Our initial guidance on tax control frameworks (TCFs) was based on an OECD publication Co-operative Tax Compliance – Building Better Tax Control Frameworks.
You can read the full Co-operative Tax Compliance - Building Better Tax Control Frameworks on the OECD website.
Co-operative Tax Compliance - Building Better Tax Control Frameworks (OECD.org)
Our initial guidance on TCFs applied to our significant enterprise and high-wealth individual (HWI) customers. However, our initial guidance may be helpful to other enterprises when developing or reviewing their tax control framework (TCF).
We said that an enterprise's tax governance framework should reflect its size and complexity. The tax governance framework should include a TCF to focus on specific internal controls and processes, and manage daily tax activities. The specifics of a TCF for any business depends on the circumstances of the business and the relevant industry.
The essential features of a TCF are determined at the top level of an enterprise, rather than decisions being made at a lower level down in the organisation.
Top-down building block approach
From the guidance we identified 6 essential building blocks that TCFs should have.
| TCF building block | Description |
|---|---|
|
Tax strategy |
This should be clearly documented and owned by the senior management of the enterprise (the board of directors). |
|
Comprehensive |
All transactions an enterprise enters into can affect its tax position, so the TCF needs to govern the full range of the enterprise's activities. Ideally, the TCF should be embedded in the day-to-day management of business operations. |
|
Responsibility |
The board of an enterprise is accountable for the design, implementation and effectiveness of the TCF. The role of the enterprise's tax department and its responsibility for implementing the TCF should be clearly recognised and properly resourced. |
|
Governance |
There needs to be a system of rules and reporting that ensures transactions and events are compared with the expected norms and potential risks of non-compliance identified and managed. This governance process should be explicitly documented. |
|
Testing |
Compliance with the policies and processes embodied in the TCF should be the subject of regular reporting, testing and maintenance. |
|
Assurance |
The TCF should be capable of providing assurance to stakeholders, including external stakeholders such as Inland Revenue, that tax risks are subject to proper control and that outputs, such as tax returns, are reliable. This is accomplished by establishing the entity's 'risk tolerance' and ensuring that the risk management framework can identify departures from that tolerance. There should be mechanisms to mitigate or eliminate any additional risks. |
The final building block, assurance, is the result of having all the other building blocks in place. If all the building blocks are there, it is possible to achieve assurance.
Key questions
We recommended that boards and HWIs address the following key questions. These key questions are still relevant and should be addressed by all enterprises.
- Is there a documented tax strategy and has it been kept up to date?
- Have effective systems, procedures and resources been put in place to manage tax risks, and is this clearly stated in the annual report?
- Is annual reporting transparent and can all stakeholders analyse and effectively interpret the information provided on taxes paid?
Tax governance checklist
We provided a tax governance checklist with 10 questions for boards of directors to consider.
| Question | Checklist |
|---|---|
|
1 |
Does the company have a well-documented overarching tax strategy? |
|
2 |
Does the chief financial officer or tax manager formally confirm, at least once annually, that this strategy has been regularly reviewed, updated where necessary and followed in practice? |
|
3 |
Does the company have an effective tax control framework to manage day-to-day tax risks? |
|
4 |
Has the operation of the tax control framework been tested independently in the last 3 years? |
|
5 |
In the last 3 years, have any tax control deficiencies been identified? If so, have follow-up actions been taken to remedy those deficiencies? |
|
6 |
Are key internal policies, procedures and controls covering the data collection, analysis, calculation, recording and reporting for tax filing, and other tax compliance requirements, documented and available for examination by Inland Revenue if required? |
|
7 |
Does a review take place at least annually for changes to accounting policies on which group financial statements are prepared, and all items examined where tax treatment may differ materially from financial accounting treatment? |
|
8 |
Is there a robust process in place for the finance or tax team to stay on top of all relevant changes in tax law and related Inland Revenue guidance? |
|
9 |
Is a process in place to identify significant transactions (including those which need to be reported to the board or relevant board sub-committees) regarding which external advice or binding rulings may be required? |
|
10 |
Do senior management report regularly to the board or relevant board sub-committees on potentially material tax issues or risks? |
Good tax governance is applicable to all enterprises not just our larger or more complex enterprises. We have expanded our guidance, including the guidance on the 6 essential building blocks that a TCF should have, to assist enterprises to develop and implement good tax governance practices.