Board members who have not yet seen the Multinational Enterprises – Compliance Focus 2019 publication recently released by the Commissioner of Inland Revenue should source a copy and make it a priority to read.
The Multinational Enterprises Compliance Focus 2019 is an updated version of the 2016 release and whilst focussed specifically on multinational enterprises, it is equally relevant to all large New Zealand companies. It serves to communicate – some might say warn – company boards and management what the key tax concerns Inland Revenue have with companies operating in New Zealand and how these will be used by Inland Revenue to determine which companies will be subject to additional audit activity over the next two to three years.
It’s an easy-to-read, well put together document, condensed to 35 pages. Towards the very front of the document - and before specific issues such as transfer pricing, related party dealings and tax avoidance strategies are even mentioned – tax governance is called out. Talk to any of your Australian board member friends or colleagues and they will tell you how important and critical good tax governance is now in Australia.
Any listed or multinational company operating in Australia now that does not have a well-documented and regularly updated tax control framework (or tax charter as we may more commonly refer to it in New Zealand) are automatically rated as higher-risk taxpayers and will receive a disproportionate amount of audit attention from the Australian Tax Office (ATO). As a result of this approach by the ATO, virtually every significant company doing business in Australia will have a well-documented tax charter which sets out what is acceptable tax behaviour and how tax risk must be managed.
Tax charters benefit are generally welcomed by both boards and management as they eliminate uncertainties around what is acceptable and intended and, what is not. Just as boards are accountable to shareholders for tax decisions, management are accountable to the board and having a well structured and clear tax control framework document should ensure no surprises occur.
In the same way safe working environments and sustainability policies are crucial to a large business having a social licence to operate in New Zealand, being a good corporate tax citizen is also critical. Being called out by Inland Revenue or on social media for not being a good corporate tax citizen will negatively impact a company’s brand and its ability to successfully trade in New Zealand or overseas.
Further, companies looking to raise capital or maintain a strong share price should understand that many investors, particularly pension funds and large managed funds, through their environmental, social and corporate governance (ESG) investment rules will generally be unsupportive of companies that have questionable tax disputes with Revenue Authorities. Strong tax governance, therefore, is not only important to limit time management, spent on dealing with Inland Revenue enquiries, it is also important to ensure companies have unfettered access to new capital and that their shares are not prohibited investments for investment fund managers.
The table below has been reproduced verbatim from the Multinational Enterprises Compliance Focus 2019 document. What is expected is very clear and boards that have not yet addressed this important aspect of governance would be well advised to prioritise it in the near future.
Our KPMG Tax Barometer is a web-based tool developed for our clients that enables boards and management to corroboratively define, test and implement a documented tax control framework (tax charter). This should ensure all the boxes in Inland Revenue’s checklist for boards of directors can be confidently ticked.
The risk of not having a well-documented tax control framework – both financially and reputationally – is now too much to ignore.