Tax Tips Alert February 2020

� Tax governance and Inland Revenue transformation

� Research and development (R&D) tax incentive: What is ‘eligible core R&D’?

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Tax governance and Inland Revenue transformationInland Revenue recently issued a tax governance checklist for boards of directors of New Zealand, and re-endorsed OECD guidance on corporate tax governance.

Corporate tax governance is increasingly becoming a focus area for tax authorities globally. Being able to demonstrate that a strong tax control framework exists provides tax authorities with confidence that the right amount of tax is being paid. A key theme from all tax authorities is that tax should be on the boardroom agenda and company directors should have an understanding, and take oversight, of tax risk.

In New Zealand, the recently released Multinational Enterprise Compliance Focus document makes it clear that corporate tax governance is a key focus area for Inland Revenue. The Compliance Focus publication highlights that “compliance begins with the right tone from the top being set by directors and senior management” and provides a checklist for board directors of New Zealand companies. Although this was published in the context of the Multinational Enterprise Compliance Focus document, our view is that the Inland Revenue checklist should be adopted as best practice for all large New Zealand corporations.

Let’s talkOrganisations should be looking at formalising the way they manage tax and leveraging technology to enhance their tax control frameworks. To find out more about how, please contact your PwC adviser.

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When working through this checklist the key question organisations should be asking is “how can I prove that we are doing this?” And is it being done effectively? For example, it would be easy to tick yes to “does the company have a tax control framework (TCF) to manage day-to-day risk”; the harder questions that should be asked include: Is this framework documented? Does the documentation reflect current practice? Is the TCF effective at managing not just technical risk but also operational risk? How is compliance with the TCF being tested? Is the TCF fit to meet current and future needs of the organisation?

Tax governance is a global trend…

The focus on corporate tax governance is a global trend and we are seeing a number of revenue authorities in the OECD adopting tax governance measures. Examples of jurisdictions that have taken action in this area include:

• Australia – as part of its Justified Trust regime the Australian Tax Office (ATO) has implemented a structured streamline assurance review for the top 1000 Australian taxpayers. Under this programme, the ATO requires evidence of the existence of a tax control framework, that the design of the framework is fit-for-purpose and is operational in practice. The upside of meeting these requirements is a reduction in the intensity of ongoing enquiries that the ATO would seek of the taxpayer. The ATO also has a voluntary tax transparency code aimed at larger organisations to disclose key information regarding their tax affairs. The ATO has also set out expectations regarding tax governance for privately owned groups.

• United Kingdom (UK) – HM Revenue & Customs introduced a requirement for large businesses to publish their tax strategy in relation to UK taxation, with penalties imposed if this is not complied with. In addition, the Senior Accounting Officer (SAO) regime requires the Chief Financial Officer (or equivalent) to sign off on whether there are appropriate tax accounting arrangements in place, with personal penalties imposed on the SAO for failure to meet the requirements.

Inland Revenue checklist for boards of directors

Does the board have a well-documented overarching tax strategy?

Is this strategy actually followed in practice by the company’s management?

Is the strategy and its implementation regularly reviewed and updated?

Does the company have a tax control framework to manage day-to-day tax risk?

Is senior management confident in the capacity and capability of the systems, procedures, and personnel in place to achieve overall company tax compliance?

Is the tax or finance team on top of all relevant law changes (such as the anti-BEPS measures, the Common Reporting Standard and revisions to tax treaties)?

Does management report regularly to the board on potentially material tax issues and risks?

Has the operation of the tax control framework been tested independently in the last three years?

Is a clear statement made in the company’s annual report as to tax governance?

Is annual reporting of tax payments and provisions sufficiently transparent for all relevant stakeholders to fully understand the company’s overall tax position in New Zealand?

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• Singapore – Inland Revenue Authority of Singapore is currently developing a voluntary tax governance framework in consultation with taxpayers and looking at ways to encourage taxpayers to adopt.

• United States – now requires all applicants of its Compliance Assurance Process (CAP) to adhere to a tax control framework requirement.

