Why company boards must keep an eagle eye on tax governance
Pillar Two, ESG and readiness for an ATO review should be front of mind, says one tax specialist.
The ATO is taking a close look at how company boards are handling tax governance this financial year with Pillar Two adoption imminent, heightened awareness of ESG and a focus on readiness for a review.
Grant Thornton national managing partner for tax Sandie Boswell said from
the ATO’s perspective, an organisation's tax risks are a key responsibility of the directors on the board.
“They’ve really got to demonstrate that the organisation has an effective, robust tax risk management and governance framework that's in place and is being implemented,” she said.
The tax office expected the board to be across the detail, she said, and the ATO had specific programs of streamlined reviews which began with the top 100 but now took in companies and groups with a net value of at least $50 million.
“It started programs across the board to get assurance from companies that they are paying the correct tax.”
Under its Justified Trust Program a company had to demonstrate three things:
“Are they were actively considering and discussing tax at board?
“Do their management teams have the right skills and tools to maintain a clear oversight over all tax risks?
“Are the right policies and procedures in place to identify and manage tax risks as they arise?”
This year the ATO would focus on readiness for reviews and whether a company could respond within a tight timeframe. If required, the office could investigate and conduct a detailed review of a business’s activities and tax positions, taking key people out the business to focus on ATO queries.
Ms Boswell said she concentrated on three factors when briefing boards.
“The importance of tax compliance – so emphasising the critical role of tax compliance and maintaining your organisation's reputation, financial stability and legal standing. Non-compliance can lead to significant financial penalties and other brand reputation and legal consequences.”
“The second one is around overseeing your tax planning and strategy. It's really important to highlight how important strategic tax planning is to stay within the legal boundaries. The board needs to be across that.”
“The third one is risk mitigation and overall governance. Here you really need robust tax management strategies as a governance board, and then those governance processes to identify and assess and mitigate potential risk factors in relation to tax effectively. This could be things like internal regular risk assessments, fostering a real culture of compliance, and just to safeguard the organisation because overall. A strong tax policy that's transparent is a really good tool for companies to demonstrate their wider ESG commitments and contributions, and build that stakeholder and public trust.”
Boards also needed to be prepared for specific technical reviews around issues such as transfer pricing reviews and thin capitalisation.
“ESG is another area that I think boards need to be across. Essentially it's about looking at what other companies are doing, benchmarking your company against that,” she said.
“We currently require companies in Australia to have a certain level of documentation about tax risk management policy, and to have a governance framework and that makes up part of your ESG strategy. So that's really important.”
While Pillar Two adoption awaited legislation, it would usher in a global minimum corporate tax rate and was likely to begin for income years commencing on or after 1 January 2024.
“It's about that global minimum corporate tax rate of 15 per cent which applies to large multinationals with an annual global revenue of €750 million. So an Australian inbound subsidiary of a multinational group may have to pay top-up tax if their effective tax rate is less than 15 per cent.
“For an outbound group headed by an Australian ultimate parent entity, owning an entity in a jurisdiction that does not meet the 15 per cent effective tax rate the Australian parent entity shall pay its proportionate share of top up tax to the ATO.”
A company board should ask who in the organisation was taking responsibility for the implementation of Pillar Two engaging the auditors around those issues.
Ms Boswell said one certain red flag for the ATO was a lack of a tax governance framework with documentation.
“They need to start thinking about have they got governance processes in place? Are they documented and ready to be given to the ATO in the event of a review? Because you don't want to be scrambling to get that ready.”
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