Why take action on Tax Governance?

In today’s fast-paced business world, tax governance often takes a backseat to operations, growth strategies, and financial goals. However, what many business owners, executives, and financial managers fail to realise is that a lack of robust tax governance can result in costly errors that may seriously impact their bottom line and brand reputation. For groups with little or no documented tax governance, these basic errors can escalate quickly, leading to penalties, fines, and long-term operational disruptions.

The Tax Governance Blind Spot

Tax governance refers to the structured approach an organisation takes in managing its tax obligations, risks, and compliance. It includes the systems, controls, documentation and processes that ensure a company’s tax strategy aligns with regulations and is transparent to stakeholders. However, when tax governance is neglected or insufficient, businesses are often left vulnerable to a range of issues that can have immediate financial repercussions and long-term strategic consequences.

For businesses with little or no documented tax governance, these errors can appear deceptively simple but are often the most costly:

1. Misapplication of Tax Laws

A fundamental mistake that can occur is the misinterpretation of tax laws and regulations. Every jurisdiction has its own set of rules, and failing to stay up to date with changes can lead to significant financial penalties. Without a reliable system that allows for effective responses to tax laws and changes thereto, a business might accidentally misclassify income, overlook tax credits or deductions, or apply the wrong tax rates. These mistakes, while difficult to detect, can snowball into large financial discrepancies.

2. Improper Documentation and Reporting

One of the most common tax-related omissions in businesses with weak governance structures is inadequate documentation. Failure to keep adequate records and documentation to comply with reporting requirements can result in costly audits and adjustments if errors are identified on audit but documentation is found to be lacking. In many cases, companies may not have the right checks and sign-offs in place to validate their financial statements and tax returns, which can lead to significant discrepancies. At a minimum, companies are expected to have documented their own tax processes. The repercussions of not taking such actions include increased penalties and fines, increased back taxes, and potential reputational damage, particularly where the errors involve employees and their salary and benefits.

3. Inconsistent Compliance across Jurisdictions

Multinational companies are especially vulnerable to tax errors if they do not have cohesive tax governance. Without centralised governance, each jurisdiction may apply different standards, causing inconsistencies in compliance practices. This not only exposes a business to tax penalties, but it also creates confusion for employees, shareholders, and even auditors. Unlike many other jurisdictions, Australia has its own defined tax governance expectations that were published by the ATO more than 8 years ago. 

4. Failure to Identify Tax Risks

Without a proper tax governance framework, businesses may not fully understand the tax risks they face. This could include inadvertent exposure to what might be seen as reckless behaviour or at worst, tax evasion claims, e.g. risks stemming from changing international tax rules (like the OECD’s BEPS, Pillar 2). A lack of risk identification increases the chances of making incorrect and misinformed decisions that may prove costly going forward, resulting in tax overpayments or, conversely, underreporting.

The Value of Robust Tax Governance

For groups with limited or no documented tax governance, implementing a strong tax framework can make all the difference. Here’s why it’s critical:

1. Reduced Risk of Errors

Tax governance frameworks provide clear guidelines for ensuring compliance. By having a well-documented system in place, businesses reduce the risk of simple errors such as misreporting income or neglecting deductions. A structured tax governance approach ensures all steps are accounted for, from the financial statements for audit sign-off, through to lodgement of the income tax return. 

2. Enhanced Transparency and Accountability

Good tax governance increases transparency within an organisation, making it easier to track and report tax obligations. When the Board and its empowered management have a clear understanding of tax risks and compliance status, informed decisions can be made and hence, avoid costly mistakes.

3. Proactive Risk Management

With tax governance in place, businesses can better anticipate changes in tax laws, regulatory updates, and potential risks. By establishing a process for regularly reviewing and updating their tax strategies, companies can avoid financial setbacks before they even occur.

4. Strengthening Relationships with Regulators

Having a robust tax governance framework can foster a cooperative relationship with tax authorities. When regulators see that a business is proactive, organised, and committed to compliance, it’s more likely to receive favourable treatment with a “lighter-touch” approach during reviews as a result of “assurance” being provided (this is substantially due to having an effective tax governance framework in place). The ATO operates a 'Monitoring and Maintenance' review of the tax outcomes for the relevant years to maintain their level of confidence that the taxpayer continues to pay the right amount of tax.

5. Long-Term Financial Benefits

Although establishing a tax governance framework requires an investment of time and resources, the long-term benefits far outweigh the initial costs. By avoiding penalties, ensuring proper tax lodgements, and identifying tax-saving opportunities, businesses can strengthen their financial position over time. 

The existence of a robust tax governance system will be apparent if the company goes through a tax due diligence process where the company will be subject to rigorous review and assessment of inherent tax risk in the business.

6. Corporate Social Responsibility 

Every business has a responsibility to society to be socially accountable to itself, its stakeholders, and the public. Having an effective and robust tax governance framework in place greatly contributes to this responsibility.

Conclusion: Protect Your Business NOW with Tax Governance

For those businesses that have not yet done anything about tax governance or have not thought much about it, now is the time to give it some very serious thought. 

In the world of business, tax errors are not just a nuisance, they’re a risk that can snowball into significant financial and reputational damage. For companies with little or no documented tax governance, the potential for such errors increases dramatically. The only way to avoid these costly missteps is by adopting strong tax governance practices. By doing so, businesses not only protect themselves from the immediate consequences of tax errors but also set themselves up for sustained success and long-term stability.

In short, the small price of effective tax governance today can save businesses from the large costs of tax mistakes tomorrow.

RSM Tax Governance Services

We’re here to help with implementing an effective tax governance system for all businesses, large and small, public or private.  

We can help those businesses that have either not yet done anything or wish to improve upon what tax governance they have done so far. 

If you would like to find out more about this very important and burning topic with regulators, including the ATO, please contact our specialists in Tax Governance, Tony Fulton or Shaun Cartwright to discuss what this would involve for your organisation. 

We strongly recommend acting now rather than waiting for the inevitable ATO Review Notification Letter to arrive in which often the first action point will be to provide your tax governance documentation and describe the steps you have taken to date to implement a tax governance framework.

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your Shaun Cartwright or Tony Fulton