The rise of tax governance and what it means for businesses

Tax governance has come to the fore for many companies, with concerns on the environmental, social and governance (ESG) agenda increasingly taking top priority in recent times. Governments around the world, including Singapore, have been stepping up on corporate governance initiatives in line with global standards. At the same time, a worldwide resource crunch has triggered the need for tax authorities to channel their limited resources towards companies with higher tax risk profiles.

Against this backdrop, businesses should anticipate greater scrutiny over their tax governance regime in the coming years as the ESG agenda gains further momentum. KPMG recommends that companies should move quickly to manage risks and compliance with Singapore’s tax laws, while assessing potential business opportunities in the process. 

In February 2022, the Inland Revenue Authority of Singapore (IRAS) launched two new tax frameworks to help companies strengthen their tax compliance - the Tax Governance Framework (TGF) and the Tax Risk Management and Control Framework for Corporate Income Tax (CTRM). These come on top of existing initiatives such as the Assisted Compliance Assurance Programme for Goods and Services Tax (GST ACAP), which was introduced since 2011. A broad overview of Singapore’s tax governance framework is shown below.

The TGF, CTRM and GST ACAP are voluntary compliance initiatives that operate independently. In other words, a company may choose to adopt only one or all of the initiatives, depending on its readiness and business needs. However, companies are strongly encouraged to implement all three initiatives to demonstrate their commitment towards good tax governance and tax risk management. There are also several benefits to encourage companies to sign up for the TGF and CTRM. These range from an extended grace period for the waiver of penalties under the IRAS’ voluntary disclosure programme to stepped-down tax compliance review, among others.

In the region, the Australia Taxation Office (ATO) has in place the Justified Trust programme, with expectations that businesses have in place a tax risk management framework. The Malaysian Inland Revenue Board (MIRB) has also issued its tax corporate governance framework (TCGF) and guidelines to help organisations design and operate their TCGF and to encourage voluntary participation in the programme. 

These new tax frameworks are a signal that tax governance has become a critical component of ESG and sound corporate governance. Along with this, Boards are also facing heightened responsibility in maintaining tax transparency and accountability while balancing their tax risks.

This direction towards responsible tax is also echoed on the global front, where there have been rapid developments observed in tax reporting and tax transparency. Tax strategy was first included in the ESG ratings for the Dow Jones Sustainability Indices (DJSI) and since then, more comprehensive standards and guidelines on tax transparency have also been introduced. Other regulations, such as Action 13 of the OECD’s BEPS (Base Erosion and Profit Shifting) and the EU public country-by-country reporting, have also incorporated tax transparency standards. 

Tax-related ESG reporting largely remains voluntary for now, but this does not mean that businesses can afford to take a wait-and-see approach. Rather, it is critical for Boards and the top management to proactively kickstart their company’s tax transparency journey as early as possible to sidestep any potential risks. In addition, businesses with established good tax governance framework are better placed to respond to new tax requirements and meet ongoing tax obligations. This in turn fosters greater trust with relevant stakeholders, which could generate sustainable benefits for long-term success.

For a start, this could include setting aside an annual budget and taking tax governance into consideration as part of the financial, time and resource-planning exercise. Businesses concerned about whether these may pose challenges to business-as-usual or lead to resourcing and budgeting constraints could consider taking a “bite-sized”, modular approach that will help them progress along their tax transparency journey incrementally. Companies can also turn to Singapore’s TGF to gain an understanding of the key principles and practices behind good tax governance. The framework may even be adapted for other areas of business beyond Singapore’s shores.

In addition, companies will benefit from adopting tax technology and transformation initiatives to improve governance, efficiency and effectiveness. Apart from unlocking opportunities in process enhancements, such as clearer tax processes and controls, technology tools and solutions can also help businesses better manage key tax governance risks through leveraging data and analytics.

Achieving tax transparency can be filled with complexities, which is why businesses should expect to commit time and resources for the long haul. However, with ESG expectations here to stay, companies that embark on this journey early will find themselves steps ahead of their competitors and will be able to seize significant positive benefits in the horizon.