Best practice in corporate tax governance – from the finance team to the Board

By Annamaria Maclean and Paul Dixon

Time to reflect on the adequacy of your corporate tax governance approach

Good corporate tax governance is increasingly becoming a theme that Boards are expected to include in their corporate governance framework.

Recently there has been a considerable amount of media and public attention on whether global corporations are paying their “fair share” of tax.  Aggressive tax planning strategies, while currently legal, are being viewed negatively by the public and are having a significant reputational impact on companies that have implemented them.

Tax planning, compliance and risk management have traditionally been thought of as matters to be handled by the finance team.  But now with much more attention focused on tax in the public arena, company executives and Boards should ensure that tax risk management is part of their corporate governance framework.

Tax authorities around the world are implementing initiatives which mean that the tax paid and the tax strategies of large companies are becoming more transparent.  Board members are also are expected to have an understanding of and take responsibility for the tax risks of the companies they act for.

In New Zealand, Inland Revenue includes tax governance as a behavioural criterion in its assessment of large enterprises’ risk ratings.  They have also included in their recent International Questionnaire a question on whether the taxpayer has a tax governance policy or framework in place.  The Minister of Revenue has also repeatedly discussed the concept of multinationals paying their “fair share” of tax in line with the OECD Base Erosion and Profit Shifting proposals.  Inland Revenue keeps a good eye on practices of tax authorities around the world and we wouldn’t be surprised if some of the below approaches are replicated in New Zealand.

The Australian Tax Office (ATO) recently issued its tax risk management and governance guide which focuses on both Board and managerial level responsibilities.  The guideline provides that best practice can be demonstrated at the Board level by:

• A Board endorsed formalised tax control framework;
• Formalised company director roles and responsibilities for tax risk management;
• An established tax risk committee or tax risk allocated to an independent board sub-committee (for example the audit risk committee);
• Board / sub-committee charters include review of tax risks;
• Regular summarised progress updates to the Board/sub-committee on how tax issues and risks are trending (i.e. high, medium, low);
• Tax risk registers and escalation of issues where appropriate;
• An annual report that includes a statement from the Board attesting that they have effective policies and processes in place to manage tax risk;
• A testing plan to determine the effectiveness of tax control frameworks and reports from independent assurance providers on the effectiveness of tax control frameworks.

Australia also has new transparency rules requiring public disclosure by the ATO of corporate tax information for all corporate taxpayers with turnover over A$100 million.  And the Australian Board of Taxation has been working on developing a voluntary tax disclosure code directed at greater public disclosure of tax information by large businesses.

In the UK, Her Majesty’s Revenue and Customs (HMRC) released a consultation document in July 2015 seeking consultation on the potential for:

• A legislative requirement for large businesses (turnover greater than £200M and/or assets greater than £2B) to publish their tax strategies, where it is intended that a member of the Board should ‘formalise, articulate and own’ the tax strategy and sign off to HMRC to this effect;
• A voluntary code of practice on taxation for large business; and
• A set of “Special Measures” to tackle a small number of large businesses that habitually undertake aggressive tax planning.

In addition to the increased focus on tax governance by tax authorities, many businesses are responding to the current Corporate Social Responsibility (CSR) environment and incorporating CSR statements in their annual reports.  Having an appropriate and robust corporate tax governance framework in place will help deliver the message that your business is operating in a socially responsible way.

Overlaying this current environment and focus on corporate tax governance is New Zealand’s company director duties. The concept that the Board must assume a more “hands on” approach to tax is gaining traction and support in the public’s eye and is consistent with existing director duties. As such it is crucial that Boards review their corporate tax governance framework to ensure that they could and would stand up to external scrutiny.

Is your corporate tax governance framework fit for purpose?

With the global attention corporate tax governance and tax risk management is receiving, now is a good time for taxpayers to reflect on their tax governance frameworks and tax controls and consider whether their current framework is robust enough in the current climate.

Taxpayers should also review whether their existing tax frameworks, to the extent these exist, continue to be in line with and are integrated with broader business strategies.  It is not uncommon for businesses to be missing opportunities or creating risks by inadvertently excluding tax considerations from their business strategy and decision making processes.

A recent global survey conducted by Deloitte has shown that nearly half of the respondent organisations have no formal corporate tax governance policy in place and that only a third of those organisations that have a formal written policy have these signed off by the Board. Anecdotal evidence further suggests that those organisations that have formal written policies have not reviewed these policies since they were put in place and may have limited to no processes in place for identifying, controlling or reporting tax risk.

How to strengthen your tax risk management framework

We suggest a 4 step approach to strengthening your tax risk management framework.