Intense focus on the quality of corporate governance now lies at the core of the overall compliance strategy of most tax administrations in the OECD, including the ATO, for their management of tax compliance by major corporate taxpayers.
Under “Co-operative Compliance” approaches, worthy large corporates engage with revenue bodies in a relationship of mutual disclosure and transparency, described by the OECD as “Transparency in exchange for certainty”. The benefits to the large corporate include less tax risk, earlier certainty over tax positions, enhanced reputation and lower compliance costs. Worthiness however must be incentivised, earned and vindicated.
The OECD concept of “justified trust” requires revenue bodies to ensure they justify their communities’ trust in them to collect the right amount of tax due in accordance with the law. It also aptly describes an essential ingredient of worthiness for Cooperative Compliance. The corporate must have a Tax Control Framework (TCF) demonstrates its worthiness is based on objective criteria and justified trust.
To achieve justified trust, the ATO has embarked on a review of the Top 1000 large business taxpayers. In these reviews the ATO seeks assurance that the corporate’s governance and tax risk frameworks are appropriate and applied in practice.
ICGTAX has developed a robust and cost-effective offering to review your tax governance and tax risk management. Our review
- Is designed with tax governance expert input
- Is to the OECD and ATO justified trust standard
- Is tailored to your specific sector and tax risk characteristics
- Provides a gap analysis and recommendations
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“Justified Trust” is a concept developed by the OECD to focus revenue authorities on ensuring they are administering their various tax systems in a way that will justify the trust that their respective communities place in them to do so fairly, objectively, independently, and according to the rule of law. It is also an expression that aptly describes an essential ingredient of the “Cooperative Compliance” approach recommended by the OECD and now adopted by many OECD revenue bodies as the mainstay of their management of tax compliance by major corporate taxpayers. Cooperative compliance is an approach which shifts away from continuous inspection, detection and enforcement (the ‘command-and-control’ model) more toward compliance risk management. Major corporate taxpayers are risk assessed and those that qualify have the opportunity of a cooperative compliance relationship. The cooperative compliance relationship requires significant commitments by both revenue body and taxpayer. From the revenue body it requires commitments to :
- commercial awareness
- openness through disclosure and transparency
From the large corporate taxpayer it requires commitments to
- disclosure and transparency in dealings with the revenue body
- Tax governance and tax control frameworks (TCF) that assure objectivity and justified trust
Disclosure means providing all the information the revenue body needs for a fully informed risk assessment; not limited to information required by statute. Transparency provides a framework within which the disclosures are made. Good corporate governance systems is now seen as integral to CC – “Tax is increasingly more important in the boardroom’.
The essential components of disclosure and transparency by the large corporate taxpayer are:
- a TCF that ensures accuracy of tax returns and disclosure of material tax uncertain positions and transactions; and
- The taxpayer’s willingness to disclose those positions voluntarily.
CC is not intended to achieve a more favourable tax outcomes for the taxpayer. Tax payable should be the same as under more traditional audit or enquiry-based approaches. But collateral benefits to large businesses include early resolution of tax issues, early certainty, and financial advantages through reduced compliance costs. In Australia To achieve “justified trust” the ATO seeks
“objective evidence that would lead a reasonable person to conclude a particular taxpayer paid the right amount of tax.”
In response, the ATO has articulated in its Top 1000 review program the methods and approaches it will adopt, the subject matter it will look at and its expectations of companies, in order for the ATO to achieve justified trust.
The “justified trust” program therefore includes the ATO’s audits and assessments of taxpayers’ risk and governance framework in demonstrating that the public’s trust is justified. The ATO has stated that it expects that a corporate’s tax governance and tax risk management framework are structured and implemented to give the company, its board, shareholders and the ATO an appropriate degree of confidence about compliance with the tax laws.
The ATO has published its guidance for corporates in its latest publication “Tax risk management and governance review guide” (April 2018). In reviewing our clients’ tax governance and tax risk management, appropriate attention is given to the specific areas and methods the ATO have identified, but that does not distract from what otherwise is determined to be good tax governance.
It is noteworthy that the Australian revenue has taken an influential role among OECD nations in developing this framework. ATO officers are on secondment to the OECD and heavily involved in international programmes. In this respect, corporate tax governance systems that meet the ATO justified trust standard are well positioned to meet expectations by other revenue authorities within the OECD.