Tax Governance, are you ready?
Tax Alert - October 2020
By Annamaria Maclean, Jodee Webb & Kirstie Anderson
Tax governance is working its way up the agenda of Boards of Directors as a result of tax authorities around the world becoming highly focused on tax governance and best practices.
The New Zealand Inland Revenue is no exception and in its refreshed Multinational Enterprises Compliance Focus Document it reiterated its stance that corporate tax governance should be a key focus for Boards. Inland Revenue has endorsed the OECD’s recommendations regarding tax governance and has included as part of its Compliance Focus a helpful checklist for Boards to tick off to ensure the right tone is set from the top. Inland Revenue’s expectations around corporate governance do not just apply to significant enterprises, but also those organisations that currently file a basic compliance package and also high net wealth individuals who have complex business interests. All these types of taxpayers are expected to have appropriate and robust tax control frameworks in place. See our article in December 2019 where we discussed in more detail what this means.
Recently, Inland Revenue’s tax governance focus has progressed, with questions on tax governance being included in the most recent International Questionnaire.
But it is not just tax authorities that are raising questions around tax governance, investors are increasingly interested in knowing that businesses are sustainable long-term and part of this is their “social licence to operate”. The Global Reporting Initiative (GRI) Standards, which are designed to be used by organisations to report on their impact on the economy, the environment and society have introduced a standard for reporting on tax which is applicable to reports and materials published on or after 1 January 2021. This helps an organisation communicate with its stakeholders on a range of topics, including: management’s approach in relation to tax; its tax governance and control framework; how the organisation engages with the tax authorities; tax policy advocacy; and the level of direct and indirect tax paid by the organisation on a country by country basis.
With the global attention corporate tax governance and tax risk management is receiving from multiple avenues, 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.
How to strengthen your tax risk management framework
We suggest a three-step approach to strengthening your tax risk management framework and ensuring it is fit for purpose.
Organisations should undertake an initial assessment of the current state of their tax governance position. To help you develop an initial assessment or benchmark we can use Tax Cube, a risk assessment diagnostics tool. The Tax Cube is a comprehensive set of questions based on best practice in the area of tax risk management and is completed in a half day workshop with your tax / finance team and other key stakeholders. We generally recommend the company’s CFO attends the first hour when we cover Board level controls and overriding tax governance.
The results of the workshop are summarised in a heat map which will then enable you to identify priorities for change and clear actions to take forward.
Risks identified during the Assess phase can be responded to by implementing a robust tax control framework or refining an existing framework where one already exists. There are several elements to consider when putting in place a robust tax control framework. These can be categorised under the five interrelated components of the Tax Cube. Tax controls should be applied comprehensively to cover all transactions that have an impact on all relevant tax positions.
Tax controls and documentation
Once in place, the tax frameworks and control documentation should take a top down approach, with the Board having overall responsibility for the tax strategy for the organisation.
Documentation should include:
- Tax strategy document set and owned by the Board, covering areas such as the organisation’s tax risk tolerance and approach to relationships with tax authorities;
- Tax control framework to assist management with managing tax risks, including tax management plans and tax risk registers;
- Tax control processes for each specific tax type;
- Tax policies and procedures to provide guidance at a day to day operational level.
Review of specific tax risks
If risks in relation to specific tax types have been identified during the Assess phase, we can assist clients undertake more focused reviews on certain tax types. This will help close any gaps in the tax control framework, tax policies and procedures and ensure the risk is better managed going forward.
Given Inland Revenue’s increasing use of data analytics to identify risks, our reviews are more and more data analytics focused and our findings are often shared with Inland Revenue in order to limit the scope of any review they undertake.
Even if risks regarding a specific tax type are not identified at the Assess phase, it is best practice to have rolling independent reviews of key tax risk areas for the business (for example, fixed assets, GST, customs, PAYE, FBT and other indirect taxes), including a review of the tax controls in those areas.
Monitoring and ongoing compliance
As with any process, tax governance is not a “set and forget” exercise but requires regular attention and testing to ensure it meets the organisation’s needs.
Ongoing monitoring and regular reporting to the Board and other stakeholders is essential to ensure that tax risks are continually monitored and reviewed. To facilitate this, Tax Cube can be re-performed to see how an organisation is tracking against the original benchmark assessment.
If you would like to discuss tax governance further or are interested in running a Tax Cube diagnostic workshop, then please get in touch.
October 2020 Tax Alert contents
- Tax Governance, are you ready?