If you are a company director, you will have seen the headlines on Australia’s introduction of the Diverted Profits Tax, and before that, the Multinational Anti-Avoidance Law.
These two pieces of legislation give our nation one of the toughest tax regimes of all the countries partaking in the OECD’s Base Erosion and Profit-Shifting (BEPS) agenda.
But there is another Australian tax initiative, inspired by the BEPS program, that directors need to be particularly aware of – because it now gives them specific responsibility for ensuring their company’s tax governance and risk framework is in good working order.
And the catch is that sometime this year the ATO will be reviewing it.
Last month a largely unheralded ATO announcement slipped out detailing its so-called ‘justified trust’ initiative.
Justified trust is the current buzz phrase in tax and represents the ATO’s effort to reinstate public trust in the corporate tax system through demonstrable governance and transparency by taxpayers.
The burden of proof is shifting on to companies to be able to evidence, to the ATO’s (and ultimately the public’s) satisfaction, through a demonstrable control framework, that their tax risks are identified and managed effectively and everything possible is done to make sure the right amount of tax is paid.
The ATO is taking this very seriously. It has been given budget to audit the top 1000 Australian companies over the next four years – starting with the top 100, plus others, this year. These reviews will check how company frameworks operate in practice.
The ATO will revise the taxpayer’s risk rating – potentially upwards – and then re-assess the ongoing relationship depending on the outcome. If any other incentive were needed to make companies approach this seriously, bear this in mind. If called upon to attend the re-opened Senate Inquiry into Corporate Tax Avoidance, the ATO intends to draw attention to the work being undertaken as part of the justified trust initiative. This is likely to become a line of questioning for those organisations called to attend.
Companies should note that adoption of the Board of Tax’s Voluntary Tax Transparency Code is seen by the ATO as indicative of good governance. More than 70 companies have now registered with the Board, and more registrations are expected as Audit Committees meet to discuss year-end or half-year accounts.
I urge all companies to do so. The code should mean more valuable information for stakeholders being generated by a principles-based approach to tax transparency.
Our fear is that if there is not sufficient registration, then Parliament will require a mandatory code, which will see transparency becoming a compliance issue.
We have already seen with the ATO’s publication of the tax paid figures by large corporates just over a year ago that boiler-plate disclosures are of limited value. Companies need to tell their own story.
So what does the new ATO announcement involve? They will be looking beyond stated policies for a control framework and a testing plan which bring them to life. This should be written specifically with the internal audit function in mind.
Lack of evidence of controls testing and demonstration of remediation will result in substantive ATO testing during those reviews. Those companies will be deemed not to have inspired ‘justified trust’ by the ATO and the public.
Whilst the Guide provides for an “if not, why not” approach, it sets out clear expectations:
- it splits practices specifically into board and management considerations
- the board is explicitly responsible for setting a tax risk appetite (that is, the amount and type of tax risk they are willing to accept) and a testing framework. The board should also have some degree of independent tax knowledge
- the tax risk appetite is to be articulated from both a strategic and operational perspective
- the framework covers all taxes, including those dealt with by state revenue authorities
- there is a focus on data, IT controls and information flows between entities, systems and reports from a tax perspective.
As the board is ultimately accountable for good tax management, it needs urgently to develop an oversight framework to ensure tax is consistently and appropriately managed across all entities – and service providers if the company has outsourcing arrangements.
Data from KPMG’s online corporate tax departments benchmarking tool suggests that many companies will need to come up with substantial improvements or modifications of their tax governance framework to meet the new requirements.
Only just over half – 51% – of our respondent companies have a formal tax policy and, of those, only 21% are reviewing it annually. Yet these documents need to be “living” – as this is what the ATO is testing under its new approach.
Tax governance maturity for embedded processes and technology is increasing but there is still a long way to go, and the clock is now ticking loudly. Companies have to manage their tax risks – and prove they have done so.
A version of this article was originally published in the Australian Financial Review on Wednesday, 22 February, 2017.