Navigating global tax governance: the challenge for regulators

By Gary Anders

Tax regulators around the world have been progressively sharpening their focus on corporate tax risk management and governance.

It is an ongoing process, but their objectives are largely aligned. Tax regulators want to ensure that the corporations operating within their respective jurisdictions are accounting for and paying the correct amounts of tax.

To achieve this outcome, regulators want corporations to have detailed, documented policies and robust internal control systems in place to identify and manage potential tax risks. The presence and testing of a tax internal control framework is an integral part of the risk-assessment protocols used by tax authorities.

As a key part of this, regulators want corporations to have governance frameworks that explicitly outline the responsibilities of their board of directors (or authorised board-level sub‑committees), as well as their senior management, financial and tax managers, and even lower-level employees.

A global governance approach

The Organisation for Economic Co-operation and Development (OECD) largely defined the governance ground for all tax regulators in 2016 when it released its Tax Control Framework (TCF). The aim of the TCF was to bring greater rigour to corporate tax returns and disclosures on a global level.

In it, the OECD introduced the concept of “justified trust”. That is, by having very strong tax governance processes in place, tax regulators, and other stakeholders such as investors, can have justified trust that a corporation is paying the right amount of tax.

The Australian Taxation Office (ATO) was an early adopter of the OECD framework.

The ATO used funding made available to the Tax Avoidance Taskforce to deploy its justified trust program in the large Australian taxpayers market in 2016, starting with the top 100 population and later the top 1000.

According to Faith Harako, assistant commissioner public groups and international at the ATO, “The justified tax program has become the ATO’s flagship program, to help it have confidence over the tax compliance of the large market”.

The ATO’s Tax risk management and governance review guide sets out principles for board-level and managerial-level responsibilities, with examples of evidence that entities can provide to demonstrate the design and operational effectiveness of their control framework for tax risk.

“We’re looking at corporations having a documented group tax strategy, as opposed to not having those formalised frameworks in place – and having the oversight of these principles and expectations from the highest level in the organisation,” Harako says.

“In the past, perhaps, tax was not frequently discussed at the board level.

“What we are really trying to impress upon organisations is to ensure the boards undertake this important oversight and monitoring role in organisations and are aware of material business decisions and compliance with their tax obligations.

“The last thing is around the tax control framework, and making sure that there is a framework that is fit for Australian tax compliance purposes. That is particularly important for entities operating in many jurisdictions that have multiple business segments in locations all over the world.”

Malaysian framework

The Inland Revenue Board of Malaysia (IRBM) released its Tax Corporate Governance Framework (TCGF) and Tax Corporate Governance Guidelines (TCGG) in April 2022, as part of a push to adopt a fair and effective cooperative tax compliance process.

According to Mark Chan, tax governance leader at Deloitte Asia Pacific, “The release of the TCGF and TCGG is a major step towards fostering a cooperative relationship between the corporate sector and the tax authorities. 

“It is also a positive approach to develop a more consultative and transparent compliance regime in the country.”

 

"The release of the TCGF and TCGG is a major step towards fostering a cooperative relationship between the corporate sector and the tax authorities."

 

Malaysia’s TCGF broadly sets out the strategic and operative roles towards tax governance and management within an organisation, providing guidance in line with the OECD’s governance recommendations stated in its Tax Control Framework.

“Ultimately, the TCGF requires organisations to formally document the tax management strategies it adopts and set out clearly the accountability for such strategies and tax risk management,” Chan says.

Organisations will also be required to indicate how they will evaluate and assess compliance against the established framework, Chan adds. They are also required to get their TCGF independently reviewed by a consultant before they submit it to IRBM for review and assessment.

The ATO’s governance framework was developed primarily for large and complex corporations, tax consolidated groups and foreign multinational corporations conducting business in Australia.

However, the regulator says its principles can be applied to a corporation of any size if tailored appropriately. The tax governance principles fundamentally relate to both income tax and to goods and services tax (GST).

The principles mainly deal with formalised tax control frameworks, periodic internal control testing, the identification of significant transactions, understanding of roles and responsibilities, and ensuring that boards are appropriately informed.

