The risk that arises from a business’ inability to understand the tax environment(s) in which it operates. This, in turn, results in its inability to manage its tax-related expenses in the best way and to its best interest. In conducting its activities or operations, the business will incur financial losses or encounter specific difficulties in relation to management of its taxation affairs. However, the definition of tax risk may depend on perspective. Traditional views perceive tax risk mainly in terms of a host of unrewarded risks that a business has to terminate altogether, such as potential underpayments, overpayments, tax penalties, and assessments. The focus here is the so-called below the line taxes (corporate income taxes)- i.e., direct taxes. From a broader perspective, tax risk may be analyzed also using above the line taxes, such as value added tax (VAT) and other indirect taxes, in addition to employment and transaction taxes and costs relating to tax reporting.

Yet a much broader perspective would add to the sphere of tax risks those arising on account of reputation and brand mismanagement (as reflected in the negative picture painted by the media and nongovernmental organizations (NGOs), even when a business’ tax policies and reporting are in compliance with regulations and laws. Other potential tax risks may include inability to meet tax requirements, failure to capitalize on tax savings, and exposure to unexpected cash taxes.

Additional tax risk factors may be identified in the operations of banks and financial institutions particularly in terms of the extra burden and costs incurred on stress testing and capital requirements.