Tax governance is a key focus area under the justified trust methodology for large public and multinational businesses. Demonstrating how your good tax governance is embedded in positions taken, disclosures in returns and tax calculations provides us with evidence we can rely upon which can reduce the intensity of enquiries.
We have developed practical guidance to assist large public and multinational businesses to understand how we rate tax governance in applying our justified trust methodology. This guidance is based on the Tax risk management and governance review guide (the Guide). We recommend you review the Guide for best practices, self-assessment procedures and detailed examples about what evidence can be provided.
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How we assess tax governance
In order to assess large public and multinational businesses' tax governance, we look for evidence that a tax control framework exists, focusing on the controls set out in the director's summary within the Guide. We use the following staged rating system:
- Stage 1: tax control framework exists
- Stage 2: tax control framework is designed effectively
- Stage 3: tax control framework is working in practice
- Red flag: not evidenced or significant concerns
Stage 1: demonstrating a tax control framework exists
You will reach stage 1 when you provide objective evidence that a tax control framework exists. This includes one or more of the following:
- board endorsed tax policy documentation describing how the organisation identifies and manages tax risk
- documented procedures for preparing returns, including income tax returns and Business Activity Statements
- a testing program to validate the operating effectiveness of the tax control framework.
We are unable to rely on slide presentations, draft policies or narrative descriptions of the tax control framework, as they do not represent source documentation. We look for evidence in the form of actual policies and procedures demonstrating the existence of a tax control framework.
Stage 2: demonstrating design effectiveness
When we have established a tax control framework exists, we then look for objective evidence that the framework is designed effectively.
We recommend you prepare a gap analysis by self-assessing the design of your framework against the Guide. If a gap exists, you should describe your compensating controls and document why particular aspects of the Guide may not be applicable to your circumstances. This may be due to a range of factors including size, complexity and history.
Stage 3: demonstrating the framework is operating in practice
This stage is the highest rating for tax governance, and we encourage all large public and multinational businesses to achieve this stage. Achieving stage 3 provides a strong foundation for our level of confidence and supports less intense future engagements.
To achieve this stage, you must be able to demonstrate that your tax control framework has not only been designed effectively, but is also operating as intended.
This stage can be evidenced by a periodic tax controls testing program as well as reports describing the outcomes of that testing. The program scope should include testing of the six controls as set out in the director's summary.
Evidence of the program could also include:
- reference to the tax internal controls testing program in the tax control framework
- an extract of the testing program for the next 3-5 years setting out the
- scope of tax controls testing (controls and taxes reviewed)
- details of who is conducting the review (extent of independence)
- description of the testing methodology to be applied to gather evidence.
The report describing the outcomes of the testing should include an opinion on the operating effectiveness of the tax control framework and could also include a description of the:
- tax controls tested
- testing methodology
- sample sizes.
We look for the independent review and testing of tax controls, for example by internal or external auditors, that provide an independent level of assurance to the audit committee and the Board. Control owners (such as the tax or finance teams) testing their own controls do not provide the requisite degree of independence.
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Red flag: not evidenced or significant concerns
A red flag may be assigned where you cannot provide evidence to demonstrate a tax control framework exists or if we have significant concerns with your tax risk management and governance. These concerns may include your approach to tax compliance, for example, where there are significant errors your tax control framework is not detecting. We will let you know our concerns before we give you a red flag rating.
Practical guidance on how we review and rate tax governance to assist large public and multinational businesses.