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Tax Governance: Inland Revenue’s latest compliance campaign

Tax Alert - October 2021

The New Zealand Inland Revenue is following the lead of other tax authorities around the world and this week launched a compliance campaign focusing on tax governance. The first step of the campaign kicked off with Inland Revenue issuing a questionnaire to approximately 150 organisations with over $30m of revenue (both foreign and NZ-owned). We understand a tax governance review will also be undertaken on organisations that are subject to annual risk reviews as part of their annual compliance programme with Inland Revenue.

The questionnaire’s focus is deeper than ensuring an organisation has a tax strategy in place, but reviews how it is embedded into systems and processes. Inland Revenue expect tax strategies and tax control frameworks to be in place, with sound systems, clear accountabilities, strong controls and highly skilled people supported by robust processes and procedures. Inland Revenue also focuses on senior management (i.e. the CFO) taking responsibility for tax governance.

There is also a clear expectation that Board members have an understanding of, and take responsibility for, the tax risks of the companies they act for.

It is not just Inland Revenue and other tax authorities that are raising questions around tax governance, investors are increasingly interested in knowing that businesses are sustainable long-term and part of this is their “social licence to operate”. The Global Reporting Initiative (GRI) Standards, which are designed to be used by organisations to report on their impact on the economy, the environment and society have introduced a standard for reporting on tax which is applicable to periods after 1 January 2021. This helps an organisation communicate with its stakeholders on a range of topics, including: management’s approach in relation to tax; its tax governance and control framework; how the organisation engages with the tax authorities; tax policy advocacy; and the level of direct and indirect tax paid by the organisation on a country by country basis.

Given Inland Revenue are starting on a journey to review tax governance frameworks, and the increasing focus for other stakeholders, even if you are not a recipient of the questionnaire, now is a good time to reflect on your tax governance framework and consider whether it is robust enough in the current climate.

We suggest a three-step approach to strengthening your tax risk management framework and ensuring it is fit for purpose.

Organisations should undertake an initial assessment of the current state of their tax governance position. To help you develop an initial assessment or benchmark we can use Tax Risk Cube (“The Tax Cube”), a risk assessment diagnostics tool. The Tax Cube is a comprehensive set of questions based on best practice in the area of tax risk management and is completed in a workshop with your tax / finance team and other key stakeholders.

The results of the workshop are summarised in a heat map which will then enable you to identify priorities for change and clear actions to take forward.

We also offer a Tax Cube Lite version, which provides an insight into the key aspects of governance and general tax management within the organisation without drilling into specific tax types. This would provide a great starting point in determining how well an organisation could respond to Inland Revenue’s questionnaire.

Risks identified during the Assess phase can be responded to by implementing a robust tax control framework or refining an existing framework where one already exists.

What is a Tax Control Framework?

A Tax Control Framework incorporates board level controls, the organisations risk appetite and approach to risk management, and embeds this in internal controls, policies and procedures so the organisations tax strategy can be implemented in practice.

The essential components of a Tax Control Framework should include:

  • Defining tax risk – what are we trying to manage?
  • Tax risk management processes – how do we go about managing risk?
  • Tax risk appetite – what risks are we willing to take?
  • Tax risk management segregation of duties – who is responsible for what?
  • Tax risk governance – how do we oversee tax risk management?

There are several elements to consider when putting in place a robust tax control framework. These can be categorised under the five interrelated components of the Tax Risk Cube: Governance, People, Process, Data & Systems, and Technology. Tax controls should be applied comprehensively to cover all transactions that have an impact on all relevant tax positions.

Once in place, the tax frameworks and control documentation should take a top down approach, with the Board having overall responsibility for the tax strategy for the organisation.

Documentation should include:

  • Tax strategy document set and owned by the Board covering areas such as the organisation’s tax risk tolerance and approach to relationships with tax authorities;
  • Tax control framework to assist management with managing tax risks, including tax management plans and tax risk registers;
  • Tax control processes for each specific tax type;
  • Tax policies and procedures to provide guidance at a day to day operational level.

If risks in relation to specific tax types have been identified during the Assess phase, we can assist clients undertake more focused reviews on certain tax types. This will help close any gaps in the tax control framework, tax policies and procedures and ensure the risk is better managed going forward.

Given Inland Revenue’s increasing use of data analytics to identify risks, our reviews are more and more data analytics focused.

Even if risks regarding a specific tax type are not identified at the Assess phase, it is best practice to have rolling independent reviews of key tax risk areas for the business (for example, fixed assets, GST, customs, PAYE, FBT and other indirect taxes), including a review of the tax controls in those areas.

As with any process, tax governance is not a “set and forget” exercise but requires regular attention and testing to ensure it meets the organisation’s needs.

Ongoing monitoring and regular reporting to the Board and other stakeholders is essential to ensure that tax risks are continually monitored and reviewed. To facilitate this, the Tax Cube can be re-performed to see how an organisation is tracking against the original benchmark assessment.

Tax control testing is also a really vital part of the monitor phase to ensure that the tax controls are working as intended. The Inland Revenue also expect that tax controls and the tax control framework is tested independently every three years.

We can help to test tax controls in many ways including a walkthrough of tax compliance controls, testing the operational effectiveness of controls and assessing the design effectiveness of controls.

If you would like to discuss tax governance further or are interested in running a Tax Cube diagnostic workshop, then please get in touch. We can also help to test the design and operational effectiveness of tax controls for those companies that have put tax governance policies and controls in place.

We will be running a tax governance webinar for our clients on 20 October 2021. The webinar will provide an overview of what good tax governance means, what a tax control framework looks like, and the various phases involved in its maintenance. A representative from Inland Revenue will also be attending to share their views.

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