Best practice in corporate tax governance – from the finance team to the Board
Tax Alert - October 2015
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
Introducing the Tax Cube
Understanding and assessing your current tax risks is an important first step.
We can assist taxpayers to develop an initial assessment, or benchmark the current state of their tax controls, with our risk assessment tool called the Tax Cube.
The Tax Cube is a comprehensive set of questions based on views of best practice in the area of tax risk management. It categorises and scores responses into four interrelated components that together form an integrated tax risk framework for internal controls over tax. These components are:
Governance: Governance encompasses the 'tone at the top' and defines tax objectives and the basis on which tax risk is addressed. Robust corporate governance practices aim to ensure transparency and accountability and are essential to lowering a taxpayer's risk profile.
People: Appropriate resourcing models, integration with the business and qualified personnel allow tax / finance teams to respond effectively to increased complexity in tax legislation and rapidly changing business environments.
Process: Effective tax processes in the areas of compliance, reporting, planning and Inland Revenue management allow the tax / finance team to operate in an efficient and controlled manner while also delivering value to the business.
Data and systems: Data and systems underpin the tax / finance team’s ability to gather high quality, tax sensitised data. This is paramount to the delivery of accurate, complete and timely tax compliance and financial reporting.
The Tax Cube output gives an indicative assessment of risk based on the responses to the questions. This allows the tax manager, financial controller or CFO to understand and identify priorities for change and actions recommended.
Time to close the gaps
An assessment of a company’s tax risk position can reveal the difference between where the business is and where it wants to be. It can also reveal gaps between the stated tax governance position and the actual position.
The common steps taken to close the gaps identified by the Tax Cube is an update, refresh or preparation of a corporate tax governance policy that is endorsed by the Board and the preparation of a tax management plan to manage (and mitigate where appropriate) the tax risks and tax opportunities identified.
These steps should look to address the current tax risks and opportunities but should also include a proactive approach to assessing the impact of any future changes in the tax rules and the tax environment for both risk and opportunity.
Deloitte is well placed to assist you in reviewing your tax risk and opportunity positions and can offer assistance in refreshing or developing forward looking business strategy oriented corporate tax governance documentation and tax management plans. If you would like to discuss your corporate tax governance documentation and what Deloitte can do to help please contact your usual Deloitte advisor or Annamaria Maclean on (09) 303 0782
October 2015 Tax Alert