It's high time firms strengthened their tax governance

Tax governance―or having clear processes and controls to manage tax risks―is now more important than ever for large organisations.

The need to reduce tax leakage, the increased digitalisation of business transactions, and greater tax transparency are driving authorities globally to introduce tax control frameworks for companies. Measures such as the Organisation for Economic Co-operation and Development (OECD)'s Base Erosion and Profit Shifting (BEPS) initiatives are being adopted to ensure large businesses, especially multinational groups, pay their fair share of taxes.

Singapore is no exception. By recently introducing two voluntary tax governance programmes, the Inland Revenue Authority of Singapore (IRAS) has sent a clear message―tax governance is not just a "good-to-have". It should be a "best practice" for taxpayers.

New frameworks to strengthen tax controls, risk management

Singapore's latest effort to promote stronger tax governance comes in the form of two programmes―the Tax Governance Framework (TGF) and the Tax Risk Management and Control Framework for Corporate Income Tax (CTRM).

Unveiled in February 2022, the TGF and CTRM encourage large companies to embrace and strengthen good tax governance principles and practices. They are voluntary, and companies may choose to adopt one or both. The TGF encompasses both corporate income tax and the goods and services tax. It sets the tone at the board level, emphasising the importance of tax controls and tax risk management as part of effective corporate governance. To participate in the programme, a company must incorporate a broad set of principles and practices in its tax governance policy.

The CTRM is a bottom-up and more detailed framework. It involves businesses creating internal controls and processes to identify, monitor and reduce tax risks. This enables a company to perform a holistic review of its controls and risk management for corporate income tax matters.

In addition, there is an existing Goods and Services Tax control framework, namely the Assisted Compliance Assurance Programme (Acap), established by the IRAS in 2011, to enable businesses to determine the effectiveness of their indirect tax controls.

When adopting the CTRM framework, a company must monitor its progress, analyse results and get a formal sign-off from an independent reviewer. It should ideally link its tax risk management framework to its general enterprise risk management to make it more effective. Given the level of commitment required, it is important to have adequate processes and controls in place before participating in the programme.

A boost to tax revenue and corporate governance

Singapore's tax governance frameworks are fairly prescriptive, unlike other jurisdictions that adopt a more principle-based approach. There are clear rules and standards to follow, so companies know exactly what the IRAS expects.

But all tax authorities largely aim for the same outcomes. Tax governance initiatives create efficiencies and support tax collection efforts by allowing taxpayers to "get it right" in the first instance, thereby reducing costly and time-consuming audits. With robust controls in place, companies can ensure they are paying the right amount of tax while minimising errors and inaccuracies.

The IRAS also believes that commitment to tax governance builds trust between corporate taxpayers and the agency, and fits within the IRAS' goal to maximise voluntary compliance. This enables the IRAS to focus its resources on priority areas, such as resolving domestic and cross-border disputes, addressing tax policy gaps, and enhancing tax administration.

Trends driving change

Tax authorities around the world face resource and compliance monitoring constraints as transactions become more digitalised. Digital transformation also means that businesses are changing how they operate and increasingly automating their tax processes. This is driving more authorities, including the IRAS, to rely on internal tax controls to ensure companies capture transactions correctly, and to better understand taxpayers' systems and processes.

At the same time, advances in data analytics and other technology mean that tax authorities now know more about companies' tax affairs than ever. International frameworks such as the OECD's BEPS initiatives also give tax authorities like the IRAS access to more financial information about multinational groups. These initiatives aim to improve the applicability of international tax rules to new business models and ensure multinationals pay their taxes wherever they operate.

This increased tax transparency can create more controversy for companies because authorities have more insights into taxpayers' global tax profile. But with good tax governance, a company can minimise misstatements, ensure that tax positions are adequately reviewed and commercially aligned, and enhance its tax risk profile.

Tax controls are also growing in importance as environmental, social and governance (ESG) reporting gains ground. While this remains new in Singapore and is mostly voluntary, the IRAS' new frameworks indicate the rise of tax governance as a vital part of ESG and effective corporate governance. As a result, companies might face greater scrutiny of their tax affairs as Singapore aligns itself with global ESG standards.

Good tax governance creates value

Good tax governance delivers value to business beyond ensuring compliance.

With good tax governance, a company reduces its risk of misstatements and incomplete filings. It can also help mitigate excessive taxes from being paid due to lack of oversight or insufficient supporting details.

Fostering trust with the IRAS can also minimise tax audits and controversies, which can potentially lower a company's compliance costs. For example, an organisation with CTRM status is awarded penalty waivers for discovered errors and should face less intensive audits.

Deloitte has helped many organisations to evaluate and enhance their tax processes and controls. We have seen that as a company expands, matures, and acquires businesses, its tax processes become more complex and gaps may arise over time. For these reasons, adopting and updating tax governance frameworks should be seen as akin to "house-cleaning".

By participating in a tax governance programme, an organisation can get its affairs in order and learn what other companies are doing. It has an opportunity to identify gaps in its systems and adopt best practices to improve its tax processes as well as controls. This ultimately saves time and costs, while minimising tax risks as well as reputational risks which may be costly to repair.

Tax governance is here to stay, and for good reason. Therefore, it is vital for companies to act early. By adopting the two new frameworks from the IRAS, they can strengthen their tax governance and tax risk management while minimising tax leakages.