Corporate Tax Governance - From the Top Down...
Tax Alert - December 2019
By Annamaria Maclean and Kirstie Anderson
In a world that is increasingly concerned with where tax is being paid, and who is (or rather, who is not) paying their “fair share” of tax, tax governance remains a hot topic for corporates and tax authorities alike around the globe. But what does tax governance actually mean?
Let’s explore what good tax governance looks like and what tax authorities are doing to assess whether corporates stack up to expectations.
Many tax authorities are implementing initiatives that require large companies to be more transparent about the amount of tax paid and their tax strategies. It is now expected that Board members have an understanding of, and take responsibility for, the tax risks of the companies they act for.
Here in New Zealand…
While New Zealand has not (yet?) introduced prescriptive requirements relating to tax governance, it is clear from the recently released Multinational Enterprises Compliance Focus document that corporate tax governance remains a key focus area for Inland Revenue when it comes to multinational enterprises. In particular, Inland Revenue has endorsed the OECD’s recommendations regarding tax governance and has included as part of its Compliance Focus a helpful checklist of 10 things for Boards to tick off to ensure the right tone is set from the top:
Checklist for boards of directors of New Zealand Companies
- Does the board have a well-documented overarching tax strategy?
- Is this strategy actually followed in practice by the company's management?
- Is the strategy and it's implementation regularly reviewed and updated?
- Does the company have a tax control framework to manage day-to-day tax risks?
- Is senior management confident in the capacity and capability of the systems, procurements, personnel in place to achieve overall company tax compliance?
- is the tax or finance team on top of all relevant law changes (such as the anti-BEPS measures, the Common Reporting Standard and revisions to tax treaties)?
- Does management report regularly to the board on potentially material tax issues and risks?
- Has the operation of the tax control framework been tested independently in the last three years?
- Is a clear statement made in the company's annual report as to tax governance?
- Is annual reporting of tax payments and provisions sufficiently transparent for all relevant stakeholders to fully understand the company's overall tax position in New Zealand?
Around the world…
The UK and Australia are examples of jurisdictions that have taken more prescriptive action in this area:
- In the UK, Her Majesty’s Revenue and Customs (HMRC) introduced legislation requiring large businesses within its scope to publish their tax strategy in relation to UK taxation on their website before their financial year-end, with penalties applied if this is not complied with.
- Australia has introduced a structured governance assurance programme following the implementation of the ATO’s Justified Trust methodology in 2016. The ATO has published prescriptive tax control framework expectations in its Tax Risk Management and Governance Review Guide (the ATO Guide), setting out the key tax controls that it expects corporates to implement. The Australian Board of Taxation has also developed a Voluntary Tax Transparency Code directed at greater public disclosure of tax information by large businesses.
One aspect that resounds through the guidance from all of the tax authorities mentioned above (including Inland Revenue’s checklist) is the existence of a tax control framework. So, what actually is a tax control framework and how do we know whether we can tick that box?
Tax control framework (TCF)
Under New Zealand’s current approach to tax governance, best practice is to put in place a TCF that picks up the Board-level controls of risk appetite and approach to risk management, while also endorsing the internal control framework to be implemented by management.
There is various guidance from around the world on what constitutes a TCF, with jurisdictions adopting different approaches to what they require of taxpayers. However, there are common themes that pop out of the guidance we have seen as to what a TCF should look like.
The OECD’s 2016 report on Co-operating Tax Compliance – Building Better Tax Control Frameworks identifies six essential building blocks of a TCF:
1. Tax strategy established: this should be clearly documented and owned by the Board.
2. Applied comprehensively: All transactions entered into that are capable of affecting its tax position in one way or another should be governed.
3. Responsibility assigned: The Board is accountable for the design, implementation and effectiveness of the TCF. The tax team is responsible for the implementation of the TCF.
4. Governance documented: The governance process should be explicitly documented and sufficient resources should be deployed to implement the TCF and review its effectiveness periodically.
5. Testing performed: Compliance with the policies and processes embodied in the TCF should be the subject of regular monitoring, testing and maintenance.
6. Assurance provided: The TCF should be capable of providing assurance to stakeholders, including external stakeholders such as a tax administrations, that tax risks are subject to proper control.
The essential components of a TCF should therefore address the following:
- Defining tax risk – what are we trying to manage?
- Tax risk management processes – how do we go about managing risk?
- Tax risk appetite – what risks are we willing to take?
