Guidance on tax control frameworks (TCFs) was released by the Forum on Tax Administration (FTA) in 2016. It followed two earlier OECD publications (Principles of Corporate Governance and Guidelines for Multinational Enterprises) and seeks to assist businesses in designing and implementing effective tax governance. We fully support this FTA guidance. A full copy of Co-operative Tax Compliance - Building Better Tax Control Frameworks can be found on the OECD website.
Co-operative Tax Compliance - Building Better Tax Control Frameworks (OECD)
Summary of the OECD guidance on tax control frameworks
Top-down building block approach
The guidance assumes that the essential features of a TCF will be determined at the top level of an enterprise rather than being an amalgamation of individual decisions made lower down in the organisation as to which particular controls may be needed.
Rather than attempting to prescribe a one-size-fits-all TCF, the guidance identifies the following six essential building blocks of a TCF.
| TCF building block | Description |
|---|---|
|
Tax strategy |
This should be clearly documented and owned by the senior management of the enterprise (that is, the board of directors). |
|
Comprehensive |
All transactions entered into by an enterprise are capable of affecting its tax position in one way or another, which means that the TCF needs to be able to govern the full range of the enterprise's activities and ideally should be embedded in day-to-day management of business operations. |
|
Responsibility |
The board of an enterprise is accountable for the design, implementation and effectiveness of the TCF of that enterprise; the role of the enterprise's tax department and its responsibility for the implementation of the TCF should be clearly recognised and properly resourced. |
|
Governance |
There needs to be a system of rules and reporting that ensures transactions and events are compared with the expected norms and potential risks of non-compliance identified and managed; this governance process should be explicitly documented. |
|
Testing |
Compliance with the policies and processes embodied in the TCF should be the subject of regular reporting, testing and maintenance. |
|
Assurance |
The TCF should be capable of providing assurance to stakeholders, including external stakeholders such as Inland Revenue, that tax risks are subject to proper control and that outputs such as tax returns can be relied upon. This is accomplished by establishing the entity's 'risk tolerance' and then by ensuring that their risk management framework is capable of identifying departures from that with mechanisms for mitigating/eliminating the additional risk. |
The final building block, assurance, can be seen as the overall result of having put in place all the other building blocks; if they are there, it is possible to provide the desired assurance.
Application in New Zealand
We consider the FTA guidance applies not only to significant enterprises (in particular, those enterprises that currently file a basic compliance package with us), but also high wealth individuals (HWIs) who have complex business interests. We agree with the FTA that the actual specifics of a TCF for any business will depend upon the particular circumstances of that business and the industry in question.
In particular, at a minimum, we recommend that the following key questions be addressed routinely by boards and HWIs.
- Is there a documented tax strategy and has it been kept up-to-date?
- Have effective systems, procedures and resources been put in place to manage tax risks and, if so, is a clear statement made in the annual report to that effect?
- Is annual reporting sufficiently transparent such that all stakeholders have the capacity to analyse and effectively interpret the information provided on taxes paid?
In setting the right tone from the top, we also recommend that boards of directors consider endorsing a set of overarching principles.
In addition, we recommend boards of directors of New Zealand companies consider the following questions in exercising their corporate governance function.
| Question | Checklist |
|---|---|
|
1 |
Does the company have a well-documented overarching tax strategy? |
|
2 |
Does the chief financial officer or tax manager formally confirm, at least once annually, that this strategy has been 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 so, 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 by Inland Revenue 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? |