When we review an enterprise's tax compliance, we look for specific components in their tax control framework (TCF).
These components include the 6 essential building blocks of a TCF, which are summarised in our initial guidance.
Initial guidance on tax control frameworks
We have expanded our initial guidance and set out what we look for when we review an enterprise's TCF.
The components below will help your enterprise to assess its TCF, identify improvement opportunities and move through the maturity model. The maturity model is part of our guidance on how to assess your tax governance practice.
Assess your tax governance practice
The components we look for
We have not provided an exhaustive list of the components we look for, as a TCF should be tailored to the enterprise. We recognise that enterprises may adopt different tax governance practices based on factors such as their size, complexity, history and corporate culture.
Some of the key components overlap across the building blocks, so a key component under 1 building block may also apply to another building block. Each building block forms part of the total TCF and should not be read in isolation.
Tax strategy
An enterprise's tax strategy should reflect the tone from the top regarding its tax risk profile and should include tax objectives. It is important for the tax strategy to show how the enterprise, including the tax team, are steered by the board, and how key business risks are managed effectively. The board (or equivalent) should approve the tax strategy.
It is also important for the board (or equivalent) to be aware of what senior management is doing to ensure the enterprise is complying with its tax obligations. Reporting should be on a regular basis, not only when issues arise.
What we look for
We look for a documented tax strategy, or plan of action, that displays the overall tax strategy at the strategic and operational level. This can include details of:
- the enterprise’s tax risk appetite and how the tax risk will be managed to achieve that
- an acceptable level of tax risk for day-to-day operations and what would require escalation
- the board's engagement on matters involving significant and material tax risks
- the enterprise's approach to engaging with us.
Comprehensive
The TCF should focus on process. It should document all the policies, rules, procedures and processes for the full range of an enterprise's tax obligations.
What we look for - processes
We look for detailed documentation outlining the respective tax policies, processes, and procedures for each tax type.
For example, if a member of the tax team is involved in a non-routine transaction, there should be a documented process for the appropriate sign-off and/or rules about when external advice is required.
As another example, if the enterprise needs to hire a new member for the tax team, there should be a documented process for them to learn how to prepare tax returns. The process should list the key personnel involved.
What we look for - checklists
We expect checklists showing the necessary steps, required reviews and signoffs obtained for each process. The checklists need to be completed and kept. This will help to confirm that processes have been followed.
We may look for certain features when reviewing documented processes for preparing returns for PAYE, GST, payroll, FBT and other taxes.
If your enterprise's returns are prepared in-house, procedures should be set out to show:
- how data is extracted and who is responsible to ensure the correct data sets are used
- how to ensure that the correct tax treatments are applied to material ongoing and atypical transactions
- consideration of Inland Revenue’s view, including in treating material ongoing transactions
- references and reconciliations to accounting reports, workpapers or source documents
- separation of duties in the preparation and review processes
- compliance with the relevant tax legislation.
Returns prepared by a tax agent
If your enterprise engages a tax agent for tax compliance obligations, procedures should be set out to show:
- effective controls to ensure accurate data and information is provided to the tax agent
- the agent's work is consistent with the agreed scope and tax obligations are met
- oversight of the tax agent's work and output, including review and approval.
Responsibility
Senior management are responsible for the development of a tax strategy and TCF. An enterprise's tax advisor may also be involved, if approved by the CFO or board (or equivalent). At an operational level, the TCF must clearly define the roles and responsibilities of others in the business if they are involved with the tax function.
We expect that people with relevant tax roles and responsibilities should have (and maintain) the appropriate skills and experience to carry out their functions. They should take regular training programmes to keep up to date with tax technical knowledge, recent law and interpretive changes.
What we look for
We expect to see the following information in a tax strategy and TCF.
- Details of who prepared the tax strategy and TCF. If they were prepared within the enterprise, details of the preparer's skills and experience.
- Clearly defined roles and responsibilities, with organisational charts and role descriptions.
- Reporting to the board (or senior personnel responsible for the overall tax strategy of the enterprise) is done on a regular basis, not just on material issues when they may arise.
