Tax governance, risk and compliance
July 2023 marked the launch of Inland Revenue’s (IR’s) third instalment of the ‘Tax Governance in Practice’ campaign, with letters issued to more than 900 ‘significant enterprises’ across New Zealand. This campaign confirms that tax governance should be a priority for all significant enterprises (taxpayers with a turnover of $30 million or more) across New Zealand.
IR has also been clear that both high wealth individuals and larger compliance managed businesses will also be subject to increased scrutiny around their tax risk management practices.
Why is IR focusing on tax governance?
IR recognises that good governance plays a significant role in the ability of businesses to get tax compliance right and pay the right amount of tax. The campaign creates a clear link between tax governance and the required standard of taking ‘reasonable care’ in conducting tax affairs. This means IR is taking a more sophisticated approach to risk assessment, which ultimately determines which businesses get ‘special attention’ through risk reviews and audits. The quality of tax governance practices will also influence the application of penalties in the event of audit adjustments.
IR’s focus is inline with global trends focusing on ESG outcomes as well as OECD initiatives to improve tax governance and the transparency of reporting key tax data points by businesses. In this environment, stakeholders are becoming more and more focused on understanding how businesses are ensuring they have appropriate tax governance measures in place to confirm they are complying with their tax obligations and are paying their fair share of taxes to contribute to social outcomes.
What does good tax governance look like?
Echoing the themes from the earlier two campaigns and IR’s published guidance, businesses need to be operating at an “established” level of tax maturity on IR’s Tax Maturity Framework.
IR’s previous campaign activity highlighted that 60% of respondents did not meet this expectation, and were placed on a watchlist or received more immediate compliance action.
Three key ‘work-ons’ were identified as critical to meeting these expectations, including:
Documentation of tax strategy and tax controls framework - A formalised tax strategy and tax controls framework is expected, although IR recognises the impact of scaling this to your organisation’s size and complexity.
Reporting to the Board - The Board is responsible for ‘setting the tone’ for managing tax risk, and regular reporting is key to ensuring the Board is aware of key tax matters and that these are being managed in line with your organisation's tax risk appetite.
Testing and updating controls - It is not uncommon for finance and tax teams to embed data validation checks and exception testing into day to day compliance processes. However independent testing is important to testing the effectiveness of broader tax controls and supporting ongoing enhancements/ improvements to your TCF.
IR has recommended that businesses undertake a current state assessment as a first step to understanding where there are gaps in their current tax governance framework, and where enhancement is needed to meet expectations. This questionnaire, as provided by IR, can be used as a starting point for this assessment.
Practical tips for getting started and meeting IR’s expectations
Documenting your tax strategy and tax control frameworks: Consistent with IR’s expectations, documenting your businesses key tax risks and how they will be effectively managed is the first step in your tax governance journey. This framework sets the ‘tone from the top’ in respect to your businesses tax risk profile, so should be approved by the Board and clearly define the roles and responsibilities of others across the wider organisation. We find that completing this alongside IR’s recommended current state assessment allows for identifying potential gaps and opportunities to implement “best practice”.
Implementing “fit for purpose” policies and procedures for key tax types: While this will be different depending on the size and complexity of your business, this typically includes designing and documenting the key processes that are undertaken by your tax function in respect to income tax, GST, or employment-related taxes. Whether via a process map or a written manual, these processes will capture the key steps undertaken to collect source data, complete the required tax calculations, and implement the controls needed to ensure you pay the right amount of tax.
Regular “health checks” into the operation of key tax types: Regular, independent testing of your tax processes is also an expectation of IR. These reviews ensure that your tax processes and controls are operating effectively in mitigating tax risk.
Reporting: It is important that directors and particularly independent directors (in smaller organisations) are aware of what management is doing to ensure they are compliant with tax obligations. Reporting should be on a regular basis and not just on material issues as and when they may arise.
Ongoing training: Many organisations fall back on staff expertise as a key tax control, so it is essential that organisations have regular training programmes in place to keep technical knowledge refreshed and employees involved in tax processes up to speed with recent law and interpretive changes.
PwC View
Having a robust tax control framework is now critical to managing your internal tax risk profile and Inland Revenue’s growing expectations in this area.
While IR has made it clear that ‘doing nothing is not an option’, we are pleased to see that IR has adopted an approach which recognises the diversity in size and complexity observed across New Zealand’s businesses. This approach is refreshing when contrasted with the landscape in other jurisdictions around the world, and aligns with IR's broader approach to tax compliance and engagement with taxpayers in New Zealand.
We also understand that enhancing your tax controls framework requires time and budget, and can become a cost benefit exercise particularly given the challenges businesses are already navigating in the New Zealand business and tax landscape.
We can assist you in completing a current state assessment to identify potential gaps and opportunities to implement “best practice” while focusing on what is ‘fit for purpose’ for your business. This is an essential step to identifying and prioritising actions that can help you to create value and mitigate risks moving forward.
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