework

At its core, a Tax Control Framework is a comprehensive system that manages an organization’s tax risks effectively and underpins a well-functioning tax strategy. It contains several elements:

1. Tax Governance

According to Grant Thornton, tax governance is the umbrella term for the different documented steps and processes an organization should have in place to ensure tax risks are appropriately identified and managed at the operational, senior management, and board levels. Establishing clear roles, responsibilities, and accountability is crucial for maintaining control over tax-related matters.

Effective governance also ensures that tax strategies align with the organization’s overall objectives and regulatory expectations. Currently, nearly half of tax executives (43%) cited they had limited clarity about how tax fits into their organization’s broader governance structure. To align with the business, tax executives need to get a seat at the table and advocate for the tax team.

Key Elements:

• Business Alignment: A tax strategy should be clearly defined and aligned with the organization’s overall business objectives, requiring buy-in and consistent partnership with revenue drivers. How many times has your tax team been left out of revenue conversations? This relationship must be continual, ensuring tax teams are a key part of business development conversations and never the last to know.
• Assigned Accountability: Each team member should know what they are responsible for and how that plays into the overarching tax strategy.
• Education and Communication: oftentimes tax teams are left out of conversations, but the burden of ensuring participation rests with all stakeholders. The structure that a well-crafted TCF provides allows tax teams to communicate the importance of tax strategy to peer business groups. The TCF’s structure also enables the breaking down of complex tax issues into a simpler form that breaks down some of the myth of complexity that usually hangs over tax. Improved communication facilitates alignment of tax and business goals, brings tax professionals to the decision table, and fosters more transparency allowing for more effective governance and clearer lines to accountability every step of the way.

2. Risk Management

A proactive approach to identifying, assessing, and mitigating tax risks is crucial to minimize potential financial and reputational damage. Risk management ensures that emerging tax challenges are addressed before they escalate or cause harm.

Key Elements:

• Tax Risk Assessment: Performing a risk assessment for key areas of the tax function, such as indirect and direct tax compliance is important to gain insights into where your organization is opening itself up to risk.
• Risk Appetite: Understanding how much risk your company is willing to take to achieve results is an essential step to building your risk management strategy.
• Internal Controls: Controls, like automation or specific processes, should be in place to mitigate significant tax risks and ensure compliance across the entire organization.

3. Tax Compliance Processes

Compliance is a top priority for every tax team and organization. A Tax Control Framework should consider the current state of compliance and outline the processes and controls necessary to comply with regulations, minimize errors and penalties, and safeguard the company’s reputation.

Key Elements:

• Legislative and Regulatory Monitoring: Tax regulations are always changing, so a structured process for monitoring changes in tax legislation and global regulatory requirements is essential for staying ahead of compliance needs and avoiding last-minute scrambling.
• Standardized Procedures: Clear and standardized procedures for tax workflows are essential to ensure tax obligations are met accurately and timely. These processes must be documented and be followed consistently. This makes it easier to scale confidently.
• Technology Integration: Leveraging technology to automate key tax duties improves accuracy and efficiency, reduces manual errors, and avoids concentration of key knowledge in a few employees.
• Visibility: Using tax workflow software, you can gain visibility into team performance, current workloads, and enterprise risk, which allows for strategic decision-making.

4. Monitoring and Assurance

Continuous monitoring and assurance keep the Tax Control Framework effective and adaptive to new risks or changes in regulatory environments.

Key Elements:

• Regular Audits and Reviews: Conducting regular internal audits of tax processes ensures that tax governance works as intended and that compliance risks are mitigated.
• Future Planning: Building on regulatory and legislative monitoring, an effective TCF integrates monitoring into future planning, allowing for assurance audits and reviews to current requirements simultaneous to planning for any future changes on the near-term horizon.

5. Awareness

Building a culture of tax compliance for long-term effectiveness requires regular training and clear communication both within the internal team and throughout the entire organization. Employees at all levels should understand their responsibilities and roles in the Tax Control Framework.

Key Elements:

• Ongoing Team Training Programs: Providing training on tax laws, internal controls, and the organization’s tax policies helps employees stay up to date with current regulations and practices, while regular business updates ensure the team is well-informed of business developments and prepared to address future challenges.
• Clear Communication of Policies: Tax policies, procedures, and updates should be clearly communicated across the organization to ensure that all stakeholders understand their responsibilities. Assistance to tax professionals on effective communication strategies and utilization of the TCF structure to convey complex issues in a structured format builds credibility for the tax function within the organization and shifts perception of tax to an active partner and resource in wider planning and operational processes.
• Raising Awareness: Creating awareness about the importance of tax compliance and the implication of non-compliance helps foster a culture of accountability and reduces the risk of errors.

How to build a comprehensive tax control framework

Building a strong TCF requires a systematic approach. Here are the key phases to guide the process:

1. Gather Insights

The insight phase involves analyzing the current state of tax operations, identifying risks, and understanding existing policies, processes, and control mechanisms.

