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Harry L. “Hank” Gutman
Director
KPMG’s Tax Governance Institute

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KPMG’s new Tax Governance Institute director offers important advice on tax risk best practices.

Why is tax risk becoming an increasingly important topic inside the C-suite and before corporate boards?

Historically, taxes have not received a great deal of attention by those outside the tax department. Dialogue within a company about goals, objectives and risks typically avoided discussions of tax. This frequently created a disparity between the company’s tax risk profile and its overall corporate risk profile.

However, as the regulatory and business climates have shifted in recent years, we have seen a growing recognition of the scope and magnitude of tax risk. This has been prompted in a large part by the overwhelming number of tax-related material weaknesses reported under Sarbanes-Oxley 404, highlighting inadequate internal controls over the financial reporting of income taxes, a responsibility that falls squarely within the purview of corporate management and the audit committee.

Additionally, the recent implementation of FIN 48 and demands for greater transparency and disclosure by the SEC, Congress and taxing authorities throughout the world, have created a need for audit committees, corporate management and tax directors to collaborate more formally on the oversight of their company’s tax risk management.

What does the Tax Governance Institute aim to accomplish?

The mission of KPMG’s Tax Governance Institute is to provide a forum for discussion about issues of tax risk and tax risk management among various constituencies -- including board members and corporate management -- as they strive to balance regulatory compliance, effective controls and prudent management. The TGI leverages resources from the regulatory and legal communities, as well as corporate management and board members, to facilitate the dialogue about emerging tax risk and tax risk management issues.

We use a variety of communication channels, including roundtables, face-to-face seminars, video Webcasts, and a Web site, to enable these constituencies to identify and explore emerging tax risk and tax risk management issues by sharing knowledge and engaging in meaningful dialogue about them

How would you describe tax governance?

Tax governance focuses on establishing policies and processes and allocating responsibility to various individuals or functions within an organization to identify, communicate, manage, and disclose tax risk.

Indeed, effective tax governance hinges upon the integration of a company’s tax risk management into its overall enterprise risk management strategy. It requires the collaboration of the tax function, corporate management, and the audit committee to ensure that significant tax positions, planning considerations, and potential exposures, as well as related financial reporting implications, are communicated and addressed in a timely manner throughout the organization.

What challenges do directors face concerning tax risk management?

Given the developments surrounding tax risk in the past few years, (e.g., S-O 404, heightened scrutiny by tax regulators, FIN 48), there is little question that directors are more aware of the financial reporting and reputational risks taxes can pose to an organization. The primary challenge for directors, however, is to understand how a company identifies, measures and manages these risks. The inherently complex and detailed nature of taxation, combined with ever-changing laws and regulations of the jurisdictions in which an organization operates, can make this task even more daunting.

Directors are not required, nor should they be expected to be conversant with, the complexities of tax law or the intricacies of preparing comprehensive corporate tax returns. However, a framework must exist to allow them to determine whether management has established appropriate policies, procedures, and processes to ensure identification and communication of significant tax risks within the organization; identification of, and compliance with, applicable tax laws and regulations; and appropriate accounting for and disclosure of the effects of taxes in the company’s financial reporting process.

What specific tax risk issues should board members focus on?

There is no one answer to that question. Taxes are embedded in nearly every aspect of a company’s business and, therefore, tax risk can arise in a number of areas including operations, transactions, compliance efforts, and financial statement disclosures. It is important that boards recognize and appreciate the scope of tax risk and are kept aware of emerging issues that may affect the tax risk their companies face. As I have already said, board members need not possess a detailed understanding of tax law and its constant evolution, but it is essential that they know enough about key issues so that they may effectively govern the tax risk management efforts of their company.

How do boards and board committees manage to stay on top of these issues? What kind of dashboard do they need?

Open channels of communication within their organizations are critical. The most effective board members manage to stay on top of these issues by leveraging internal and external resources that identify emerging issues and provide high-level insight into them. Based on that information, board members can then formulate specific questions for management. Those questions can serve as a primer for in-depth discussions with management about specific tax risks and the process by which such risks are measured, monitored and managed.

With whom should the board and, in particular, the audit committee, be communicating on tax risk management issues?

To maximize the efficiency and effectiveness of a company’s tax risk management strategy, the audit committee should be communicating regularly with the tax director. It has become more common recently for corporate management, the audit committee and the tax director to meet formally to discuss the organization’s overall tax risk management issues and strategy. Although it is generally the case that the tax director takes the lead in developing an organization’s tax strategy, effective tax governance requires the input and approval of that strategy by the audit committee.

What are some of the future topics in tax risk that KPMG’s Tax Governance Institute will explore?

In October, the Tax Governance Institute will hold a webcast on the role of the audit committee in the tax risk management process. We will explore issues such as incorporating tax risk into the audit committee’s oversight framework, audit committee education on tax risk, and internal communications and reporting of tax risk. This will be followed by programs on the experiences and issues with FIN 48 implementation and ongoing compliance, and a series on the tax considerations and risks associated with multinational companies conducting business in jurisdictions outside the United States.

The future programs follow our highly successful video Web casts conducted in the first half of 2007, which covered first quarter experiences with FIN 48, tax risks associated with transfer pricing and financial, tax and securities laws implications of equity-based compensation. Through our programs and Web site we will continue to identify emerging tax risk issues while promoting a greater awareness of these issues in the marketplace.

What has the reception to the Institute been in the marketplace?

Based on the membership response, it is clear that we have identified a real need for information and insight about tax risk and tax risk management.

Since January of this year, when we announced the Institute, almost 6,000 members have registered, the majority of which come from corporate management and boards. We invite anyone interested in learning more about tax risk or the Institute to log onto our Web site at http://www.taxgovernanceinstitute.com and join the conversation. We will be glad to have you with us.

Harry L. “Hank” Gutman, a former chief of staff for the U.S. Congress Joint Committee on Taxation, is Principal-in-Charge, Federal Tax Legislative and Regulatory Services, in the Washington National Tax practice of KPMG LLP, and Director of the firm’s Tax Governance Institute.

As Joint Committee Chief of Staff from 1991 through 1993, Gutman was the primary nonpartisan advisor to the House Ways and Means and Senate Finance Committees concerning the technical, economic and revenue aspects of tax legislation. He also served as Deputy Tax Legislative Counsel in the Treasury Department Office of Tax Policy. Throughout his career, Gutman has counseled major multinational corporations on various implications of tax legislative change. He represented clients in legislative and administrative matters before Congress, the Treasury Department and the Internal Revenue Service. Before joining KPMG, Gutman was a partner in the Washington, D.C. office of the law firm King & Spalding.

Gutman taught at the University of Pennsylvania and Virginia Law Schools. He has served as Chairman of the Tax Policy and Government Relations Committees of the American Bar Association Tax Section and has been a member of the Board of Advisors of the New York University (NYU)/Internal Revenue Service Continuing Legal Education Program. He is a member of the Tax Advisory Group of the American Law Institute, the American College of Tax Counsel, the Taxation Committee of the U.S. Chamber of Commerce, the Board of Directors of the Tax Council, and the NYU Federal Tax Institute Advisory Board, and was a trustee of the American Tax Policy Institute.

Gutman received an undergraduate degree from the Woodrow Wilson School of Public and International Affairs at Princeton University, a B.A. degree in Jurisprudence from University College, Oxford University, and an LLB degree from Harvard Law School.

KPMG LLP, the audit, tax and advisory firm,, is the U.S. member firm of KPMG International. KPMG International’s member firms have 113,000 professionals, including more than 6,800 partners, in 148 countries.

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG LLP.

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.