There is a growing consensus that businesses should pay a fair share of tax to provide an economic contribution to society. Rather than being forced to do so by Inland Revenue, businesses will be incorporating that goal into their environmental, social and governance (ESG) programme.
Meeting ESG outcomes is an essential requirement for business leaders who are held to account by an ever-widening array of stakeholders. To meet diverse stakeholder expectations, an ESG programme must extend well beyond sustainability and into the very heart of a business, where attitudes to tax planning and accountability will be tested.
An ESG-empowered tax strategy is more than just having good governance. Environmental and social outcomes should also be enhanced through the tax strategy. There are fiscal levers that contribute to environmental targets, from offsetting carbon emissions for employees’ flights through to entering the emissions trading scheme.
Societal norms regarding what is a fair amount of tax to pay should also influence how businesses design their tax strategies. We have seen a clear shift in corporate tax planning. There has been a noticeable shift from businesses engaging in aggressive tax planning to a mindset that sees tax as a responsibility where certainty is of more value than mitigation. On a day-to-day basis this has seen our clients seeking comfort from binding tax rulings or front-footing underpayments of tax with Inland Revenue rather than waiting for a tax audit.
Good tax governance requires board-endorsed tax strategies, with transparent tax reporting that goes beyond reporting effective tax rates. Consideration should also be given to publishing key tax policy documents. Having an effective tax strategy is not just relevant for the back office, but directors and senior management need to pay attention because if their tax strategy is found lacking it can strike at the heart of a company’s (and the individuals’) reputation and values.
These principles have been endorsed internationally and in New Zealand by Inland Revenue. The World Economic Forum published 21 core metrics and disclosures of sustainable value creation following consultation with more than 200 companies. That included reporting of total tax paid as a contribution to government revenues which support government functions and public benefits. Meanwhile, Inland Revenue has endorsed the Forum on Tax Administration’s guidance on corporate tax governance – including that the tax strategy should be clearly documented and owned by the board of directors, who are accountable for the design, implementation, and effectiveness of the tax control framework.
Practical steps to take now
A robust tax strategy should identify the types of transactions that attract enough risk to be escalated to the board of directors and senior executives. It identifies how those leaders will be made aware of important tax law and Inland Revenue policy changes, and establishes a monitoring plan which will ensure actions are implemented.
The strategy needs to determine when to seek external sign off; how and when to work with Inland Revenue; and how best to manage legal professional privilege of tax advice and documents within the ambit and spirit of the law. It should show that appropriate resources are applied to tax matters, and there are sufficient internal controls, and checks and balances in place – and that they are actually being documented and applied. That requires directors and senior executives to have a good understanding and visibility of tax issues and legislative changes affecting critical business areas, and extend beyond solely relying upon their finance team.
Many businesses will have work to do to comply with their ESG programme. When the tax paid by companies generates stakeholder and shareholder interest, the stakes are high. Boards and senior executives should protect their businesses by reviewing their tax strategies from an ESG perspective. Our highly regarded Tax team and Sustainability practice are perfectly placed to assist.
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