Most company directors acknowledge the need to incorporate the management of tax into their business, but there seems to be little consensus about how to ‘do’ this. A good starting point is for business owners to question why ‘tax’ does not have a seat at their boardroom table. Nine times out of ten it is because they feel the topic is adequately addressed by the general business knowledge of existing board members. If you share this sentiment, then take a deep breath, because you are likely to be navigating unknown waters around the management of your tax positions at a company and / or shareholder level.
Why is it important to have tax on adviory board agendas?
Tax is fast becoming a strategic issue for business owners due to the pace of tax reform and the subsequent impact this is having on earnings and cash flows. Tax is now not only a corporate governance issue but also a reputational one. Tax cases around the implementation of business structures (e.g. Penny and Hooper) have proven one thing; tax cannot be considered in isolation anymore, it needs to be integrated into your strategic decision making and specialist advice is required.
Has your advisory board considered these tax announcements?
- Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill.
- The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill introduced in August 2016 was passed by Parliament and now awaits Royal assent.
- From 1 April 2017, employee share schemes will be subject to new tax rules.
- IRD Business Transformation Project. This alone has wide reaching implication, including changes to the administration of PAYE, GST and Provisional Tax.
- The impact on the adminstration of depreciation following the tax case Queenstown Airport Corporation Limited v Commissioner of Inland Revenue.
Compounding this pace of reform are the changing attitudes of tax authorities who have adopted a more risk based approach to identifying non-compliant taxpayers. Hopefully you are now beginning to appreciate the importance of tax in the boardroom.
What tax areas do advisory boards need to address?
Based on our experience, today’s advisory board agendas should (to a greater or lesser degree depending on the size of the company) cover the following areas:
- Tax function resources and skills. Does your company have adequate resources (funding and skills) to address the current and changing tax policy landscape?
- Tax risk and corporate governance
- How are current tax issues and the potential for changes in tax policy being managed by the company?
- When is tax consulted?
- What are the company’s most significant tax risks?
- What assumptions are embedded in transfer pricing?
- Tax authority audits
- What were the results of recent audit activity?
- What do the results say about the tax function?
- How have we addressed the risks moving forward?
- Uncertain tax position management and disclosure requirements
- How can tax policy changes affect the company’s effective tax rate and financial reporting?
- Are the company’s tax disclosures in its financial reporting accurate, understandable and complete?
- Tax reform landscape. How does the company monitor changes in tax legislation and tax policy (domestic and offshore)? The growing view from external stakeholders is that the board has responsibility for oversight of the company’s tax policies. This is resulting in many advisory boards adding skilled tax resources to its seats to ensure that it is equipped to manage tax risk.
When is it time to introduce ‘tax’ to your advisory board?
This is a common question, but as you would expect there is not ‘one size fits all’ answer. We would generally recommend that an assessment is undertaken in order to assess the most appropriate framework to manage your tax. This assessment could result in an immediate appointment to your advisory board or it may conclude that tax management discussions only need to be covered off at an advisory board level twice a year.
Introducing tax to the agenda will keep a board on its toes by injecting fresh debate on a topic that has likely only ever been addressed in the past at a very general level. Good governance produces higher quality decisions that can drive an increase in tax management plus a reduction in future costs in terms of tax liabilities.