Key Elements:

• Conduct a Gap Analysis:
  Compare current practices against industry standards and regulatory requirements to identify weaknesses in your current tax practices.
• Map Processes:
  Document existing tax workflows and processes to better understand dependencies, inefficiencies, and compliance gaps.
• Engage Stakeholders:
  Consult tax, finance, and operational teams to gather input on challenges, risks, and improvement opportunities.
• Classify Risks:
  Use risk assessment tools to categorize tax risks by likelihood and impact. Define acceptable levels of risk (risk appetite) for the organization.
• Review Technology:
  Evaluate existing systems and identify technological gaps that hinder compliance or efficiency.

Best Practices:

• Audit internally for a comprehensive look at tax operations.
• Use interviews and workshops to gather insights across departments.
• Maintain a forward-looking perspective by factoring in potential regulatory changes and emerging tax trends, such as digital taxation.

2. Lay Out The Foundation

Based on the insights, planning sets the foundation for an effective TCF by defining the framework’s objectives, scope, and strategy. This phase is critical because it establishes a roadmap guiding the initiative.

Key Elements:

• Define Objectives:
  Based on your findings from the insight stage, identify the framework’s key goals, such as improving compliance, minimizing risks, or enhancing transparency. The objectives should align with the organization’s broader business and governance strategies.
• Assess Scope:
  Define the scope of the TCF within your business by considering factors such as the organization’s size, target markets, and tax obligations. Clarify the objectives, outline the necessary resources, establish a realistic timeline, and identify any potential constraints or limitations that could impact the process.
• Assemble a Team:
  Create a cross-functional team, including tax, finance, legal, and IT experts, to oversee the implementation. Assign clear roles and responsibilities.
• Prioritize Risks:
  Focus resources where potential risks and impacts are greatest.
• Allocate Resources:
  Set a budget for technology, training, and external consulting if needed. Building a robust framework may require both financial and human capital.

Best Practices:

• Engage leadership early to secure buy-in and align objectives with corporate priorities.
• Create a detailed plan that includes timelines, milestones, and deliverables for each phase.
• Take the time to map out a communications strategy with internal business partners like finance, legal, and operations. Break down complex concepts and communicate goals and objectives for any aspects of the plan that may impact peer business groups within an organization.

3. Design & Define

The design phase transforms insights and builds off the planning phase by establishing robust systems, controls, and policies to address identified gaps and risks.

Key Elements:

• Develop Policies and Procedures:
  Create standardized protocols for managing tax responsibilities, such as reporting and auditing.
• Define Controls:
  Install safeguards like segregation of duties, reconciliation checks, and automated alerts to minimize errors and risk.
• Integrate with Business Frameworks:
  Align tax controls with the organization’s overarching Business Control Framework (BCF) for seamless integration and operational efficiency.
• Implement Necessary Technology Solutions:
  Implement or upgrade systems such as Enterprise Resource Planning (ERP) or automated tax compliance software to handle tasks like reporting and data tracking.
• Create Training Programs:
  Design education sessions to ensure all employees understand and adhere to the new policies and processes.

Best Practices:

• Document all new procedures to avoid ambiguity and ensure standardization.
• Build flexibility into the framework to adapt to future changes in tax regulations or organizational goals.

4. Implement & Train

Implementation involves putting the designed framework into action. This phase focuses on embedding processes, controls, and policies into everyday operations.

Key Elements:

• Pilot the Framework:
  Test the new processes in a controlled environment or with a specific department to identify any refinements needed.
• Roll Out in Phases:
  Introduce the framework incrementally, prioritizing high-risk areas first to ensure quick wins and reduce exposure.
• Provide Training:
  Equip employees with the skills and knowledge to follow new procedures and understand their roles within the framework.
• Monitor Onboarding:
  Check that all teams and departments are adopting the measures to prevent misalignment.
• Communicate Changes:
  Keep stakeholders informed about changes, emphasizing how the TCF will and does benefit the organization.
• Enable Continuous Feedback:
  Create channels for employees and stakeholders to report issues or suggest enhancements to the framework.

Best Practices:

• Establish communication channels for ongoing feedback and troubleshooting during implementation.
• Assign implementation champions in each department to ensure smooth adoption.

5. Monitor Results

Monitoring ensures the framework continues to operate effectively, adapting to evolving risks and regulatory requirements.

Key Elements:

• Conduct Regular Audits:
  Schedule periodic internal audits to assess whether policies, processes, and controls are being followed and remain effective.
• Measure Key Metrics:
  Track performance indicators like compliance accuracy, filing deadlines met, and audit outcomes to evaluate the framework’s success.
• Update for Emerging Risks:
  Review the framework annually or after significant regulatory changes to update policies and practices as needed.
• Leverage Technology:
  Use analytics and risk assessment tools to identify trends and potential risks in tax data, enabling proactive adjustments.

Best Practices:

• Stay informed about changes in tax laws and industry benchmarks to maintain an updated framework.
• Utilize automation to improve efficiency.

With regulatory frameworks growing increasingly complex and stakeholder expectations rising, businesses can’t afford to treat tax compliance as an afterthought. Instead, proactive tax control — anchored in a robust Tax Control Framework — must become a strategic pillar of organizational success.

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.