Tax Governance – New Inland Revenue guidance

As part of its enhanced audit/enforcement activity, Inland Revenue is conducting process, controls and system reviews to examine the capability of tax functions and to assess the effectiveness of tax control frameworks. 

Inland Revenue has indicated that it may take into account the existence and quality of tax governance practices when considering whether penalties should be applied when errors are discovered. Tax governance can also be a factor when Inland Revenue undertakes risk profiling of taxpayers. 

To help taxpayers to “get it right”, Inland Revenue has released new guidance on what it expects to see when reviewing whether taxpayers have appropriate tax governance arrangements in place. 

Good tax governance

An effective tax control framework needs to have three core elements:

• Evidence of a framework for managing tax risk and appropriate policies, processes and procedures for tax compliance obligations. 
• The framework and processes should be designed effectively to ensure the correct tax outcomes are achieved.
• The framework and processes should operate effectively, to enable a business to meet its tax obligations and to identify and manage tax risks. 

What this means in practice

The new guidance expands on Inland Revenue’s expectations for the “building blocks” of a tax control framework. These include:

1.    A documented tax strategy detailing the tax risk appetite and how risks are managed to achieve that, the level of Director/Board (or equivalent) engagement on matters involving significant tax risk, and the approach to engaging with Inland Revenue.

2.    Documented policies, processes and procedures for key tax types, in the form of process maps flow charts, written manuals and checklists.

3.    Regular tax reporting to Directors/Boards (and equivalents), with an expectation that this is not limited to reporting only on material tax risks and issues.

4.    Evidence that tax is being considered as part of business decision making, including ensuring material transactions are documented and subject to appropriate tax reviews and sign-offs.

5.    Inclusion of tax risks in a risk register, with an assessment of the risk rating for relevant risks, allocation of responsibility for dealing with these risks, and recommended actions.

6.    Regular testing of tax processes to ensure they operate effectively and are fit-for-purpose, with the aim of identifying any departures from the tax control framework.  

These key features of a tax control framework should be reviewed regularly, and updated as necessary, to ensure that they are fit for purpose and accurately reflect the operations of your organisation, its key systems, roles and responsibilities for staff, Management and the Board, and processes.  

Key actions for business

The new guidance should be a prompt for all organisations to (re)evaluate the maturity of their tax governance arrangements, in preparation for greater Inland Revenue scrutiny. 

Key questions should include: 

• Do you have a comprehensive, fit-for-purpose, documented tax governance framework and supporting tax policies, processes and procedures for key tax types? 
• Have you reviewed your tax processes and procedures recently to ensure these are appropriately designed and operating effectively?
• Is there a plan to undertake regular reviews and testing of tax processes and procedures (for example, as part of a wider internal audit plan for testing key controls)?
• Is there regular tax risk reporting to those in governance roles and inclusion of tax risks in a (tax or general) risk register?
• Is tax risk management built into the day-to-day and transactions decision making?

If the answer to one or more of the above is no, these should be obvious areas of focus.

And even if the answer is yes, do you have appropriate evidence to demonstrate this?

Our KPMG specialists would be more than happy to work through these questions with you and help your organisation to get tax governance right.

Further Details

Documented policies, processes and procedures for key tax types

Tax compliance procedures should cover:

• Data extraction to ensure correct data sets are used.
• Key tax treatments / technical positions adopted for tax calculation purposes.
• Whether/how Inland Revenue views (interpretations/guidance) are considered.
• Reconciliations to financial/accounting information, workpapers and source data.
• Where external tax advisors are engaged to assist, the steps to ensure accuracy of the information provided and appropriate review and oversight over their outputs.
• Separation of roles and responsibilities (such as preparer/reviewer/approver roles) for tax compliance processes.

Tax is embedded in business decision making

Tax risk management policies should cover:   

• How material/significant transactions are defined for tax purposes (for example, this may be a combination of qualitative and quantitative factors).
• When internal or external tax advice may be sought to address transaction tax risks. 
• Whether Inland Revenue views are considered, to identify potential for disputes, with appropriate measures identified to manage such risk (such as a tax ruling).
• The types of transactions, risk or issues that require escalation (including to Directors/Boards or equivalents). 
• Accurate and timely voluntary disclosures if an error has been identified.

Regular testing of tax processes

This should include:   

• A testing plan to determine the effectiveness of the overall tax control framework.
• An audit plan that describes rotational audits of key tax processes and controls by internal and/or external audit.
• Testing by independent assurance providers (internal or external) that presents findings on the effectiveness of the tax processes and controls for all the tax types. Importantly, Inland Revenue expects that such testing is likely to be in addition to testing for financial statement audit purposes.
• Ongoing monitoring and review of tax processes, including for new systems, changes to staff, and new ways of doing business.