Tax compliance isn’t just about the numbers in the tax return. Tax governance plays a part too. Inland Revenue has extended review activities of small and medium enterprises (SMEs) to include tax governance.

What is tax governance?

Tax governance can broadly be described as the policies, procedures and controls an organisation has in place to manage and resolve tax matters.   Documenting and reporting are also key.

Fundamental to good tax governance is a tax control framework.  This focuses on specific internal controls and processes to manage daily tax activities.  The features of a tax control framework will be unique to each organisation and is set at the highest level of management.

Core elements

To achieve good tax governance, a tax control framework must have three core elements:

• Evidence of existence – processes and procedures in the framework result in consistent outcomes.
• Design effectiveness – the system is designed to ensure the organisation pays the correct amount of tax; tax risks are identified and mitigated; documentation and regular reviews are carried out.
• Operational effectiveness – regular testing of processes and procedures to ensure they are up to date and fit for purpose. 

These core elements are reflected in the six building blocks discussed below.

Six building blocks

Inland Revenue has recently updated its initial guidance on tax control frameworks.  

There are six features Inland Revenue will look for in a tax control framework.  Briefly, these are:

• Tax strategy – this is clearly documented and owned by senior management (in a SME this could be shareholder-employees).
• Comprehensive scope – the framework should be embedded in the day-to-day management of business operations.
• Responsibility of parties – these are clearly outlined, e.g. owners or managers at the highest level are accountable for the design, implementation and effectiveness of the framework.  The organisation’s tax division or, in a SME, the accounting team lead (for example, this could be the person responsible for the finance and accounting function) is responsible for implementing the framework and should be properly resourced to do so.
• Governance – the system of rules and reporting is explicitly documented.  Transactions and events are compared with expected norms.  Potential risks of non-compliance are identified and managed.
• Testing regularly – of the policies and processes and outcomes are reported.  Does the framework remain fit for purpose?