technology builds transparency: achieving justified trust · co-operative compliance. the idea is...

Technology Builds Transparency: Achieving Justified Trust

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INTRODUCTION A fair international tax system is one of the Organisation for Economic Co-operation and Development’s (OECD’s) main focus areas. Its Base Erosion and Profit Shifting (BEPS) program is at the heart of this.

The BEPS initiative has the backing of more than 100 countries. Each state’s tax bodies and other agencies are working together to identify businesses within their jurisdiction that try to avoid tax and benefit from arbitraging tax rules to shift profits to low-tax or no-tax regimes.

The OECD acknowledges most businesses that pursue aggressive international tax strategies are not breaking the law. But at the same time, they are not meeting community expectations about paying the appropriate amount of tax for the profits they earn.

BEPS includes 15 Action Items national agencies like the Australian Taxation Office (ATO) can implement to stop local businesses shifting profits and standardise tax compliance processes for businesses under their jurisdiction. The aim is to create a truly international tax framework.

At the moment the OECD is monitoring how different countries are applying the action items in their tax systems. In Australia, the ATO is pursuing its ‘justified trust’ approach to tax compliance, which centres on the question: ‘If we told the community how we assured the tax paid by a taxpayer, would they be satisfied we did enough?

Most Australian corporations are already well underway with actions and strategies to address the ATO’s BEPS initiatives. Establishing justified trust is the next step on the journey to transparency.

Now is an ideal time for finance and tax professionals to examine where technology can continue to expedite this process, whilst ensuring valuable resources remain focused on the strategic needs of the business and are not pulled further into the compliance mire.


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UNDERSTANDING JUSTIFIED TRUSTThe OECD first raised the notion of justified trust in 2013[1] in reference to the Dutch model of co-operative compliance. The idea is for tax agencies and organisations to develop mutual trust through the latter supplying fact-based evidence to justify its tax position. This is in contrast to the ATO’s previous compliance management model through which the tax office relied on companies to self-identify their main tax risks[2].

This program has significant implications for the way businesses need to structure their finance and tax teams, and their approach to data and technology across these areas.

The ATO has both the political backing and the resources to leverage against companies that do not engage. The Tax commissioner Chris Jordon has been explicit in his intent to recoup tax revenue as a result of such programs.

Tax commissioner Chris Jordon told a March 2017 Senate Estimates hearing[3] that:

• He would be recouping $2 billion from seven global technology, energy and resources businesses through the federal government’s programs to recoup the right tax from local and global businesses.

• A total of 70 businesses were being reviewed. Fifty-nine MNCs were being audited and 25 had already taken steps to bring their tax affairs into line with the tax office‘s expectations.

• The ATO expects its tax compliance program to reap $3.7 billion over four years.

It is clear that much more collaboration is required in a justified trust environment. Organisations must ensure their systems and culture can adapt to a tax landscape based on a justified trust mindset.

The ATO’s justified trust program applies to the top 1000 Australian companies and requires a tailored approach designed for each of these organisations, depending on variables like company size and industry.

While every business’s program will be different, justified trust covers four areas:

• Understanding the business’s tax and risk management framework.

• Review of tax risks communicated to the market.

• Developing an understanding of significant new transactions.

• Developing an understanding of why accounting and tax results may vary.

This program has significant implications for the way businesses need to structure their finance and tax teams and their approach to data and technology across these areas. Much more collaboration is required in a justified trust environment and organisations must ensure their systems and culture can adapt to a tax landscape based on a justified trust mindset.


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TRANSPARENCY TIMELINE The OECD and the ATO have followed a timeline during which new regulations and protocols have been progressively released for companies to follow to ensure they meet the ATO’s tax reporting expectations:

2016

20172017

2015 11 December 2015: federal government passes the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (Act 170 of 2015), which enshrines in law the requirement for Australian businesses, or global businesses with Australian subsidiaries with annual global income of $1 billion or more, to comply with the ATO’s country-by-country reporting program.

24 May 2016: ATO releases file formats for entities supplying information about their tax affairs. Two types of local files will be accepted by the ATO:

• A short form local file for small taxpayers and those with immaterial related-party transactions.

• A full local file to be completed by all other taxpayers.

7 July 2016: ATO releases local file template to help companies understand new reporting requirements as part of country-by-country reporting.

27 September 2016: ATO releases principles and processes for assessing an exemption request regarding an entity’s country-by-country reporting obligations. The idea is to balance the OECD’s reporting rules with the ATO’s twin aim of cutting red tape for companies.

31 December 2017: complying entities required to file their tax information in standardised tax format for the 2016 tax year.


