Building Up a Protective Shield: The Role of Tax Communication for Corporate Tax Risk Management

Abstract

Our objective is to examine the ‘black box’ of corporate tax risk management by providing unique insights into practitioners’ tax risk perception, implemented tax risk management practices, and the internal dynamics leading to these practices. We perform our analysis based on 33 expert interviews, which we conducted with 42 practitioners. One important insight from our interviews is that substantial heterogeneity in tax risk definitions exists among corporate insiders and corporate outsiders. Another important finding is that our sample firms engage in detached tax risk management practices that are not integrated into enterprise-wide risk management efforts. We attribute this separation to the unique risk profile of the corporate tax function. Our results further reveal that 90% of our sample firms engage in (preventive) external tax communication to manage their tax risks. Through addressee-specific tax communication, targeted at different external stakeholders, tax departments shield their firm and its CFO from impinging external pressure and thus reduce corporate tax risk exposure.