Tax governance: A matter of justifying trust

Tax governance: A matter of justifying trust

James Gordon reports on the ATO's new approach to effective tax governance, aimed at reinstating public trust in the corporate tax system.

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Director, Tax Transformation

KPMG Australia

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On Friday, 27 January 2017, the Australian Taxation Office (ATO) released an update to its Tax Risk Management and Governance Review Guide (Guide), establishing its new approach to tax with specific guidance for board attention.

This expands what the ATO sees as Directors’ duties in relation to tax. The new approach marks a paradigm shift in the way the ATO administers tax. It holds boards 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 organisation-wide regardless of a taxpayer’s risk rating or fact pattern. The ATO begins testing application this year.

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 and a testing framework.
  • 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.
  • A focus on data, IT controls and information flows between entities, systems and reports.
  • Preparation of a board-endorsed tax transparency report is recommended.

This framework underpins the notion of ‘justified trust’; the ATO’s effort to reinstate public trust in the corporate tax system through demonstrable governance and transparency. It will ultimately also enable regulators to administer the tax system more efficiently, and is a global trend.

The ATO will commence ‘justified trust’ reviews imminently over the next 4 years with full coverage of the Top 1000 companies. The Top 100 and others in the broader population will be tested this year on how they are effectively implementing the practices. Many are already taking steps to ensure they are ready for their ATO review, and that their boards are fully informed on discharging duties on tax, as this is communicated across the director community. The absence of a gap analysis and action plan will be viewed as a higher risk indicator.

KPMG’s Tax Integrated Governance Evaluation and Reporting tool (TIGER) can provide the required gap analysis and support the development of a tax governance and control framework informed by benchmarking data collected on industry and revenue peers.

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