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Tax Governance: How do NZ taxpayers stack up against Inland Revenue’s expectations and what are Inland Revenue doing next?

Tax Alert - March 2022

Our article on tax governance in the October 2021 edition of Tax Alert highlighted Inland Revenue’s renewed focus on tax governance with the launch of their 2021 tax governance campaign. This campaign included sending a questionnaire to a sample of 143 significant enterprise taxpayers on the current state of their tax governance. The results are now in – and it’s clear that Inland Revenue aren’t stopping there!

We caught up with the Inland Revenue International Revenue Strategy team (IRS) to hear:

  • Their feedback and key findings from the first step in their campaign;
  • Their next steps in terms of following up with those taxpayers that completed the questionnaire;
  • How they are going to include tax governance on their annual risk review programme; and
  • Their plans to send the tax governance questionnaire to a broader range of taxpayers.

To sum things up, the general impression is that New Zealand companies are falling short of expectations when it comes to tax governance. Taxpayers should be following Inland Revenue’s lead by progressing their tax governance journey. Further planned Inland Revenue activity in this area is a call to action for most (if not all) large organisations operating in New Zealand.

The Tax Governance Questionnaire asked 10 yes/no questions:

  1. Does the company have a well-documented overarching tax strategy?
  2. Does the CFO or tax manager formally confirm, at least annually, that this strategy is regularly reviewed, updated where necessary and followed in practice?
  3. Does the company have an effective tax control framework to manage day-to-day tax risks?
  4. Has the operation of the tax control framework been tested independently in the last three years?
  5. In the last three years, have any tax control deficiencies been identified? If yes, have any follow-up actions been taken to remediate those deficiencies?
  6. Are key internal policies, procedures and controls covering the data collection, analysis, calculation, recording and reporting for tax filing and other tax compliance requirements, documented and available for examination if required?
  7. Does a review take place at least annually for changes to accounting policies upon which group financial statements are prepared and all items examined where tax treatment may differ materially from financial accounting treatment?
  8. Is there a robust process in place for the finance and/or tax teams to stay on top of all relevant changes in tax law and related Inland Revenue guidance?
  9. Is a process in place to identify significant transactions (including those which need to be reported to the board or relevant board sub-committees) in respect of which external advice and/or binding rulings may be required?
  10. Does senior management report regularly to the board or relevant board sub-committees on potentially material tax issues or risks?

How would your business answer these questions?

  • Overall, the responses on the existence and documentation of tax controls fell short of expectations, with 55% of all respondents stating that they will do more documentation work on both strategy and their tax control framework.
  • While the majority of respondents had not carried out recent independent testing of their tax control framework, 100% those who had and who had identified deficiencies as a result, confirmed that the deficiencies had been remedied. This was pleasing to see, but the real issue lies in the level of independent testing – with less than 40% of respondents able to say that this had been done. Inland Revenue would like to see this increased.
  • As a generalisation, foreign owned respondents and Big 4 clients generally had a higher level of compliance with the questions on tax strategy. However high-level governance is still not firmly embedded among significant enterprises in NZ, with only about 45% of respondents having a well-documented overarching tax strategy.
  • Results were significantly better for the questions on the more operational aspects such as processes for staying on top of tax changes and identifying significant transactions – Inland Revenue reported that it was pleasing to see tax control processes are well understood and practiced at an operational level, especially in relation to tax return preparation.
  • There appears to be a good level of board reporting on tax risk (93% of those surveyed) but Inland Revenue would expect this to be at 100% given it is so fundamental to managing an organisation’s overall risk.
  • The contextual information provided along with the questionnaires was useful to gain further insights and illustrated that a ‘one size fits all’ approach to tax governance would not be suitable.

Inland Revenue has taken the following actions as a result of the questionnaire:

  1. Put some questionnaire respondents on a watchlist for further action – to be followed up by 30 June 2022.
  2. For respondents with deficiencies that need addressing, further action is required and they will be followed up in the coming months.
  3. Inland Revenue are planning to issue another questionnaire to another sample of taxpayers later this year.
  4. All those taxpayers subject to an annual risk review will be asked specific tax governance questions as part of their annual risk review in 2022.

The majority of respondents to the questionnaire fall into the first two buckets above, so can expect follow up action from Inland Revenue in the first half of this year.

For taxpayers that weren’t part of the 2021 questionnaire campaign, Inland Revenue will be running a further questionnaire towards the end of 2022 which will cover another representative sample. If you missed the first round, then your organisation may well be selected for this next questionnaire – now is the perfect time to start looking at your tax governance to identify any gaps before Inland Revenue do and consider now how you would answer the questionnaire.

Inland Revenue has developed a four-stage “maturity model”, and expect that the overall current state of tax governance is somewhere between “Progressing” and “Established”; noting that the questions asked as part of the campaign were not detailed enough to identify those taxpayers that fell in the “Aspirational” category:

Through further activity and engagement with taxpayers in the area of tax governance, Inland Revenue is aiming to shift the majority of the significant enterprise population into “Established”. As a result, there will be a large number of taxpayers who will now need to turn their focus to ensuring that robust processes are in place around tax, including tax strategy and documentation of the relevant controls.

The common misconception that there are no implications for non-compliance with proper tax governance procedures should be carefully considered. While 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 – for example, if you didn’t have a robust tax control framework in place, can you still argue that reasonable care has been taken?

Our October 2021 article set out our recommended approach to strengthening your tax governance framework, using an “Assess, Respond, Monitor” cycle:

The actions outlined above are examples of steps that can be taken to progress your organisation’s tax governance and are in line with Inland Revenue’s expectations to help take your business from “Emerging” to “Established” on their maturity model.

It is important to note though that a ‘one size fits all’ doesn’t lend itself to tax governance – it is important to ensure that policies and documentation are fit for purpose and specific to the New Zealand business to ensure they achieve the objective of managing business risk. Tax strategies should align with the overall strategic objectives of the business, and controls and testing should be focused in the right areas.

We can help in various ways at each of the phases in your tax governance journey indicated in the chart above. If you would like to discuss tax governance further or are interested in running a risk assessment workshop to get things started, please get in touch.

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