In addition, they focus on ensuring corporations having proper controls in place for data, which is particularly important for GST, as well as having documented control frameworks and procedures in place to explain significant differences between accounting and tax outcomes.

Harako says that having a well-designed and effective tax governance framework provides boards with confidence that their tax risks are being identified and managed appropriately, and that their organisations are complying with its tax obligations.

“What we have seen in practice is that it really reduces the risk of inadvertent errors or system-type errors from occurring, and also, importantly, it hopefully prevents risky positions being taken by organisations that may be inconsistent with their risk appetite set out within their governance framework documents.”

The other important part is that tax compliance is increasingly a focal point for investors, consumers, suppliers, community groups and other stakeholders of how organisations contribute fairly to the economy, especially on a global level, says Harako. The ATO is “really keen to talk about governance in the context of tax” for this reason.

Indeed, many organisations view tax compliance as integral to their environmental, social and governance (ESG) performance indicators.

“As a regulator, we see a lot of calls from various stakeholders for organisations to be more transparent about their operations and their tax contributions, and how they are participating fairly in the economy,” Harako says.

The ATO expects to see continued investment in its governance through the justified trust program. It also expects that the rating it gives under assurance reviews for governance will be increasingly used, says Harako.

Ideally, organisations will also leverage the rating to demonstrate their community and ESG credentials.

BHP, Australia’s biggest company, actively promotes its “justified trust” status with the ATO and has published a detailed description of its six tax principles on its website.

“We are committed to strong governance. We seek to identify, assess, control and report tax risks in accordance with our global Risk Framework,” BHP states under the heading “Risk management and governance”.

Malaysia’s IRBM has indicated that its program participants will be awarded with a status confirmation that is valid for three years, will get priority treatment in processing refunds and resolving issues, and will be subject to less scrutiny and frequency of audits.

Chan adds, “The ideals of the framework and goals of the Tax Corporate Governance Framework Program are intended to foster greater trust and mutual understanding between the taxpayer and the IRBM”.

Australia's scorecard

The ATO conducts an annual one-to-one review of each of the top 100 taxpayers in Australia.

Part of this includes reviewing their tax governance, with the ATO providing a rating based on its assessment of their governance framework. The ATO also reviews the top 1000 companies very four years.

This is a mandatory program that forms part of the ATO’s methodology for understanding each company’s tax profile compliance with income tax and GST laws.

“When we review and assess tax governance, whether it be an annual or periodic review of the taxpayers, we rely on the objective evidence in the form of documented policies and procedures rather than simply a narrative description of the organisation’s controls,” Harako explains.

“That’s very important, because we want to see the evidence to support sustainable good governance.”

The ATO then applies a staged rating system. The highest rating from the ATO is Stage 3, which means an organisation has demonstrated its tax governance framework is operating and designed effectively.

 

"The justified tax program has become the ATO’s flagship program, to help it have confidence over the tax compliance of the large market."

 

At the other end of the spectrum is a “red flag” rating. It means that, after careful consideration, the ATO has significant concerns about the taxpayer’s tax control framework, as evidenced by high levels of errors and/or fundamental concerns about the robustness of their existing tax control framework.

In between are Stage 2 and Stage 1 ratings.

For a Stage 2 rating, a company is deemed to have a framework that is designed effectively. To get to an overall high assurance rating the taxpayers must get a minimum of Stage 2 for their governance.

Stage 1 means the taxpayer does not have a framework that is designed or operating effectively, but they do have some kind of documented framework in existence.

The ATO recently published its annual findings for both the top 100 and top 1000 corporations in Australia based on income tax and GST assurance programs.

As of 30 June 2022, 51 per cent of the top 100 taxpayers had attained overall high assurance (justified trust), and a further 34 per cent achieved a medium assurance for income tax. In the top 1000, 23 per cent attained overall high assurance, and 61 per cent achieved a medium assurance rating.

“There are a lot of drivers to having good governance, and we hope that there will continue to be that impetus for corporates to invest in their governance. It’s not just for us, but for the wider community,” Harako says.