Will your business’ Tax Governance stand up to Inland Revenue scrutiny?

Will your business’ Tax Governance stand up to Inland Revenue scrutiny?

Inland Revenue have ramped up their audit and review activity in recent months. We are finding that Tax Governance is one of their key focus areas when undertaking business audits.

Historically Inland Revenue tended to only be concerned with Tax Governance for ‘significant enterprises’ which Inland Revenue defines as those businesses with annual turnover more than $30m. Now, however, Inland Revenue is turning their attention to Tax Governance for SME businesses. Inland Revenue views good Tax Governance as being applicable to all businesses, not just significant enterprises.

As part of Tax Governance, Inland Revenue expects businesses to have a Tax Control Framework (TCF) in place that reflects the size and complexity of the business. The TCF is expected to focus on specific internal controls and processes of the tax function, how the daily tax activities are managed and structured, board-approved controls. The specific detail of a business’ TCF will depend on the circumstances of the business and the industry the business operates in.

Key questions

Inland Revenue has noted that the key questions all business should address when looking at their Tax Governance are the following:

• Is there a documented tax strategy and has it been kept up to date (i.e. a TCF)?
• Have effective systems, procedures and resources been put in place to manage tax risks?
• Is annual reporting transparent and can all stakeholders analyse and effectively interpret the information provided on taxes paid?

Key expectations for a Tax Control Framework

A TCF is expected to include:

• Documentation: Formal, written documentation of the tax strategy and specific policies/procedures for key tax types (GST, income tax, payroll/FBT, transfer pricing etc).
• Board Accountability: The Board (or equivalent) must set the tone at the top, approve the tax strategy, set out clear roles and responsibilities for New Zealand tax obligations (including tax compliance, transactions, tax reporting and complex issues such as international tax matters) and receive regular reporting on tax risks, not just when issues arise.
• Operational Effectiveness and Testing: Regular testing of tax controls to ensure they are working, rather than relying on a ‘set and forget’ approach.

Additional items that Inland Revenue may review during audits:

• Checklists: Evidence of checklists showing necessary steps, reviews, and signoffs for each tax process.
• Risk Registers: Recording tax risks in a tax risk register with clear responsibility for mitigation.
• Independent Review: Evidence of independent testing (internal or external audit) of tax processes.
• Agent Oversight: If using a tax agent, procedures demonstrating how the business ensures accurate data is provided to the tax agent and how the agent’s work is reviewed and approved.

Multinational businesses

If your business is part of a multinational group which has a global TCF, Inland Revenue expects the TCF to be customised to the New Zealand environment to reflect New Zealand business operations and how specific tax risks are managed across the New Zealand tax types (e.g. PAYE, GST, FBT, withholding taxes and income tax).

What’s the risk?

Inland Revenue looks at how good a business’ Tax Governance is when they establish annual risk ratings for businesses.

In addition, Inland Revenue has stated that if they investigate a business’ compliance with tax legislation and find an error and need to consider imposing a shortfall penalty, they may take into account the business’ Tax Governance practices (or lack of) when determining which shortfall penalty to apply.

Shortfall penalties include lack of reasonable care, unacceptable tax position, gross carelessness, adopting an abusive tax position and tax evasion, with penalties ranging from 20% to 150% of the tax shortfall.

Next steps

Before you receive Inland Revenue’s notification of audit letter, take a moment to consider your business’ Tax Governance. Will it stand up to scrutiny by Inland Revenue? Nexia New Zealand can review your current Tax Governance position to ensure it will stand up to Inland Revenue’s scrutiny.

If you are yet to establish Tax Governance for your business, we can assist with preparing your tax strategy and TCF, together with relevant checklists and risk registers which may be required.

Talk to our experts – we can help you review your current position, strengthen your tax governance framework, and ensure the right controls and documentation are in place. If you’d like to book a consultation with a tax specialist based in Auckland, Christchurch or Hawke’s Bay, contact a Nexia advisor.

About Nexia New Zealand

Nexia New Zealand is one of New Zealand’s leading full-service chartered accounting and business advisory consultancy firms, offering the full range of chartered accounting, business advisory, corporate advisory, tax, and audit services. 

Nexia New Zealand has four offices throughout New Zealand: Victoria Street in Christchurch, Albany on Auckland’s North Shore, Newmarket in the Auckland CBD and Hastings in Hawke’s Bay.