Global demand for greater tax transparency, emanating from corporate scandals such as Google, Amazon, Starbucks, Apple and Nike, is leading the boards and audit committees of South African corporations to ask more difficult questions than ever before about how organisations are governing their tax affairs and managing tax risks. The risk of reputational damage and financial loss is simply too high to be ignored.
The first step to ensuring good tax governance is the formalisation of a clearly articulated tax strategy, supported by an effective tax policy.
In fact, King IV, the blueprint for effective corporate governance in South Africa, contains a requirement for a transparent and responsibly documented tax strategy and policy to be put in place.
Strategic tax objectives
A tax strategy should consist of three essential building blocks. The first of these is the organisation’s strategic tax objectives – the tax objectives to be achieved over a medium-to-longer-term horison.
These can be qualitative or quantitative. For example, they may speak to protection of reputation; tax compliance or effective tax rate management; or convey the organisation’s desire to be a valued business partner.
When considering the organisation’s strategic tax objectives, it is vital to ensure that these are aligned with the company’s wider strategic business objectives.
By way of example, if one of the organisation’s strategic business objectives is the growth of the operations across the African continent, the strategic tax objectives should align to these business objectives.
The second building block is the formulation and documentation of the organisation’s tax risk appetite, which is the level of tax risk that the organisation is willing to accept on a particular transaction or business venture.
Typically, in a tax planning sense, this forms part of an overall transactional decision-making framework with touch-points into areas other than tax, such as accounting disclosure, the cost of implementing a transaction, or the cost of exiting a transaction prematurely.
In addition, as part of a robust tax risk management process, the evaluation of identified tax risks against a benchmark is essential. Such a benchmark would typically also form a part of the assessment of tax risk appetite in the tax strategy.
Key roles and responsibilities
An effective tax strategy should convey the key roles and responsibilities for tax across the organisation. This addresses issues of accountability and responsibility, starting with the role of the board at the top, but also covering the roles of board sub-committees, the group CFO, divisional CFOs, the executive tax committee, the tax team etc.
Each organisation is likely to have a different organisational structure and hierarchy – the important thing is that it is debated, agreed upon, documented, and put into practice.
In my experience, the roles and responsibilities for taxes, especially outside the immediate domain of the group tax function, are often unclear. This leads to a lack of accountability and, by extension, to taxes falling into a ‘black hole’ within the organisation.
Importantly, a tax strategy should not be seen as a tick-box exercise. Its creation is a vitally important and robust process in itself, culminating in a document that sets the tone and the direction for how taxes will be governed within the organisation.
A tax strategy should be compiled with the understanding that it will be read by a range of stakeholders, both internal and external.
Principles of tax conduct
In broad terms, while the tax strategy defines what the organisation is seeking to achieve in relation to tax, that a tax policy lays down the non-negotiable principles of tax conduct within the business that will give effect to the tax strategy.
The policy therefore largely addresses operational aspects of tax such as human resources, processes and technology.
In terms of human resources, the policy should outline the approach to tax recruitment and retention, technical and soft skills training, and career development.
Concerning process, the policy should provide an outline of the key tax processes that the business relies on to make sure all its tax objectives are being met, including tax compliance, tax dispute resolution, tax reporting and tax risk management.
When it comes to the organisation’s engagement with tax technology, the tax policy should also convey how the organisation seeks to embrace technology in the conduct of its tax affairs, including the use of automation, workflow management, robotics, and analytics.
In addition to these operational aspects, the tax policy should outline how the business seeks to deal with tax authority communications and disputes, and its approach to engaging tax advisors.
Having a board-approved tax strategy, supported by a Board-approved tax policy, is critical, not only because King IV demands it, but because it provides a top-down framework within which the organisation is required to conduct its tax affairs, and it provides the tax function with a far clearer mandate. The cumulative result of this is much greater confidence to the organisation’s stakeholders.