Corporate Tax Governance

Tax governance framework

Tax governance continues to attract the ATO’s attention. Large public and multinational businesses have substantial economic activity in Australia and are large contributors to corporate income tax, excise, and petroleum resource rent tax collections. Based on 2021 tax returns, Top 1,000 taxpayers paid about $20.4 billion or 19% of all corporate income tax.

Developing an effective tax governance framework amongst large and multinational businesses should be bespoke as each business is unique. Nevertheless, whilst each business may have a different size, complexity, history or culture, the ATO has a higher bar for large and multinational business as compared with privately owned groups when it comes to their expectations for effective tax governance. A key differentiating factor is the focus of the ATO in communicating prescriptive board-level and managerial controls through the lens of ‘Justified Trust’ — these include board level periodic internal control testing and managerial level documented control frameworks.

To assist our clients in meeting the ATO's requirements, we have provided a high-level overview of why a comprehensive tax governance framework is necessary, what the ATO is looking for when assessing a tax governance framework and, the key elements that a tax governance framework should include.

Effective tax governance frameworks

Effective tax governance frameworks identify, assess and manage tax risks. Any framework that is established must also recognise the differences between the internal tax mechanisms of the taxpayer and its business lines, and the tax mechanisms required on an ‘asset’ or ‘investment’ level.

The benefits of a framework:

Promote confidence in the Board’s management of the business
Support investor confidence
Promote accountability, transparency and compliance
Maintain and generate confidence for the taxpayer that its tax obligations are being appropriately met
Assure the ATO that the taxpayer’s tax affairs are under control, and
Facilitation of effective tax compliance processes (such as in the preparation of Reportable Tax Position Schedules (RTP)).

The costs without a framework:

Increased and more aggressive audit activity from the ATO
Increased risk of inadvertent errors in tax reporting resulting in unforeseen additional tax liabilities including penalties and interest (if applicable)
Increased risk of participating in aggressive tax avoidance strategies, and
May result in more burdensome due diligence enquiries in large or significant transactions from prospective purchasers.

Why have a tax governance framework?

Promote accountability and transparency

A tax governance framework will promote accountability and transparency in the business. It will allow the business to:

Manage tax risks appropriately
Support investment, financial and operating decisions, and
Reduce the chances the ATO conducts a thorough audit.

Ensure compliance

A tax governance framework will assist with compliance. It will ensure that the business:

Meets regulatory and legal obligations
Provides real-time assurance to optimise business lines and transactions, and
Generates accurate financial reporting.

Maintain and build stakeholder confidence

A tax governance framework will assist in maintaining and building stakeholder confidence. It will allow the business to:

Maintain confidence in company strategy and management
Maintain confidence in risk management, and
Avoid any inference of fraud or unethical dealing.

Clean exit

Implementing a tax governance framework will:

Promote potential purchaser confidence in the event of a shareholder exit or IPO
Protect and foster business growth, and
Remove any skeletons in the closet.

Cost of doing nothing

Businesses must be aware of the implications that may occur if they do not implement a tax governance framework. Some of these include:

Unknown and unplanned tax liabilities
Penalties and interest
Reputational damage
Reduction in shareholder value
Directors’ and Officers’ liabilities, and
Increased ATO attention.

What does the ATO look for?

The ATO looks for comprehensive tax governance frameworks that are designed to go beyond tax technical risks.

The 8 controls of tax governance

Board-level control 1: Formalised tax control framework
Board-level control 3: The board is appropriately informed
Board-level control 4: Periodic internal control testing
Managerial-level control 1: Roles and responsibilities are clearly understood
Managerial-level control 3: Significant transactions are identified
Managerial-level control 4: Controls in place for data (GST only)
Managerial-level control 6: Documented control frameworks
Managerial-level control 7: Procedures to explain significant differences

Specifically, the ATO looks at:

Documented policies, decision-making processes and tax control frameworks
Adoption of the Tax risk management and governance review guide
Internal and external testing of controls
Distribution of responsibilities between the Board and Management
Appropriately defined and understood roles and responsibilities
Use of qualified professionals to provide proper advice
Tax liability and cashflow management
Adoption of the ATO’s Tax Transparency Code
Use of ‘the 3 lines of defence’:
- Board committees and independent assurance providers
- Management, and
- Internal compliance functions.

What are the key areas?

There are three key areas that should be incorporated into any tax governance framework:

Tax strategy

A successful tax strategy will have the following characteristics:

Reflective of the taxpayer’s culture
Align the tax strategy and objectives with the overall strategies and goals of the organisation
Ensure that the tax strategy is comprehensive and provides for full realisation of any and all potential tax obligations, and
Ensure that tax positions are aligned with commercial objectives, consistent with risk appetite and are reasonably arguable.

Risk policy

Any risk policy implemented should:

Be consistent with the taxpayer’s broader risk profile
Define, assess and review the organisation’s overall appetite for tax risk
Be regularly reviewed, and
Applied on an ongoing basis.

Tax control framework

Tax control framework should be considered on two levels:

Strategic level

Identify tax opportunities and integrate with the overall governance framework, and
Ensure appropriate board and committee oversight.

Operational level

Manage tax risks, internal controls and tax processes, and
Ensure defined roles and responsibilities are adhered to.

What steps are involved?

The development of a tax governance framework should be broken down into three steps: Identify, Assess & Report and, Manage. We've outlined some of the key considerations that you should be aware of at each stage below.

Step 1: Identify

Actual or perceived risks.
At a transaction level - pre-deal, during the deal, and post-deal.
Multi-stakeholder contribution e.g. investment manager contributions, JV Partners.
Remain vigilant.
Key personnel understand the risk policy and understand they are also responsible for identifying tax risks.

