10 tips on tax risk management and governance

Wednesday, 28 February 2018


    One year on, BDO reviews the Australian Tax Office’s ‘Tax risk management and governance review guide’ and recommends 2018’s focal points.

    Exactly one year ago in January 2017, the Australian Taxation Office (ATO) published a significant update to its Tax Risk Management and Governance Review Guide (the Guide) which was first released in 2015 and shone a spotlight on Tax Corporate Governance (TCG). The update introduced:

    • A ‘Director’s Summary’, which outlined the responsibilities of directors and public officers in the context of TCG
    • Guidelines for various stakeholders to assist the testing and assessment of the operational effectiveness of a corporate taxpayer’s TCG (Self-Assessment Procedures).

    The update specifically contained prescribed standards regarding the design, endorsement, implementation and ongoing testing of tax internal controls, across all taxes administered by the ATO, as well as guidance for directors and public officers and recommended self-assessment procedures for use by:

    • ATO Client Engagement teams when they undertake TCG reviews e.g. as part of a pre-compliance review or risk review
    • Large corporates (management or internal audit or external advisers) when self-assessing their tax risk management and governance compared against the ‘best practices’ outlined in the Guide
    • Professional firms engaged by entities to perform an agreed-upon procedures review of a tax risk management and governance framework as part of an external audit.

    The update demonstrated the ATO’s expectation that boards are accountable for tax overall, and moves the burden of proof from the ATO identifying risks, to taxpayers being able to demonstrate, through a formal, operational and well-evidenced tax control framework, that tax risks are identified and managed proactively across the business, regardless of a taxpayer’s risk rating or fact pattern. One year later it is interesting to observe the practical implications of the change, forecast the risk management landscape in 2018 and identify what actions Company Directors and Public Officers should resolve to undertake if they haven’t already.

    One-year Anniversary of the Guide

    The purpose of the update to the Guide last year was to assist organisations to understand the ATO’s shift beyond checking whether policies exist to testing whether tax risk management processes and procedures are operating effectively. One year on we have seen Boards move from defining their tax governance and risk management policies to conducting a tax operational risk assessment to implementing improvements.

    We have noted a shift in the mindset of our clients who can no longer solely rely on us as their tax advisors to manage their tax risks which are now considered to be a directors’ duty. More practically we have also witnessed a new focus on data, IT controls and information flows between entities, systems, and reports.

    During the last 12 months BDO have been assisting our clients in determining their risk appetite and to implement robust risk management policies and frameworks. This includes working with clients on their complex tax governance requirements, with a large focus on the ATO’s audit activities. BDO has a wide client base including large, medium and small clients and note that despite the fact that the expectation on tax risk management being focussed on medium to large companies, the ATO will not exclude smaller companies from reviews and audits.

    Our clients have been asked by the ATO to evidence their strategic and operational tax governance processes and framework, tax risk management policy, including corporate and/or tax risk registers and documents evidencing how the company manages tax risk. They have also been asked to provide evidence from their decision-making committees on the approval process for transactions and where they fit within the overall corporate governance process and details of those that are responsible for tax governance.

    What we can expect to see in 2018

    A year on from the update to the Guide we can expect to see companies begin to use TCG to their advantage as proactive and real-time engagement with tax authorities assists to eliminate risks of uncertainty, ambiguity and legal issues.

    We can also expect boards will also begin to consider, if they haven’t already, whether TCG plans are aligned with their organisation’s broader social responsibility goals including consideration of whether tax positions are focused on short or long term goals, whether corporate reputation or conduct impact on securing government contracts or customer sales and community impact of tax behaviours.

    Businesses will also begin, if they haven’t already, to invest in and utilise new processes and approaches to streamline finance and tax reporting processes using automation (to streamline high volume repetitive tasks), data analytics (to identify risks or trend variations) and robotics (to decrease the risk of human error and increase confidence and reliability of underlying finance data).

    Justified Trust

    During mid 2017 the ATO also launched the ‘Justified Trust’ initiative, currently being implemented it in two parallel work streams:

    • The ‘Top 100’ i.e. those taxpayers subject to ongoing engagement and review through Pre-Lodgement Compliance Reviews (PCRs) or Annual Compliance Arrangements (ACAs). These engagements will have a greater focus on tax performance and tax governance this year, in addition to the tax risks and significant transactions already a core part of these reviews.
    • The ‘Top 1000’, below the Top 100, known as the “Tax Performance Program” with letters having already been sent to the first taxpayers under this work stream. These risk reviews are scheduled to take around four months each and will be primarily focused at what tax governance processes the businesses have in place, so the ATO can undertake a risk rating. This is important as risk ratings influence which companies will be selected by the ATO for a more detailed review or tax audit.

    Where a formal, documented tax governance framework document is in place and periodic assessments of Board-level and management-level tax controls are carried out, this provides the ATO with evidence that supports ‘Justified Trust’ and influences the risk rating assigned to taxpayer. Therefore, the benefits of complying with the guide cannot be underestimated with a lack of preparedness in terms of gap analysis and action plan viewed as a higher risk indicator.

    Top 10 priorities for Company Directors and Public Officers

    The Guide did not create any new additional responsibilities for Directors, it restates what those responsibilities are. Therefore, if Company Directors and Public Officers haven’t already decided on their 2018 goals, here are a few suggestions:

    1. Document a Board approved framework for identifying and managing tax risk
    2. Familiarise yourself with the Board level policies governing the company’s TCG framework so you are aware of underlying management level policies and procedures (including responsibilities)
    3. Ensure the regularity, content and presentation of reporting of tax matters at board meetings
    4. Understand the company’s tax profile, including its effective tax rate and the basis for any significant deviation from the standard corporate tax rate
    5. Obtain assurances from management that tax risks are being managed appropriately
    6. Perform a Gap Analysis (as distinct from self-assessment) to identify weaknesses in existing processes, controls and documentation
    7. Periodically test and assess adherence to the ATO’s TCG guidelines and review and implement the results of the controls testing?
    8. Develop a scorecard to build optimal corporate tax conduct using measures including tax penalties and fines
    9. Consider whether TCG plans are aligned with the organisation’s social responsibility goals
    10. Obtain feedback from stakeholders e.g. external auditors, internal audit, regulators etc.

    TCG is an essential component of any organisation’s efficiently operating tax and finance function. Improved trust across the taxpayer base using more targeted audit and assurance programs and tailored risk assessments in conjunction with a better understanding of organisations and their internal processes and controls will maintain community confidence that taxpayers are paying the correct amount of tax. Organisations that build trust will ensure that tax doesn’t become a roadblock to doing business in Australia.

    In October 2017 BDO Australia Tax co-chaired a Tax Reform Roundtable hosted by the AICD in Sydney, where the topic of tax reform was discussed. A series of short videos featuring the BDO Tax Partners and Directors who attended the Roundtable to discuss the current challenges to tax reform is available here. Video #7 in the series, which will be released on 13 February 2018, will feature a discussion on the importance of having an appropriate tax risk management framework in place to ensure good corporate governance.

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