Tax governance helps ensure that you walk the ESG walk, not just talk the talk.
As part of the ‘G’ of ESG, it supports your organisation’s sustainability strategy – as I highlighted in my previous blog – by underpinning the tax aspects of the ‘E’ and ‘S’.
Good tax governance is key to building trust. It allows you to evidence your good behaviours and counteract any potential challenges or perceptions of greenwashing and bluewashing (overstating the business’s positive impact on the societies it operates in).
For all these reasons, tax governance is squarely on the boardroom agenda. But getting it right isn’t easy. And it will only become more complex as the ESG agenda moves on.
Identifying tax risks
So how can tax leaders put an effective tax governance framework in place?
Wherever you are in your journey, it’s essential to understand the tax risks affecting your organisation and how they’re changing in this new landscape. This will help you to future-proof your framework so that it remains fit for purpose.
That in itself is a major task, so it’s worth breaking them down into four key areas:
1. Strategic risks
Transitioning to Net Zero, and making your supply chain more sustainable, may trigger major changes in:
- the business’s underlying economics and value drivers
- how and where operations are carried out, and work is done.
Transformations like these will have far-reaching tax implications. They can upend your transfer-pricing model, and dramatically alter your indirect tax profile. You’ll need to be alert to these changes: a tax value-chain analysis on your new model will help.
2. Operational risks
The biggest tax governance challenges can arise when day-to-day processes and vital data lie outside of the finance function.
Governments around the world are introducing new tax incentives and reliefs (‘carrots’), and green taxes (‘sticks’), to shift behaviour towards decarbonisation and accelerate the transition to Net Zero. The number, and complexity, of taxes operationally embedded in the business is growing as a result.
Gathering data on your exposure to these taxes can be problematic – especially if your ERP system isn’t configured to provide ready access to this data, in the format required by tax authorities.
3. Compliance risks
The tax compliance burden has been on the rise for some time now. More tax filings must be prepared, more frequently, covering an ever-broadening range of taxes. And increasingly, they must be submitted in real time, and be right first time.
In this context, you’ll need to identify the optimal tax operating model for your organisation, now and in the future. And you’ll need to identify the technology and skills it will require.
4. Reporting risks
There’s a growing demand from governments and consumers for tax transparency. As such, organisations are having to share more about their tax contribution in the societies in which they operate.
Voluntary sustainability standards such as the GRI and the Dow Jones Sustainability Index, include tax governance requirements. You’ll need to consider how your current governance measures stack up against these. And you should assess how tax disclosures can be made, to provide evidence that you’re walking the walk.
Managing tax risks
Whatever your tax risk profile, designing and implementing a comprehensive framework to manage these risks is a whole separate challenge.
This would typically include items and topics such as:
- your organisation’s tax strategy and risk appetite – as agreed by the board
- a RACI matrix – defining roles, responsibilities and accountabilities within the tax function
- documented processes
- reporting lines – for communicating tax risks as they emerge
- escalation procedures – including to board level where appropriate
- maintaining a tax risk register
- your ‘three-lines-of-defence’ model – with the appropriate checks and controls embedded
- how the framework will be regularly tested – and evidence of its effectiveness gathered.
Of course, there’s no such thing as a one-size-fits-all framework. Each of these elements will look different in each organisation.
And in today’s fast-changing tax environment, it’s essential that your framework is dynamic. It must be adaptable to the different tax risks you need to manage. For example, the RACI and three-lines model will differ for the Plastics Packaging Tax compared to Corporation Tax.
With that in mind, frequent horizon-scanning will be necessary, so as to:
- foresee the business and operating model changes coming down the line
- identify and assess any new tax risks
- understand how to adapt your tax risk management framework.
Whatever tax risks you face, and however mature your framework, KPMG’s experts can help make sure you have robust governance in place. Please get in touch to find out how we can support your tax function.