Tax governance and oversight - article

We all know the famous phrase about the only two certainties in life being death and taxes. For most large businesses its probably fair to say that these days there is a third certainty – regulation. Many organisations today will be familiar with a seemingly endless barrage of more and more regulation across a range of operational areas, be it employment law, health and safety or anti-money laundering requirements.

Tax is not immune from this wave of regulatory change. The message for all medium to large taxpayers, and those that are multinationals, is that they are clearly in the Government’s firing line, as it seeks to address on-going concerns about whether multinationals are paying their “fair share” of tax.

This was made abundantly clear in November 2019 when Inland Revenue released its Multinational Enterprises Compliance Focus document (“the Multinational Document”). The Multinational Document is an update and extension of the 2016 release and is focussed on making tax compliance more transparent. It is ironic that the intention to make tax more ‘simple, open and certain’ leads to increased legislation, Board-down expectations and consequent increases in the costs of compliance.

While the title of the Multinational Document suggests that the recommended actions are intended for multinationals, there is no doubt that this document also represents a shift that will cascade down to domestically owned medium and large corporates in New Zealand, particularly with respect to expectations around tax governance.

Very clearly Inland Revenue now expects that tax governance begins with the right “tone from the top”. Boards and senior management are expected to have a documented tax strategy, supported by appropriate controls and systems to ensure tax obligations are accurately complied with. It is clear that tax can no longer be relegated to the concern of those specifically charged with undertaking an organisation’s tax compliance.

Although the “tone at the top” and governance more generally are perhaps the most important messages in the Multinational Document, it also outlines some key developments in the multinational compliance space in recent years, including:

Inland Revenue’s increased powers to collect information and assess tax on ‘large multinational groups. The major banks operating in New Zealand all meet the definition of a large multinational group as their consolidated group income exceeds the €750m threshold.
BEPS minimum reporting standards have been introduced enabling country-by-country reporting on the high-level activities of a group’s global activities and the ease of exchange for tax authorities regarding international tax rulings.
New Zealand’s tax laws have been amended to strengthen our transfer pricing rules so that they better align with the rules in Australia and the OECD. The onus of proof now resides with the taxpayer rather than Inland Revenue. This increases the importance of maintaining up-to-date transfer pricing documentation as a lack of adequate documentation would make it difficult for a group to rebut alternate arm’s length conditions proposed by Inland Revenue.

The Multinational Document also lays out a range of quantitative measures that will likely attract increased Inland Revenue scrutiny. These include having two or more consecutive years of tax losses, higher than 40% debt gearing – particularly if related party debt, interest payments in excess of 20% of EBITDA and paying margins of more than 5% on cross-border services charges. If nothing else, this provides multinationals with a chance to review their financial and tax positions and if failing any of these metrics, presents an opportunity to be ready to explain why.

This must be understood against the backdrop of Inland Revenue’s multi-billion-dollar Business Transformation project which has resulted in a major step change in their ability to compile and analyse taxpayer data. Inland Revenue’s ability to undertake more comprehensive data analytics will mean that taxpayers failing the sorts of metrics noted above and who are outliers in their industry will now be able to be more quickly identified. Inland Revenue’s messaging to Boards and senior management regarding governance is therefore, no idle threat or some theoretical point being made. Inland Revenue’s ability to monitor and enforce compliance has been enhanced. Accordingly, its expectations have lifted also.

It makes the need for company specific tax charters or tax control frameworks significantly more of a priority if larger companies are to be trusted by Inland Revenue and left in relative peace to do what they do best – manage their business for the benefit of stakeholders rather than dealing with increased audit activity from Inland Revenue.

Authors: Bruce Bernacchi and Tony Joyce

View our article: Tax, transparency and trust