Gone are the days when tax was just another item to be managed and minimised.
Whether it is the quality of tax governance policies, pressure to be more transparent with tax authorities and other stakeholders, or society holding businesses accountable for paying their “fair share” of tax, these issues have become the subject of increased scrutiny. Not least from Inland Revenue.
Inland Revenue’s recent tax governance questionnaire campaigns have further elevated the importance of having robust and well documented tax governance policies and procedures. The expectation is that all businesses will have appropriate policies and procedures to manage tax risks, commensurate to the nature and complexity of their operations.
For those with tax responsibilities in the business (be that specialist tax resource, the wider finance team and/or others), some of the questions will include:
- Are the tax risks to be managed clearly defined and articulated?
- Are the roles and responsibilities for managing tax risks (including the performance of tax compliance obligations) clear?
- Are tax risks able to be identified and are there effective mitigation strategies, having regard to the type and nature of the particular tax risk (such as use of external advisors, or other mechanisms to gain certainty)?
- Are tax compliance processes documented and regularly updated for changes in the business (or accounting or financial systems that may impact the relevant tax calculations)? Are these processes regularly tested for their effectiveness?
There is also a clear expectation on Boards to exercise effective governance over tax matters, including setting the appropriate tone from the top (the business’s “tax risk tolerance”), approving appropriate risk mitigation strategies (a framework for managing tax risk consistent with the Board’s tax risk tolerance) and holding those with responsibility for tax in the business to account for compliance with these strategies (for example, through regular reporting to the Board on tax matters and specific risks).
Why business should take note
With the profile of the recent campaigns, we expect Inland Revenue will have little sympathy where businesses have not paid sufficient attention to their tax governance arrangements. Business should expect questions about tax governance to become more engrained as part of future Inland Revenue reviews. The responses are no doubt likely to inform Inland Revenue’s assessments around maturity of the tax function and therefore the overall “risk” (with associated enforcement implications). And with a new IT system and enhanced data analytic capabilities, Inland Revenue’s tool kit for risk profiling taxpayers has expanded considerably from even a few years ago.
Aside from meeting Inland Revenue’s expectations, it makes good business sense for Boards and Management to have robust tax governance frameworks. Setting out clear expectations on tax risk management, with regular reporting on tax risks and compliance, should give comfort to the Board that the company is satisfying its tax obligations. For those charged with the day-to-day management of tax, it provides a clear steer on how tax should be managed, consistent with the Board’s expectations.
Increasingly, third parties also have expectations about good tax governance. Investors, funders and business partners will be interested in how tax is managed, while external auditors should be asking questions around tax controls as part of the audit process. There are also financial and reputational risks from poor oversight in relation to tax matters, not least from civil society and the media in an age where all businesses are expected to pay their “fair share” of tax.
How KPMG can help
KPMG has worked with a range of businesses to help them:
- Develop tax risk management frameworks (tax strategies and tax controls) that reflect their specific business circumstances.
- Design best practice tax controls, considering the technology, systems and people that underpin the tax function.
- Review the operation of their tax controls, through tax health checks and detailed reviews of tax processes and systems.
Inland Revenue’s expectation is that tax risk management frameworks will be tailored to your business, rather than based on a standardised or “template” approach. KPMG’s approach is to work with your team in drafting or reviewing documentation, seeking feedback from a range of stakeholders in the business, to ensure what is developed is fit for purpose and meets Inland Revenue’s requirements.
Please get in touch with us to see how we can assist in improving how you manage tax risk in your business.