Step 2: Assess & Report

Create and maintain a risk register.
Assess risks for their materiality and potential cost to the taxpayer.
Escalate assessments internally and seek external advice consistent with the principles of the risk policies.
Document assessments and reports.

Step 3: Manage

Manage risks consistently with the tax strategy.
Allocate the right resources, maintain relationships with tax authorities.
Review consequences and the effect on tax planning.
Assign the best method of treatment (avoid, accept, reduce, transfer).
Maintain a record e.g. opinions obtained, correspondence with the ATO.

Justified Trust

Tax governance is a fundamental pillar of 'Justified Trust' reviews. The ATO’s one-on-one approach seeks to understand the operational effectiveness of tax governance arrangements within the context of the taxpayer’s business (i.e. a tailored approach).

Good tax governance for a particular business will depend on its size, complexity, history and culture.
Broadly, the ATO will review the following aspects of tax governance:
- the key roles and responsibilities related to recognising and managing tax risks
- the processes and controls in the preparation of the taxpayer’s income tax return process
- how the tax governance controls are tested to ensure compliance with tax and superannuation laws.
The ATO will expect tax governance documents to have been prepared and readily available.

ATO focus areas

The existence, application and testing of a well-designed effective tax governance framework is a key area of focus with the ATO. In the ATO’s findings report for the Top 1,000 income tax and GST assurance programs, it noted the following outcomes for the assurance ratings for tax risk management and governance:

Ratings

Stage 3: You provided evidence to demonstrate that a tax control framework exists, has been designed effectively and is operating effectively in practice.
Stage 2: You provided evidence to demonstrate that a tax control framework exists and has been designed effectively.
Stage 1: You provided evidence to demonstrate a tax control framework exists.
Not evidenced or concerns: You have not provided sufficient evidence to demonstrate a tax control framework exists or we have significant concerns with your tax risk management and governance.

Source: ATO Findings report – Top 1,000 income tax and GST assurance programs, Graph 6

ATO focus areas

Areas that should be addressed by a tax risk management framework

1. Board-level control 1: Formalised tax control framework

The tax control framework should be a formalised document that is prepared by management and understood across the organisation.
Best practice includes a tax strategy document prepared by management such as a board tax policy which provides details of how tax risks are identified and managed.

2. Board-level control 3: The board is appropriately informed

The Board is to be briefed by management on tax risk matters and the effectiveness of the tax control framework.
Best practice includes:
- Board or sub-committee charters including oversight of tax risks.
- Regular and timely updates from management on the identification and management of tax risks including emerging trends.
- Tax risk registers and evidence of escalation of appropriate tax risks to the Board.
- Board or sub-committee meeting minutes documenting discussion of the above.

3. Board-level control 4: Periodic internal control testing

Regular testing of the internal control processes in the tax governance framework to assure the Board the framework is robust and managing tax risks effectively.
Best practice includes:
- Evidence of a testing plan and timeline for testing of the tax controls.
- Gap analysis identifying areas not covered by existing assurance processes (such as internal or external audits).

4. Managerial-level control 1: Roles and responsibilities are clearly understood

The tax governance framework should clearly identify and document the roles and responsibility for staff, management and Board in managing tax risks.
Best practice includes:
- Formal documents, policies or procedures outlining roles and responsibilities in relation to tax risk management and compliance. Contents may include role descriptions for compliance, administration and management, segregation of duties ,methods and frequencies for revieing and escalating tax risks.

5. Managerial-level control 3: Significant transactions are identified

The tax governance framework should systematically identify, categorise and report on significant strategic, reputational, compliance and other risks in relation to transactions or arrangements with significant tax impacts.
Best practice includes:
- Detailed matrix for identifying transactions with a specified value which would require tax sign-off.
- Transactions, issues or risks that are material enough for escalation to senior management or the Board.
- Thresholds for seeking external tax advice on transactions.

6. Managerial-level control 4: Controls in place for data

Practically, a tax governance framework should recognise the important role of Information Technology General Controls (ITGCs) in ensuring the financial data used in determining tax liabilities and/or identifying tax risks are robust and reliable. The tax governance framework should identify what ITGCs are in place and how they ensure the integrity of the business’ data.

7. Managerial-level control 6: Documented control frameworks

Building on item 1 above, the tax governance framework should include documented internal control frameworks in relation to the compliance procedures of the business showing the complete and accurate reconciliation between accounting (i.e. as in the financial statements) and tax (i.e. the income tax return, excise return or BAS). Evidence includes detailed workpapers and a review process.

8. Managerial-level control 7: Procedures to explain significant differences.

Building on item 7, where there is a significant difference between accounting and tax an effective tax governance framework should include procedures to reconcile and provide explanations for significant variances.

Areas that should be addressed by board policy

Roles and responsibilities

Documentation of tax roles and responsibilities for individuals within the business.
Chain of command for tax sign-off and administration.
Whether those charged with governance understand their tax and superannuation obligations (i.e. reporting and filing requirements).

Risks flagged to market (should be addressed by both tax governance framework and board policy)

Consideration of available ATO guidance that may be applicable to the taxpayer’s business (i.e. taxpayer alerts, ATOIDs etc).
Early engagement procedures where potential ATO disputes may arise due to differing interpretations of the law.

Example of tax governance framework structure

Your tax risk management framework must be bespoke and specific to your business. This will ensure it is effective, ATO compliant and achieves ‘Justified Trust’.

Following a discussion on key high-level tax governance considerations and opportunities for your business, we will assist by drafting a tailored tax risk management framework that meets your needs.

While each tax risk management framework is unique, we have set out a sample structure to the right.

contents