- Tax risk management segregation of duties – who is responsible for what?
- Tax risk governance – how do we oversee tax risk management?
Also think about: how do we engage with the tax authorities and is our tax risk policy published internally and in our annual report?
While the Board owns the tax strategy, management (the finance team and the tax team) is responsible for how the TCF is implemented. The ATO Guide provides insight into what management controls are expected:
- Roles and responsibilities are clearly understood - tax compliance and risk management roles are documented including segregation of duties and escalation of tax risks.
- Senior management confident of capacity and capability - tax staff experience, qualifications and training; KPIs include tax risk management; tax risks are escalated and tax reports are presented to senior management.
- Significant transactions are identified - policy to identify significant transactions (including which need to be reported to Tax/the Board) and where external advice is required. Tax risks are rated and reported.
- Controls in place for data - IT controls ensure systems accurately calculate, record and report tax data.
- Record-keeping policies - record retention policy with staff training plus audited compliance.
- Documented control frameworks - documented procedures for reviewing tax return and reconciling to financial statements.
- Procedures to explain significant differences - documented procedures for preparing deferred tax and tax return, and explaining differences between tax return and financial statements.
- Complete and accurate tax disclosures - income tax return review prior to lodgement, controls in place to review other taxes.
- Legal and administrative changes - processes, systems and controls are updated for law and administration changes.
While many large New Zealand corporates have a tax strategy policy in place that is endorsed by the Board, many corporates should now be looking more closely at how this is being implemented at a management level, and whether this is being regularly monitored.
In terms of tax planning and identification of risks, a tax management plan is a tool that is commonly used among corporates and forms a key part of identifying tax risks. An effective tax management plan should include rolling reviews of key risk areas for the business – including for example fixed assets, GST, customs, PAYE, FBT and other indirect taxes.
Inland Revenue has been more focused on indirect taxes and has been undertaking more auditing in this area. As this is often an area where returns aren’t regularly subject to external signoff, best practice is to ensure that periodic health checks are undertaken.
In our experience, a tax management plan serves two key purposes:
1. Ensures the organisation’s tax strategy is monitored and implemented across all tax types;
2. Provides a platform for the organisation to address tax risks and optimise tax planning.
If you are interested in putting in place or refreshing an existing tax management plan, we can assist you with putting this together.
Independent testing of a TCF
Another point on Inland Revenue’s checklist asks whether the operation of the TCF has been tested independently in the last three years. We understand the ATO generally adopts a walkthrough approach when conducting a review of tax governance processes to determine if controls and assurance processes are adequate, depending on the level of risk involved.
From a New Zealand perspective, this is not something we have seen Inland Revenue do to date, but is something that corporates should be doing to ensure the effectiveness of their TCF once this is in place.
In terms of tools for assisting with this, our Tax Cube [DTT1] workshop is a risk assessment tool that assists taxpayers to develop an initial assessment or benchmark the current state of their tax controls. The Tax Cube is a comprehensive set of questions based on views of best practice in the area of tax risk governance. The Tax Cube output gives an indicative assessment of risk based on the responses to the questions, displaying a “heat map” that allows the tax manager, financial controller or CFO to understand and identify priorities for change and actions recommended. The heat map can also provide a simple way to report to the Board on the tax risks in the business and allow the business to develop a plan to address these.
Reporting to the Board and in the annual report
Other key factors in Inland Revenue’s Compliance Focus is regular reporting to the Board on tax risks and including relevant statements in your annual report on tax governance.
So ask yourself – how often does your company report to the Board on tax risks? Best practice is that tax risks are included in a risk register with appropriate ratings (high, medium, low) and reported on a regular basis to the Board (our Tax Cube can assist with this as noted above).
Reporting on tax governance in the annual report should also be regular practice for large New Zealand corporates. Inland Revenue expects to see a clear statement around tax governance in the annual report, much like other areas of governance.
If you would like to learn more about how your business stacks up on the tax governance front, or if you are interested in running a Tax Cube diagnostic workshop, our tax team would be happy to help.
December 2019 Tax Alert contents
- Inland Revenue: “No place to hide overseas income”
- “You Do The Math” – 10 Simple Ways to Keep Inland Revenue Away
- Corporate Tax Governance – From the Top Down…
- Tax Policy: What to expect in the twenties
- Don’t hold back; investment income reporting is almost
- OECD consults on “GloBE” global minimum corporate tax rate
- Snapshot of Recent Developments