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Would your tax governance framework stand up to a review or audit?

Tax Alert - August 2023

By Jodee Webb, Annamaria Maclean, Kirstie Anderson & John Alcantara

Inland Revenue has just launched its next step in its ongoing tax governance campaign and has made it clear that tax governance should be on the priority list for all significant enterprises in New Zealand. These “nudge letters” issued by Inland Revenue give taxpayers a chance to address any gaps in their tax governance framework before it is subject to scrutiny as part of a review.

Taxpayers who have been following the Inland Revenue activity in this area will be aware that this is the third campaign in as many years specifically focussed on tax governance and ensuring that organisations embed the right “tone from the top” when it comes to tax risk and compliance. Our October 2021 and March 2022 articles have highlighted the growing activity in this area, exhibited by the previous questionnaire campaigns.

We caught up with Inland Revenue to understand their overall objectives from this campaign, what they have learnt from the previous campaign, the latest round of “nudge letters”, and what we can expect in terms of follow-up activity going forward. If your business has received this latest letter, or you are yet to be selected for a tax governance campaign, read on to find out why you should be taking stock of your organisation’s tax governance.

What has Inland Revenue done so far?

Inland Revenue recognises that the focus of corporates over the last few years has drifted away from tax governance, with many finance teams pivoting to other priorities raised through the pandemic. The recent campaigns signal Inland Revenue’s objective to correct this and put the spotlight back on the need to have robust tax governance practices in place.

As outlined above and in our previous articles on this topic, Inland Revenue’s approach in the 2021 and 2022 campaigns was to send a short questionnaire to a total sample of 279 significant enterprises, including both foreign- and NZ-owned. This allowed Inland Revenue to build a picture of the overall level of tax governance among NZ corporates and identify key areas that generally require improvement.

The majority of respondents in these campaigns received follow-up action, with 171 of those taxpayers being placed either on a “watchlist” for further action, or an “unsatisfactory” list. The latter have already received follow-up compliance action by Inland Revenue in the form of further review/audit, due to being identified through the questionnaire as requiring significant improvement.

The key takeaway from these campaigns was the identification by Inland Revenue of three key “work-ons” that taxpayers should focus on to improve their overall tax governance. These include:

  1. Documentation of tax strategy and tax control framework: Tax risks are often managed informally, with a lot of reliance placed on key personnel. Taxpayers are urged to formalise their tax governance practices through documentation. The format of this is not being prescribed by Inland Revenue as they appreciate it's not a ‘one size fits all’.
  2. Testing and updating of controls: Tax control frameworks should not be a “set and forget” exercise. Ongoing monitoring and updates are required to ensure the framework remains fit for purpose.
  3. Reporting to the Board: Boards have overall accountability so they should be promptly informed about tax risks and how these are being managed.

2023 campaign

Unlike the first two years of the campaign where Inland Revenue required selected taxpayers to complete and submit a questionnaire in respect of their tax governance practices, Inland Revenue is taking more of an educational approach in 2023.

This year, Inland Revenue is encouraging all significant enterprises to work through the questionnaire as a self-assessment tool, to determine the current state of their tax governance framework and address any gaps. While there is no requirement to submit the questionnaire by a due date this time around, there is no room to be complacent. Inland Revenue has confirmed and we have seen that they are ramping up their review activity and will expect taxpayers to have good tax governance in place that is available for review, or at least be working towards a robust framework when questions on tax governance are raised.

Recommended action to ensure your business will stand up to future reviews

For 2023, Inland Revenue have sent letters to approximately 900 significant enterprises. However Inland Revenue has also made it clear that other taxpayers who didn’t receive a letter, such as large family-owned groups, should also be taking a proactive stance to tax governance. In particular there will be a special focus on the for taxpayers who are subject to the risk review programme, with specific reviews and walk-throughs taking place from 2024.

As there is no “one size fits all” approach to tax governance, it is important to consider what is appropriate for your business and what actions are required. Inland Revenue specifically called out that New Zealand businesses that are part of a global group looking to leverage frameworks developed offshore should ensure that these are appropriately adapted for the New Zealand landscape.

The expectation is that corporate taxpayers should be at least “established” in Inland Revenue’s maturity model (set out in our March 2022 Tax Alert and below), which essentially requires the taxpayer to be able to answer “yes” to all of the questions in the questionnaire.

We encourage all taxpayers operating in New Zealand to use the Inland Revenue questionnaire as a self-assessment tool – even if your business has not yet received a letter from Inland Revenue this is a good starting point to identify any gaps in your existing tax control framework. We are currently working with our clients to complete these self-assessments and prepare a plan for addressing the gaps.

The Tax Governance questionnaire asks ten 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?

In our October 2021 article, we included our recommended “Assess – Respond – Monitor” approach to strengthening a tax governance framework. This includes further examples of how we can help you transition from “Emerging” to “Established” in the maturity model.

What are Inland Revenue’s next steps?

Inland Revenue recognises that developing a tax control framework takes some time, and indicated a rough timeframe of six months. In our experience this can often take longer, particularly when you factor in Board review and approval. It is therefore best to get onto this early to ensure you are able to demonstrate a robust framework in the event of an Inland Revenue review.

Starting in early 2024, Inland Revenue indicated that scrutiny of tax strategy and tax controls will be common practice in Significant Enterprise compliance reviews and audits. We understand there will be consequences for taxpayers under review who are found to have taken no action to ensure there are good tax governance practices in place. Further, should adjustments arise out of future compliance activities, the adequacy of tax governance will be considered with respect to any penalties applied. A lack of good tax governance may point to a taxpayer not taking reasonable care.

Aside from Inland Revenue activity, there are clearly many other good reasons to continually consider and improve the level of your organisation’s tax governance. A proactive stance to tax governance ensures your business is actively managing tax risk and identifying any potential errors before they turn into material issues. Paying the right amount of tax is an important aspect of a business’s social licence to operate, and a robust tax governance framework can go a long way to ensuring that this is the case. Certain ESG frameworks have also recognised this and having a well-documented tax governance policy can also improve ESG ratings as discussed in our February 2023 article.

With all this said, we believe it is time to give tax governance a closer look and ensure that your tax governance frameworks are up to scratch.

Contact us

Given tax governance is bespoke to each business, it can be difficult to know where to start and what the right approach is depending on the size and complexity of your finance function. We can assist in a range of different ways with your tax governance journey, whether it is an initial gap analysis or the development of a control framework and documentation to address gaps you already know exist. If you would like to discuss tax governance further please get in touch.

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