Tax Governance: How In-House Teams Win Cooperation
In part one of our three-part series, we established how to get started: identifying pressure points and engaging stakeholders. Yet stakeholder engagement alone is not enough. Part two explores how to design formal governance elements that work as intended – simple enough to follow, practical enough to maintain, and aligned with business objectives.
Once the informal groundwork has been laid and stakeholders are engaged, formal policies, guidance and processes should be put in place. These will form the framework that can be consulted by individuals in their day-to-day work.
The Five Design Objectives
Poorly designed governance frameworks – those that are overly complex, lengthy to read, unclear or misaligned with business needs – can create more problems than they solve. Investing some time to ensure there is a solid concept before putting pen to paper is well worth it.
What are the objectives that such a concept should be measured against? We have identified five core elements to consider:
- Purpose – is it clear on target audience, rationale, roles, responsibilities, incentives and desired outcome?
- Simplicity – is it easy to understand and apply?
- Relevance – does it achieve the intended result if followed and do stakeholders have an incentive to comply?
- Auditability – does it leave an auditable documentation trail?
- Maintenance – does it foresee a mechanism for regular monitoring and updates?
Let’s explore these elements in a bit more detail.
Purpose
When setting out to implement policies, guidance or processes, it is vital to first fully understand what they should accomplish. What is the specific risk that is to be mitigated? What specific action or set of circumstances should be documented? What specific behaviour should stakeholders be encouraged towards or discouraged from? In other words, what should stakeholders start or stop doing? Are there specific roles and responsibilities that will need to be defined? Will anyone be reviewing or formally auditing adherence to this policy and if yes, what is it that they will looking for?
If the destination is not sufficiently clear, it will not only be challenging to map out an effective path to get there, but it will also be difficult to explain the rationale to stakeholders and convince them to come along on the journey.
Simplicity
Once the intended goal is sufficiently clear, it will need to be explored whether there are any useful starting points that already exist within the organization. For instance, are the relevant stakeholders already adhering to standard operating procedures, approval requirements etc. that serve a similar purpose? Could these be easily adapted to also achieve tax governance objectives? Are there technological resources available that would allow for a relatively painless introduction of e.g. additional checks or approval steps? These could, for instance, be existing tools, automation projects or AI initiatives. Can tax approvers easily be added to existing sign-off mechanisms? Is the tax team already performing certain monitoring activities that could be modified to kill several birds with one stone? Are there managerial governance bodies in place that can be leveraged as a platform or a source of information and documentation?
With the existing environment mapped out, it is time to nail down the format and content of the intended governance measure. Any policy that is drafted, any approval tool that is rolled out, must be straight-forward to understand and easy to follow. It should be light on tax-technical language and unambiguous on what is being asked of the audience. Business stakeholders will want to understand right away what “red tape” they must cut through and how they can do so as quickly as possible.
Drafting policies as easy-to-follow visual decision trees, providing standard templates or designing approval tools with simple click-through interfaces, can increase adherence and improve acceptance. If stakeholders are subsequently rewarded with quicker processing times (e.g. faster execution of agreements, quicker issuance of Power of Attorneys, etc.), it will ideally have become easier for the business to follow the governance process than not to.
Relevance
Designing governance based on clear purpose and straight-forward execution is key. But the process or measure must also be relevant. This means the tax team should have convincing answers to the following questions: If the measure we are implementing is followed, do we expect it will successfully achieve its goal? Do we expect that it can, with reasonable effort, be adhered to or are there practical constraints that we may not have considered? Do the relevant stakeholders have an incentive to comply, e.g. because it provides a practical advantage, has an impact on their KPIs and/or there is a clear buy-in and broad support from upper management?
We have seen an example where the Tax team wanted to enforce a strict signature policy, where agreements could only be signed within the jurisdiction of the respective entity’s legal seat. The rationale was obvious – to avoid the risk of creating a permanent establishment, and thus a taxable presence, in another country. Some business stakeholders were visibly frustrated, especially in jurisdictions where agreements must typically be signed not only on short notice but in wet ink and notarized, even apostilled. Routing signature requests through the headquarter, as required by the signature policy, was rendering it near impossible to execute the agreements on time. In this case, tax, legal and business stakeholders ended up jointly agreeing on a solution where the formal requirements were modified in a way that allowed for local wet ink signature under a Power of Attorney (PoA). The PoA was, however, contingent on upfront headquarter approval of the agreement’s key strategic terms (e.g. through electronic signature), rendering the local signature “execution only”. This meant a real win-win for all involved parties. Not only did it allow local teams to execute more quickly but it gave the authorized signatories at the headquarter the added comfort of seeing at one glance the key terms of what they were signing, in a language they understood.
Auditability
Realistically, governance measures are not implemented merely for the benefit of risk mitigation or efficiency (though these are the key drivers) – they also need to be demonstrated to internal and external auditors on a regular basis. Keeping this in mind in the design phase will help to ensure that the measures produce tangible documentation output (e.g. meeting minutes, approval tracked in system). It is also helpful to assign ownership, so that it is clear who can provide the documentation when needed and who is responsible for proper storage and retention.
Maintenance
Even the most perfect process is not sustainable if it has not been designed with a mechanism in mind that ensures it is properly rolled out, stays up-to-date and is resilient to organizational changes. Watch out for Part three of our series which will be entirely dedicated to this important aspect.
Deloitte’s View
Investing the time to design user-friendly governance processes that are simple, yet fit-for-purpose can be a gamechanger. Tax teams that do this well end up not only mitigating material tax risks but improve their audit defence, increase their involvement and improve their visibility across the organisation – allowing them to actively manage evolving situations before they develop into full-blown crises.
Authors
- Anna Eldring - Director, Tax & Legal
- Markus Reese - Partner, Tax & Legal
- Lucie Winklerova - Senior Manager, Tax & Legal