Data analytics and the impact on tax control framework

Revenue authorities are now requesting transactional level data, and they are using analytical tools to identify exceptions and target where to allocate resources. In New Zealand, Inland Revenue is currently investing in a data analytics platform and is already deploying technology to make decisions on who and where to focus its compliance activity. With the huge amount of data and information sharing between revenue authorities globally and the substantial investments into technology and analytical tools, it has never been easier for a company’s business and tax affairs to be visible to revenue authorities.

For many organisations, an enhancement to their TCF is required to ensure that the data used for tax is accurate at source and any errors are identified prior to submissions to the tax authority.

So what should organisations be doing?

Strategic level: Tax policy

A tax policy should be established and endorsed by the Board. For those that already have a tax policy, it should be reviewed in the light of the current tax environment to ensure it meets Inland Revenue’s expectations and the current/future needs of the organisation. Organisations should ensure that the tax policy does not “sit in a drawer”, that it is specific to them, and that it is implemented in practice through embedding key elements into day-to-day processes.

Operational level: Tax process and controls

The effectiveness of the current tax control framework should be assessed at an operational level. This can be done using diagnostic tools such as PwC Tax Management Maturity Model (T3M). In addition, an operational risk assessment should be performed for key tax processes. This involves looking at both the design and operational effectiveness of processes and controls. Analytical tools should be deployed to highlight key areas of risk as well as potential errors or exceptions.

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Get ahead of the curve

Inland Revenue will continue to increase its focus on tax governance. The Multinational Enterprises Compliance Focus document is a very good example of this. However, having a strong tax control framework is not just for the benefit of Inland Revenue – it also ensures that an organisation’s tax affairs are operating effectively and decisions are made in accordance with the tax management principles of the organisation. There are a number of ways this can be approached. Below is a three-step methodology that we have found to be successful when working with other organisations in this area:

Assess the effectiveness of your tax control framework1Roles and

responsibilitiesLevel of opinion

Communication & relationships

Board Committee reporting

Key obligations

Conduct an operational risk assessment across key taxes2Indirect

taxEmployment

taxOther taxes

Direct tax

Implement changes that will mitigate risk and value3Process

and controlsPeople Data TechnologyPolicies

Starting your organisation’s tax governance journey now is the best way to prepare for the shift in Inland Revenue’s focus on tax governance and the three-step methodology outlined below is a very good place to start. Please contact your PwC tax adviser for further information.

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Research and development (R&D) tax incentive: What is ‘eligible core R&D’?The R&D tax incentive came into force on 7 May 2019 for the 2019/2020 tax year. The regime introduces a 15% tax credit on eligible R&D.

‘Eligible core R&D’ is defined as an activity that:

• uses a systematic approach

• has the main purpose to create new knowledge, or new or improved processes, services or goods

• has the main purpose to resolve scientific or technological uncertainty.

Inland Revenue’s guidelines state that this definition is intended to ensure accessibility across all sectors.

Our view is that this definition has set the bar so high as to render the majority of “R&D” undertaken in the software sector ineligible under this regime – including R&D that would have been eligible under the Callaghan Innovation Growth Grant R&D definition, which this new regime replaces.

To be able to demonstrate eligibility, businesses will need to state what the technical uncertainty is that they are trying to resolve and articulate how they know this knowledge is not already publicly available (on a worldwide basis not just your business or New Zealand) or that a competent professional in the relevant area could not deduce the answer.

Let’s talkWe believe that Callaghan Innovation and Inland Revenue will interpret the definition of R&D against software companies narrowly at this early stage in the regime.

We can help you to ensure that your claim is robust. Please get in touch with your usual PwC adviser if this is relevant to your business.

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ContributorsSandy Lau Partner T: +64 4 462 7523 E: sandy.m.lau@pwc.com

Phil Fisher Partner T: +64 274 627 505 E: phil.j.fisher@pwc.com

Megan Scott Director T: +64 27 596 7650 E: megan.c.scott@pwc.com

Nadine Williams Director T: +64 21 846 464 E: nadine.williams@pwc.com

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