In this current era of tax transparency, which requires that companies devote more attention the ever to environmental and social governance (ESG) matters, there is an increasing range of stakeholders. It includes employees, investors, customers and regulators that actively evaluate a company’s identification of and approach to ESG issues.
There has been much debate in Australia concerning the more comprehensive social licence for companies to operate. It has extended to a social expectation that companies pay their fair share of tax in their operational jurisdiction. Additionally, the expectation is that they draw their resources and engage with their customers.
Government debt levels are increasing in the current environment. Therefore, regulators such as the Australian Taxation Office (ATO) will likely increase audit activity to test compliance with an organisation’s tax requirements. Satisfying the social expectations of an organisation, including its tax approach, requires building trust with the relevant revenue regulators and transparency within the community regarding outcomes.
The Australian Commissioner of Taxation notified boards that tax risk management and governance are clearly within the purview of the directors. Accordingly, it is expected that directors understand the organisation’s approach to tax risk and diligently prosecute positions adopted concerning tax matters.
Since 2016, the ATO has adopted the ‘Justified Trust’ concept from the Organisation for Economic Cooperation and Development (OECD). The ATO has applied it to the Top 100 Australian taxpayers. The size of their Australian operations identifies the Top 100. The connection between Justified Trust and ESG is apparent: the ATO articulates that the program’s purpose is to increase and maintain community confidence that taxpayers are paying the correct amount of tax. The ATO enables this by seeking objective evidence that would result in a reasonable person concluding that a particular taxpayer paid the right amount of tax.
Justified Trust program
The ATO’s review via the Justified Trust program covers the following four areas:
- Understanding the organisation’s tax governance framework – existence, application and testing.
- Identifying tax risks to the market. For example, in public rulings or taxpayer alerts.
- Understanding new and significant transactions.
- Understanding why the tax and accounting results vary.
Undoubtedly, being prepared for and adopting a measured, accommodating, and collaborative approach to the Justified Trust program is necessary. It will require a significant investment in the process by relevant organisations. Attaining an overall high assurance rating under the program would not mean that there would be less engagement with the ATO. Still, organisations could expect how the ATO engages with them to improve, such as the prospect of a lighter touch engagement approach from the ATO. This approach is known as the ‘monitoring and maintenance approach. This approach will see the ATO conduct an annual review for the next two years to maintain the confidence established as part of the initial assessment. The ATO expects a certain level of proactivity concerning material changes to the organisation’s business or significant transactions, which would involve real-time sharing of details.
An organisation that invests sufficiently in the Justified Trust program can hold high confidence that the ATO is comfortable concerning the tax positions the organisation has adopted. It can do so because the ATO adopts the monitoring and maintenance approach, particularly for those with high assurance levels. In addition, it is also reasonable for the directors to be confident that the organisation has dedicated adequate resources to ensure understanding and awareness of the tax profile of the organisation. Therefore, where an organisation may not achieve a high assurance rating, there will be some benefit with sufficient investment in the process. Specifically, the incremental increase in trust garnered from the ATO and identifying areas that the organisation can improve from a governance and tax risk perspective.
Voluntary Tax Transparency Code
Though the ATO is not permitted to publish the assurance rating of individual taxpayers, an organisation may choose to disclose the rating if it participates in the Voluntary Tax Transparency Code (the Code) facilitated by the ATO. The Code intends to encourage corporate taxpayers’ public disclosure of tax information to develop community understanding concerning an organisation’s compliance with its tax obligations.
The Board of Taxation has developed several principles and minimum standards to guide disclosure. There is no preset format for the content. However, large businesses are recommended to include the following:
- reconciliation between accounting profit to tax expense and income tax paid or payable;
- identification of material temporary and non-temporary differences;
- the accounting effective company tax rates for Australian and global operations;
- the approach to tax strategy and governance;
- a tax contribution summary for corporate income tax, and
- information regarding international-related party dealings.
The new Federal Labor Government is also in the consultation phase regarding critical aspects of its tax reform platform released during the recent election campaign, including a significant tax transparency element. The proposal would produce enhanced tax transparency for multinational enterprises, specifically through measures of public reporting of certain tax information on a country-by-country (CbC) basis. Additionally, the proposal would see mandatory reporting of material tax risks to shareholders and require Australian government contract tenderers to disclose their country of tax domicile. Such measures will build on the existing CbC reporting obligations that apply to significant global entities.
ESG Focus and tax transparency
There is an increased focus on ESG issues in general, and the adoption of OECD measures coincides with an expectation that the ATO will further increase its audit activity. The increase may see organisations benefit from obtaining a high assurance rating under the Justified Trust program. Organisations can leverage that program’s results to satisfy stakeholders’ expectations by making a fair and reasonable contribution to the Australian tax base.
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