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Tax Governance is here to stay

Tax Alert - February 2023

By Jodee Webb, Annamaria Maclean & Kirstie Anderson

Tax governance often seems like a boring “tick the box” procedure or something “nice to have” but there is much more to it now, since Inland Revenue’s renewed focus on tax governance and the key role tax governance plays in Environmental, Social and Governance (ESG) strategies.

Our March 2022 and October 2021 articles discussed Inland Revenue’s renewed focus on tax governance and since then Inland Revenue has issued another round of questionnaires in late 2022, proving that tax governance is a long-term focus area for Inland Revenue.

Tax governance is not only important to Inland Revenue. Other stakeholders are valuing well-documented tax governance and policies when looking at an organisation’s ESG metrics. Forsyth Barr illustrated this when they released their Carbon and ESG scores for NZX-listed companies. Companies with a publicly available tax governance policy added 5.6% to their overall rating.

Has Inland Revenue’s tax governance campaign changed since the prior year?

While the questionnaire issued by Inland Revenue in 2022 asked the same 10 yes/no questions as the 2021 questionnaire its aim is deeper than solely ensuring an organisation has a tax strategy in place and reviews how it is embedded into systems and processes. Inland Revenue also focuses on senior management (i.e. the CFO) taking responsibility for tax governance.

For both the 2021 and 2022 questionnaires Inland Revenue have provided ‘close-out letters’, which tend to take one of two forms.

  1. To inform the recipient that the review was complete and Inland Revenue had no further questions at this stage; or
  2. If the questionnaire indicated the taxpayer is still working on developing/improving tax governance policies and processes, the taxpayer is notified that they are being placed on Inland Revenue’s watchlist for six months. After six months, taxpayers in this category are sent a follow-up questionnaire. The follow-up questionnaire asks whether tax governance had been reviewed and documented, and asks for a copy of the documentation. If documentation is complete, taxpayers are asked to supply further information about when it will be completed.

We expect Inland Revenue to continue to issue these questionnaires to all large businesses in due course, and a proactive approach is to review the questionnaire now and consider how your organisation would answer the questions.Although there are no penalties imposed for poor tax governance itself, it is a factor that will be taken into consideration by Inland Revenue when determining the frequency of risk reviews/audits and the level of any shortfall penalties on tax reassessments.

The Deloitte global tax leader survey – How can tax teams help with ESG?

Deloitte surveyed 335 tax leaders globally and found that while tax departments are supporting their businesses’ sustainability efforts through compliance and ESG reporting, they can do more to help their organisation accelerate their sustainability goals. The report provides five steps that tax teams can take to input into optimising a business’ sustainability performance which is summarised below.

Compliance and reporting are critical, but there are also tax incentives, savings opportunities, and other sustainability-related benefits that may be available to the business. Additionally, business leaders will need to understand the tax impact of sustainability-related changes to supply chains, business models, mergers & acquisitions and other strategic shifts they may be considering.

The business will also need to understand the tax implications of new sustainability-related processes and technologies, especially those developed in-house to help factor in the availability of grants or tax credits.

For many companies, meeting aggressive carbon and climate change goals will often mean making fundamental changes to operations. As always, these business transformations will have tax consequences. Business leaders should be aware that sustainability-related supply chain changes could require consideration of intellectual property ownership, transfer pricing, GST, and customs impacts.

These risks and how to navigate them should be understood, but there are also opportunities by way of credits and incentives that could deliver more value back to the business.

The area of ESG moving fastest in tax appears to be the “G”. In the Deloitte survey, tax and finance leaders were asked which initiatives were most important to their ability to provide sound tax governance and visibility. Compliance with regulatory requirements for governance topped the list.

Meeting Inland Revenue’s tax governance expectations not only helps support organisations’ ESG strategies but can also improve an organisation's ESG metrics and ratings by maturing tax governance and transparency approach.

Depending on your industry, sustainability will place significant new demands on talent in the finance and tax team and require skills in everything from indirect and transfer taxes to assessing the impact of new carbon-reducing technologies, modelling potential scenarios, and analysing governmental policies.

In the Deloitte survey, tax leaders provided insights into the factors that would help elevate the tax point of view in sustainability conversations. The list included factors such as “greater collaboration/communication within the organization” and “more resources/information.”

The softer skills of communication and building business cases will be key to working closely with the business. Businesses can consider upskilling and diversifying the roles in their teams, acquiring new talent, increasing automation, and outsourcing/partnering to access the capabilities they need to meet increasing ESG-related business advisory needs and demands.

ESG illustrates another reason tax department transformation may be required. The focus on transparency and the resource required to support ESG initiatives provides an incentive to free up resources by using digital and artificial intelligence technologies to automate rote tasks such as compliance and filing processes.

As businesses revisit their tax operating models to create capacity for ESG-related advisory and compliance activities, this should include clarifying the role of the tax function and how it will interface with the business in these matters. Sustainability touches on many aspects of the company, and some of those areas may involve taxes that are beyond the traditional mandate of the tax function e.g. handled instead by HR and payroll.

Businesses should clearly establish who is responsible and accountable for ESG tax matters—which can range from (future) environmental taxes to minimum wage issues—and ensure that they have the right level of oversight in areas where they don’t have day-to-day control.

Sustainability measures are likely to start to permeate every aspect of business in the not-too-distant future. The ability to embed tax into ESG strategies and investment decisions by having conversations on these topics from the outset can help businesses ensure that value isn’t being left on the table.

Deloitte can help you on your tax governance journey, so if you would like to discuss tax governance further and its role in helping your organisation reach its ESG targets, please get in touch with your usual advisor.

Hot off the press: Deloitte Tax Reporting and Transparency Trends

Deloitte UK examined the trends across a sample of the FTSE350 to see how businesses are responding to the transparency and ESG reporting demands from authorities, shareholders and stakeholders. The report and their findings can be found here.

February 2023 – Tax Alerts

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