The Board establishes and maintains strong corporate governance structures for managing tax risk.
Set the Policy
The Board should determine what aspects of tax risk are within its control and what level of risk is acceptable while pursuing the objectives of having:
- enhanced profitability for the benefit of shareholders
- controlled and transparent management of tax activities on a day-to-day basis;
- decision making that is able to be understood by non-tax personnel
- an enhanced ability to anticipate issues (such as changes in law and relevant court decisions).
We provide a list of some key tax issues to be included in the policy below. For example, the Board could have set policies for:
- setting risk parameters - the Board should establish what is a "material" transaction that must come before the board and what is a material tax risk that must come before the board.
- reporting - a regular (quarterly) report to the Board from the Tax Function (be that an external advisor or an internal Tax Function) as to tax law changes which may affect the company and as to the issues published in the Australian Taxation Office compliance program as being areas the Australian Taxation Office will review.
- external sign off procedures - obtaining sign off from the Australian Taxation Office (for example by way of a tax ruling, advanced pricing agreement or otherwise), or obtaining a particular level of opinion from an adviser for transactions of a particular size.
- ATO communications - how to manage Australian Taxation Office inquiries, for example, the sign off level for communications with the Australian Taxation Office e.g. Audit Committee involvement, Board reports, or when to seek external advisory assistance.
Monitor the policy
- The Board should ensure there is a well resourced tax governance process with systems to identify, assess, monitor and approve material tax issues.
- There should be a regular audit of the effectiveness of tax governance systems.
Apply the policy where a matter comes before the Board
- The Board should regularly request an update on tax risk, especially around material transactions that come before the board.
- How the ATO categorise your business under their Risk Differentiation Framework?
- Level 1 – High
- Level 2 – Key
- Level 3 – Medium
- Level 4 – Low
- What are the consequences of your risk rating?
- If the business is utilising ATO services and rulings (product rulings, private rulings, APAs, etc) to reduce tax risk and compliance costs?
- Does the Board review the approach to tax risk?
- Your tax advisor's risk stance and does their approach to risk align with that of your business? Do you want a particular level of certainty expressed in advice? Have you communicated that to your tax advisor?
- Does your business have any major disagreements with the ATO? If so, are you satisfied with the way they are being managed? Have any potential additional tax liabilities been adequately provided for?
- Is there anything to indicate that your business results and tax payments are lower than would be suggested by economic conditions?
The Board and tax function should ensure appropriate review and sign off procedures for material transactions and reporting requirements which ensure significant tax risks are elevated to the Board.
The tax governance process should ensure there are systems to identify, assess, monitor and approve material tax issues for reporting to the Board. There should be a regular audit of the effectiveness of tax governance systems.
- Does your tax function have adequate resources to manage tax risks effectively and provide reasonable assistance when dealing with the ATO?
- Is your business ensuring that its processes and procedures adapt to reflect changes to or court interpretations of the tax and superannuation laws?
- Do you have the necessary processes in place to assess and where relevant escalate matters to the appropriate level?