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Responsible Tax Policy and Tax Risk Management

In recent times, the assessment of a company’s tax performance has progressively extended beyond conventional measures like effective tax rates. It now encompasses qualitative factors such as responsible tax policies and adept tax risk management.

The Importance of Robust Tax Governance

Governance is no longer just about creating policies that detail an organisation’s position on tax risk and compliance. Stakeholders now expect a sturdy governance framework. Such a framework should not only be well-structured but should also incorporate systems and controls that are both operational and effective, especially in our fast-evolving tax environment.

Entities that neglect to adequately address tax risks or pursue aggressive tax planning expose both their business and shareholders to potential damage to reputation and financial jeopardy. The Australian Taxation Office (ATO) considers past conduct and a company’s approach to tax-related decisions when advising the Foreign Investment Review Board (FIRB) about the tax risks linked to foreign investment. This evaluation can directly influence the nature of tax-related conditions imposed by the FIRB, leading to enduring compliance obligations for the company.

Historically, tax regulators have emphasised sound tax governance while discouraging harmful tax practices. Companies perceived as evading their “fair share” of taxes might find themselves facing public disapproval. In essence, if taxpayers fail to handle taxes responsibly or are perceived as doing so, regulatory responses are likely to follow, such as Australia’s Senate Inquiry into corporate tax avoidance.

Global Perspective on Tax Strategy and Governance

In recent years, this response has taken on an increasingly global and coordinated dimension, aiming to safeguard the worldwide tax foundation rather than just an individual nation’s interests. An illustrative example is the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative. More recently, negotiations involving over 135 countries, under the leadership of the OECD, have culminated in an agreement with the Pillar Two reforms of a global minimum corporate tax rate of 15 percent.

It’s beneficial to consider the overarching tax strategy of the company, along with its fundamental tax principles and values, within the broader context of the enterprise’s approach to risk management. The company’s approach to managing tax-related risks and governance should acknowledge the intricate and uncertain nature of tax laws. It’s vital to ensure that these risks are subject to appropriate controls and evaluation within the hierarchical structure of the company’s governance.

A prudent tax strategy should encompass the company’s stance on tax planning and its tolerance for tax-related risks. The strategy might also encompass how the company interacts with revenue authorities and other crucial stakeholders.

After establishing its tax principles and strategy, the company must ensure the presence of governance and risk management structures that facilitate the execution and adherence to its strategy.

In Australia, the Australian Taxation Office (ATO) places significant importance on tax governance, particularly within its comprehensive market compliance initiatives. This perspective arises from their belief that robust tax governance is a pivotal element in achieving what they term as ‘justified trust’. In the context of their compliance endeavours, it is customary for the ATO to assess the presence, design, and operational efficacy of the internal tax controls and governance framework within a business. In light of this, it is prudent to take into account the expectations set forth by the ATO when devising a tax governance framework. However, it’s important to note that there is no universally applicable approach to governance, and it’s imperative that the framework chosen is tailored to suit the specific nature of the business and its distinct circumstances.

Integrating Tax Strategy and Risk Management

Tax risk management is an integral part of any company’s good corporate governance framework. The most applied corporate governance model globally is the Committee of Sponsoring Organisations of the Treadway Commission model that was develop to provide better governance guidance after the collapse of WorldCom and Enron in the USA. The COSO model is ideally structured to provide direction to Boards and management of tax governance.

On a global scale, there is a significant push for enhanced transparency regarding taxation. This push manifests in two primary aspects: mandatory transparency with regulatory bodies (such as requirements for country-by-country reporting) and public transparency (illustrated by initiatives like the Board of Taxation’s Voluntary Tax Transparency code).

The increasing obligation for transparency with regulatory bodies, alongside mechanisms like the OECD Common Reporting Standard, not only contributes to the mounting compliance responsibilities for taxpayers—both in terms of time and intricacy—but also amplifies the likelihood of tax risks, inadequately managed, coming under regulatory examination.

The Role of Tax Transparency

Nevertheless, tax transparency presents businesses with both challenges and prospects. Public tax transparency, especially when data is disseminated without comprehensive context, can result in misinterpretation and misrepresentation. Conversely, voluntary tax transparency reporting offers businesses an avenue to assert their tax credentials. This is achieved by supplying additional information and context regarding their wider tax contributions.

The concepts of tax strategy, tax governance, and tax risk management have long been familiar to tax administrators. The challenge of increasing mandatory disclosures to tax authorities and facilitating information exchange among regulators is also nothing new. The journey toward heightened tax transparency, including public tax disclosure, has likewise been underway for several years.

Stakeholder Scrutiny and ESG

Stakeholders are scrutinising businesses’ tax strategy, governance practices, and risk management approaches with greater diligence. The contemporary expectation is that companies not only adopt a responsible approach to taxation but also do so in an open and transparent manner. The way an organisation deals with tax matters is no longer confined to the business and relevant tax authorities, nor is it something that can be shrouded in secrecy. In fact, it’s reasonable to assert that mere adherence to the technical aspects of the law is no longer deemed sufficient. Compliance is a given; stakeholders demand more.

With rising emphasis on environmental, social, and governance (ESG) aspects, companies are under pressure to showcase their responsible corporate behavior. One ESG area, often overlooked, is tax morality. Boards should think about integrating their total tax contributions within their sustainability reports, ensuring full transparency.

Whether it’s reviewing your existing tax risk management framework, tax policies, controls and compliance, answering questions from your board or benchmarking your tax function, the Andersen team is here to help.

For more information, contact Cameron Allen.

Cameron Allen

Managing Director, Business Advisory

For any enquiries related to this update, contact us today.

Cameron Allen

Cameron, Office Managing Director, and Founding Partner of Andersen Australia is a seasoned tax expert with 25+ years’ global experience. He excels in corporate and international tax, guiding clients through mergers, acquisitions, and restructures. Cameron serves a diverse range of clients and holds multiple board positions.

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