Governance
Enterprises must comply with New Zealand tax legislation to ensure that they pay the right amount of tax at the right time. To achieve this, an enterprise needs to have a system of rules and reporting that ensures transactions and events are compared with the expected norms. The potential risks of non-compliance should be identified and managed. We expect the rules and reporting of tax risks to be documented in a TCF.
Documents should always be up to date.
Depending on the size and complexity of the enterprise, the key processes should be designed and documented for all the tax types. The processes should be included in process maps, flowcharts and written manuals. For completeness, the processes should include steps from key tax data, calculations, and procedures through to the filing of the returns.
Significant transactions
Significant transactions should be well documented and subject to appropriate review and sign-off for tax risk management purposes. Where tax issues/risks have been identified, the policy should identify how to manage those issues/risks. Significant transactions may include the impact based on value or business impact or transactions that pose significant tax risks, for example one-off transactions. Materiality in a TCF is difficult as no one size fits all. However, when determining materiality, this should be based on the magnitude of the risk for tax purposes, and note whether proper measures have been put in place to prevent, detect and correct errors.
What we look for
We want to be able to review how an enterprise makes tax decisions.
We want to see:
- How tax is considered and documented as part of the enterprise's decision-making processes. There may be a defined list of transactions that are material in the context of the enterprise, and whose treatments require approval from certain persons.
- Material transactions are well documented and subject to appropriate review and sign-off for tax risk management purposes. Where potential or realised tax risks have been identified, there is a plan to manage the risks to limit the impact on the business.
- Consideration of Inland Revenue's published view and any differences of opinion that may give rise to a dispute. If there is a difference in view, this should be identified early and appropriate steps taken to manage the risk, including engaging with us to get greater certainty, for example by obtaining a binding ruling.
We want to be able to review how the enterprise deals with significant transactions.
We want to see:
- The value of what would constitute a significant transaction requiring authorisation from the tax area. This may be a combination of qualitative and quantitative factors.
- The types of transactions, issues or risks that are significant enough to be escalated to senior management or the board (and, by default, tax matters not requiring escalation).
- The threshold where independent external tax advice should be sought, and the levels of management sign-off required for the transaction or to address the risk.
The enterprise should have clearly defined arrangements in place for escalating tax issues and seeking tax advice.
We want to see:
- When advice should be looked for internally.
- Clear escalation thresholds showing when to seek advice externally from agents or tax advisors.
- When to approach Inland Revenue and engage with us on tax matters.
Where potential and realised tax risks have been identified, an enterprise should record the risk in a tax-risks register or equivalent. The tax risks recorded in the register may be from business-as-usual activities, significant or one-off events. The register should record the risk rating and set out who is responsible for dealing with the risk, the recommended risk treatment and the overall outcome.
Testing
An enterprise should test tax processes regularly to ensure they operate effectively and remain fit for purpose.
If there is a significant change in business activity, for example a major new system, or the enterprise has been involved in major mergers and acquisitions transactions, the new systems or changes to existing systems should be tested to ensure that they operate effectively. We would also expect the TCF to be updated to incorporate the business changes.
What we look for
We want to be able to review how the enterprise tests and reviews its processes.
We want to see:
- A testing plan to determine the effectiveness of the TCF.
- An audit plan that describes rotational audits of key processes and controls by internal and/or external audit.
- Any testing by independent assurance providers (internal or external) that presents findings on the effectiveness of the tax processes and controls for all the tax types. This testing is likely to be in addition to testing for financial statement audit purposes.
- An ongoing monitoring and review of tax processes to identify and rectify any disparities or areas of improvement.
Assurance
The TCF should provide us with assurance that an enterprise's tax risks will be identified and dealt with appropriately. For us to gain this assurance, we will assess and test the enterprise's TCF to ensure it functions in principle and is followed in practice. With risk reviews and audits, we may perform process, controls and system reviews to examine the capability of the tax function and assess the effectiveness of the TCF.
As the enterprise evolves – new systems being implemented, staff leaving, new staff being recruited and the ways of doing things changing – we expect the tax strategy and TCF to be reviewed and updated regularly to reflect the changes.