In the era of tax transparency, with increasing global collaboration and exchange of information among tax authorities, having good tax governance is vital to any business operation. In fact, many countries have introduced tax governance in their taxation systems to ensure companies follow a set of processes and procedures that will result in adherence to the stipulated tax rules and requirements.
In Malaysia, the Inland Revenue Board (IRB) introduced the Tax Corporate Governance Framework (TCGF) and Guidelines, dated April 11, 2022, to assist companies in designing and operating their tax governance frameworks. Malaysian companies are encouraged to voluntarily participate in the TCGF programme to enhance the robustness of their overall corporate governance framework, promote voluntary compliance and minimise tax risks. Taxpayers who participate in the TCGF programme will enjoy reduced scrutiny (for example, fewer tax audits), expedited tax refunds and the appointment of a dedicated tax officer at the IRB as a single point of contact in relation to the taxpayer’s tax matters.
Other countries, such as Japan and Australia, have tax governance frameworks and guidance in place. For example, the Australia Taxation Office (ATO) has established a tax governance benchmark through its Justified Trust Program. In this programme, the tax governance of a company is reviewed formally, with greater accountability placed on the board and management team in managing the organisation’s tax risk. In February 2022, the Singapore tax authorities published their tax governance and tax risk management initiatives to promote the adoption of good tax governance principles and practices among large companies. Subsequently, in March 2022, the Singapore tax authorities introduced the Tax Governance Framework (TGF) and Tax Risk Management and Control Framework for Corporate Income Tax (CTRM) to strengthen tax compliance by large companies.
Good tax governance will help companies:
(i) Enhance compliance with tax rules and regulations
Tax rules and regulations change frequently, which means keeping abreast with the latest revisions can continue to be a challenge. A tax governance framework will, therefore, help companies have a formalised structure to prepare for the ever-changing developments in the rules and regulations, allowing them to readily apply the rules to the business transactions as they happen.
Today’s digital age means that businesses need to transform their models to stay relevant and competitive. The regulatory environment is also constantly evolving to stay ahead of the disruptions in the business landscape. Unsurprisingly, there is pressure for businesses to keep up with the rapid changes, capture accurate and relevant data, and ensure the correct treatment is being adopted in their tax computations and in meeting their tax obligations.
(ii) Build stakeholder confidence
Successfully managing stakeholders’ expectations and building their confidence is key. A tax governance framework enables companies to build in the right infrastructure that supports effective risk management and tax decision-making and, ultimately, voluntary compliance. By ensuring the operational effectiveness of their tax governance framework and key internal controls, companies can address their disclosures on tax risk management and, at the same time, demonstrate the sustainability of their business from an ESG (environmental, social and governance) standpoint in their stakeholder communications.
(iii) Manage tax risks effectively
Failure to manage tax risks can give rise to legal, as well as financial and reputational, risks. A tax governance framework helps companies identify and understand key tax risk areas, including tax authorities’ potential focus areas. By having a good grasp of the tax requirements, companies can better manage the tax risks up front. At the same time, mitigation actions can be developed and implemented proactively as business transactions happen and as business structures are put in place, rather than during a tax audit.
The tax governance framework will provide boards and senior management enhanced oversight of their tax risks and strategy. With a more comprehensive overview, boards and senior management teams can ask the right questions and obtain the right information to make key business decisions.
(iv) Have open, honest engagements with tax authorities
When engaging the tax authorities, having good internal tax governance will ensure effective interactions and clarity in dealing with business transactions. It is important for the taxpayers and the tax authorities to work towards improving tax compliance together, in a transparent and honest manner. This will result in companies meeting their tax obligations and having reduced margins of error — a win-win outcome.
(v) Reduce compliance costs
An effective tax governance framework can effectively reduce future tax compliance costs. This can be in the form of more efficient processes, better certainty on tax positions, improved tax risk mitigation and a reduction in compliance activities. This means the manpower time dedicated to compliance activities can then be channelled to more value-adding business activities.
By integrating the necessary internal controls and strategic review mechanisms into the tax governance framework, companies will be able to better gauge the effectiveness of their tax risk management and avoid unnecessary tax costs in the long run.
The complex and ever-evolving business and regulatory environment, coupled with enhanced stakeholder scrutiny and expectations, reinforces the heightened focus on and importance of good tax governance for businesses. It is vital that businesses demonstrate to all stakeholders a visible and robust tax governance framework to minimise the financial, regulatory and reputational risks, today and beyond.
Farah Rosley is the Malaysia tax managing partner at Ernst & Young Tax Consultants Sdn Bhd