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TRANSPARENCY ACROSS TEAMSJames Gordon is a director in KPMG’s tax management consulting group. He explains the right approach to governance is the first step for every business in achieving a position of justified trust with the ATO.

This requires the appropriate board oversight and accountability. The tax office has made it clear the board is accountable because tax is pervasive; it exists across the organisation in its entirety.

Gordon emphasises tax involves the finance and tax departments, the risk, internal audit and HR departments, as well as the broader business.

“So the tax function needs to open up a dialogue with all these areas to make sure everyone understands tax is a shared responsibility,” he adds.

From a practical perspective, Gordon explains the first step in achieving justified trust is to do a gap analysis in coordination with stakeholders from

the various departments to develop an action plan. At the start, there may be very little shared understanding of how each part of the business is accountable for ensuring it pays the right amount of tax.

What is critical is for genuine appreciation to be developed between tax and finance about why each area requires certain information. The idea is to encourage a spirit of collaboration, breaking down the silo approach that typically applies today.

Gordon says the tax department needs to be better embedded into the activities of the finance department and into the broader activities of the business to achieve this. This could even extend to dual reporting lines through the tax and finance departments as part of the tax control framework.

TECHNOLOGY IS THE ENABLERThe business needs to use the right tools and technology to embed tax across the organisation.

“Thanks to justified trust a lot of businesses are undertaking transformation projects at the moment. They are re-configuring ERP systems, moving into the cloud and automating as much as they can,” Gordon adds.

For instance, many businesses are moving away from the use of manual spreadsheets as a main tool for collecting data. These are inherently risky, and moving to automated systems reduces the risk of errors. For instance, accounting

software that automatically pulls in accurate bank data is a vast improvement on manual systems.

Gordon’s advice for businesses developing a justified trust position is to benchmark the organisation to help achieve an understanding about what the current position looks like. This allows for comparison with other businesses to determine best practice.

Importantly, he notes justified trust also means businesses must to be able to show the ATO they have the right systems in place to test significant transactions for tax risks.


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THE POWER OF FOUR: TRUST AND STATUTORY REPORTINGTrust is predicated on four pillars: constancy, congruity, reliability and integrity. It’s these elements the ATO will be looking for to justify its trust in the organisations to which this initiative applies.

Considering the Four elements of statutory reporting[4] – process, people, technology and data – in the context of the four trust pillars will help organisations demonstrate trust to the ATO.

Within this, organisations should consider whether adopting certain best practices will help them achieve justified trust with the ATO.

• Review process steps and gaps• Same process, different location• Consistency of output• Controls• Practice run before live

• Required skill sets• Teams involved with review• Motivation and

career progression

• Consistency of inputs

•

• Other uses of data outputs

•

Enablement of process and controls

• Manual or automation?• Tools for oversight and tracking

PROC

ESS PEOPLE

DA

TA

TECH

N

OLOGY

CONSTA

NCY CONGRUITY

INTEG

RITY

RELIABILITY

Non-financial data


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ESTABLISHING THE RIGHT FOUNDATIONThe four elements of trust – constancy, congruity, reliability and integrity – are the bedrock on which a justified trust platform sits.

In an environment in which the ATO is pursuing a much more active compliance program, every business to which the justified trust program applies must be able to demonstrate it has a robust control framework in place to prove the assertions it makes about the revenue and expenses it records.

While this sounds simple, the reality is much more complex and businesses must maintain ongoing focus on this or risk heavy fines and penalties.

Businesses cannot meet the ATO’s obligations and expectations alone. It’s vital to work with the right partners who can contribute best practice technologies, processes and data to support and maintain an organisation’s justified trust position.

The correct combination of internal focus from the board down, in combination with insights from expert partners, gives organisations the best chance of achieving tax compliance in an increasingly complex global regulatory environment.

ADDITIONAL RESOURCES

What are the steps that businesses need to take to protect their interests throughout the journey to transparency? These and many more are examined in depth as part of the Thomson Reuters Journey to Transparency Series. Read more

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REFERENCE

[1] Co-operative compliance: a framework, OECD, 2013

[2] Linke, D., 2017, “Company directors in spotlight as ATO tests for ‘justified trust’”, KPMG, accessed 06/03/17 http://newsroom.kpmg.com.au/?p=5084

[3] Mather, J., 2017, “Tax Office hits seven multinationals with $2 billion tax bill”, The Australian Financial Review, 01/03/17

[4] Thomson Reuters, 2016, Harmonising the four elements of statutory reporting

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technology builds transparency: achieving justified trust · co-operative compliance. the idea is...

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