Tax governance update

Last year, after multiple warnings on the need not only for the “right tone from the top” but also effective day-to-day management of tax risks, Inland Revenue finally followed up with specific questions around tax governance arrangements.

More recently, Inland Revenue has revealed the results of its first round of tax governance questionnaire.

The questionnaire contained 10 questions, such as whether businesses had a documented tax strategy, undertook independent testing of their tax controls, and had appropriate processes to ensure management and boards were across key tax risks in the business. 

The questionnaire was sent to 143 businesses classified as “significant enterprises” (that is, those with annual turnover greater than NZ$30 million). Inland Revenue has indicated that those selected were a representative sample of foreign and New Zealand owned business, at different turnover levels above NZ$30m, and across different industry sectors. 

The questionnaire results were mixed:

• only 45% of respondents had a documented tax strategy
• while tax controls were better documented, with 83% of respondents saying they had them:
  • 31% were not willing to make these available to Inland Revenue for examination, if requested; and
  • only 38% of respondents had their tax controls tested and updated.
• on a more positive note, more than 95% respondents said they were regularly checking their tax risks and there was tax risk reporting at the board level
• there was generally little to separate the responses by ownership, size, or type of industry.

Like other regulatory requirements, having poor (or no documented) processes and controls to manage tax risk is likely to result in greater scrutiny over time. This will inform Inland Revenue’s risk profiling. 

Inland Revenue has developed a tax governance maturity model, categorising respondents into the following stages:

1. Emerging – some tax governance capability but ad hoc. Around 8% of respondents were found to be at this stage
2. Progressing – some tax process improvements initiated but not systematically implemented or institutionalised in the business. The majority (55%) of respondents were at this stage.
3. Established – robust tax processes resulting in a high degree of governance capability. This is where Inland Revenue wants the majority of businesses to be at, but only 37% of respondents were at this stage.
4. Aspirational – processes have been optimised and there is full and transparent reporting of tax risks. Inland Revenue noted they were unable to assess which respondents were at this level without a deeper examination of their tax controls and business processes.

It is likely that future questionnaires as well as Inland Revenue’s direct investigation activity will be used to calibrate where businesses sit within this tax governance maturity spectrum. 

There is more to come. We understand that:

• there will be follow up action later this year with those respondents identified as having further work to do (such as on their tax governance documentation or where deficiencies have been identified with their tax processes) 
• there will be a further questionnaire towards the end of 2022 covering another representative sample of significant enterprises
• for larger (so-called “compliance managed”) New Zealand taxpayers, who were excluded from the 2021 tax governance questionnaire sampling, there will be a special tax governance focus in 2022 that may include Inland Revenue walk throughs to test their systems for tax risks and to understand/evaluate their tax controls.

Inland Revenue has also indicated that more tax governance questions can be expected as part of routine tax reviews and investigations.

For a start, don’t assume your business is immune from having to consider tax governance.

Either because of its size or complexity, or simply because you don’t expect Inland Revenue to get around to asking your business. In our experience with Inland Revenue compliance campaigns, the target population tends to increase over time. And with a new IT system and enhanced data analysis capability, Inland Revenue’s tool kit has expanded considerably.

While there is no “one size fits all approach” to tax governance, Inland Revenue has emphasised the need for all businesses to have at least some documentation on tax risks. Whether this is “on a page” or a detailed tax manual will depend on the nature and complexity of your business. Doing nothing, however, is not an option.

Having tax governance documentation is the starting, not the end, point.

While having a robust tax strategy is an important first step as this sets out Board and management expectations/understandings around how tax will be managed, equally important are the controls to manage tax risks in the business and testing to confirm they are working as intended. The latter was a key deficiency identified in the questionnaire responses. It’s the old adage – “its not what you say that matters, but what you actually do (or don’t do)”.

And the governance focus should not be limited to income tax. GST, employer tax obligations, and withholding tax should not be overlooked, particularly as these tend to be largely systems driven processes that once set can be forgotten about. Regular tax health checks and reviews can prevent costly and cumulative errors, as well as signalling that tax governance has been considered holistically.  

Don’t expect to simply roll out “generic” governance documentation (including from another jurisdiction) and have it accepted by Inland Revenue.

For foreign owned businesses, the tax strategy and tax control frameworks need to be appropriate for your local operations and consider the New Zealand tax landscape. Generic “cookie cutter” tax governance documentation will not be fit for purpose. Similarly, don’t expect your New Zealand documentation to be accepted offshore.

Are you managing tax risks in the most efficient manner?

Setting aside the regulatory, financial, and reputational risk from getting tax wrong, have you thought about the business impact of how your tax function is currently operating?

For many businesses, tax will be part of the general finance function, rather than a specialist skillset. In the case of some foreign owned businesses, the responsibility for New Zealand tax may sit in a foreign finance team.

Do current arrangements accurately reflect the sophistication and complexity of your New Zealand business operations? Are there time and cost savings for the business from outsourcing some, or all, of the New Zealand tax function to local specialists? Are you getting appropriate tax signoffs prior to key transactions? 

As well as effective tax risk management, there may be sound business reasons for looking at how your tax function is structured and whether this is being optimised.