Tax governance

Greater scrutiny on businesses “paying their fair share” by governments and civil society has resulted in increasingly complex tax rules and greater use of data analytics by tax authorities when reviewing tax affairs.

Expectations have also changed. Rather than just showing that tax is correctly accounted for (and being penalised to the extent that it is not), it is now expected that businesses will be managing their tax risks through appropriate governance arrangements.

In summary, Inland Revenue’s expectation is that tax governance arrangements will provide sufficient assurance to stakeholders that tax risks are subject to proper controls and that outputs such as tax returns can be relied upon. Tax should not be viewed just as an operational matter for management. The tone from the top is important. To that effect, boards should take ownership of, and responsibility for, setting the company’s overall taxation strategy and direction.

Inland Revenue expects the following questions to be reviewed on a regular basis by the board:

• Is there a documented tax strategy and has it been kept up-to-date?
• Have effective systems, procedures and resources been put in place to manage tax risks and, if so, is a clear statement made in the annual report to that effect?
• Is annual reporting sufficiently transparent such that all stakeholders have the capacity to analyse and effectively interpret the information provided on taxes paid?

 

That expectation has been signalled largely through Inland Revenue’s Multinational Enterprises Compliance Focus document. In the most recent version, the tax governance focus has been extended to more businesses, not just large multinationals.

This is being backed up by an Inland Revenue campaign looking at tax governance arrangements. This campaign targets a select number of companies who have been sent a questionnaire for completion. Some of the questions being asked include:

• Is there a well-documented tax strategy and tax control framework in place and is it fit for purpose?
• Are these policies regularly reviewed/ updated and subject to independent testing?
• Are internal policies/procedures for tax compliance processes (including data collection, analysis, calculation, recording and reporting) documented?
• Are accounting and tax changes regularly reviewed to ensure that the tax impacts are considered?
• Are material tax issues/risks reported by management to the board and is there a process in place for significant transactions to be reviewed from a tax perspective?

 

Where formal tax governance frameworks are not already in place, Inland Revenue has asked whether it is expected that they will be in place in the next 12 months. The clear implication being that if tax governance has not been considered, this needs to be addressed as a matter of priority.

Inland Revenue has also signalled that, for the taxpayers selected, follow-up actions in the form of “more detailed inquiries or an in-depth review as part of a wider examination of the company’s taxation affairs” may be taken. Safe to say, business is now on notice.

This is likely the first step in Inland Revenue being more active in this area and, over time, we see this applying
to a widening range of taxpayers. Our expectation is that tax governance will form part of the overall risk assessment framework for audits and
other enforcement activity (similar to the approach in Australia). Therefore, it is more important than ever to ensure appropriate tax governance policies are in place and, importantly, that these are being complied with by the business.

However, even in the absence of Inland Revenue’s focus, we would argue that robust tax governance arrangements are simply good business practice.

Tax strategies and tax control frameworks provide clear instructions on how the board expects tax risks in the business to be managed. Regular reporting to the board on tax risks and compliance with the strategy should give comfort to all that tax is being appropriately managed and that actions are being taken to mitigate risks. Having well-documented, and independently verified, processes will also reduce the risk of anything slipping through the cracks.

Accordingly, tax governance isn’t just about demonstrating that tax is being well managed to Inland Revenue, when it inevitably comes asking. Good governance will make tax processes more robust and outcomes more predictable – that’s just good for business. 

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