Constrained firms and their investors stand to benefit from improving their governance practices to mitigate the negative impacts of both tax management and tax sheltering. Board members are also are expected to have an understanding of and take responsibility for the tax risks of the companies they act for. When firms have weak governance, corporate tax avoidance is likely to coincide with a lack of information, which makes it easier for entrenched managers to divert firm resources for their own benefit, manipulate earnings, and suppress bad news about the firm . Login Forgot login Register Log in help. Some of the earlier contributions to this literature argue that corporate tax avoidance cannot be viewed simply as a transfer of wealth from the government to firm shareholders in the presence of agency problems between shareholders and managers .
We fully support this FTA guidance. The guidance assumes that the essential features of a TCF will be determined at the top level of an enterprise rather than being an amalgamation of individual decisions made lower down in the organisation as to which particular controls may be needed.
Rather than attempting to prescribe a one-size-fits-all TCF, the guidance identifies the following six essential building blocks of a TCF:. The final building block, assurance, can be seen as the overall result of having put in place all the other building blocks; if they are there, it is possible to provide the desired assurance. We consider the FTA guidance applies not only to significant enterprises in particular, those enterprises that currently file a basic compliance package with us , but also high wealth individuals HWIs who have complex business interests.
We agree with the FTA that the actual specifics of a TCF for any business will depend upon the particular circumstances of that business and the industry in question. In particular, at a minimum, we recommend that the following key questions be addressed routinely by boards and HWIs:. In setting the right tone from the top, we also recommend that boards of directors consider endorsing a set of overarching principles.
For more info on government services go to www. Is KiwiSaver right for you? International Tax residency and status International tax for business Guidance and governance Guidance on anti-bribery laws Corporate tax governance guidance International obligations What is my company's tax residency?
In contrast, if a firm is not financially constrained, we find that neither tax avoidance nor tax sheltering has a significant impact on financial constraints. Next, we divide the sample firms into strong governance and poor governance groups based on the median value of the particular governance variable used, as described above.
In firms with poor governance, we find that both tax management and tax sheltering are uniformly associated with increased financial constraints across all governance measures. In contrast, the impact of tax management and tax sheltering on financial constraints is mixed, with weakly significant results, and the impact varies with governance measures in firms with strong governance.
Our results indicate that corporate governance moderates the impact of tax planning on financial constraints: Tax avoidance is likely to compound the financial constraints of firms with poor governance mechanisms, and it does not have a negative impact on firms with stronger governance mechanisms.
This result is consistent with the idea that strongly governed firms use tax management effectively, which can also benefit them in the long-run by not exacerbating their financial constraints. Corporate tax avoidance is a less useful source of financing for constrained firms when they are plagued with agency problems and a lack of transparency. Constrained firms and their investors stand to benefit from improving their governance practices to mitigate the negative impacts of both tax management and tax sheltering.
It is not uncommon for businesses to be missing opportunities or creating risks by inadvertently excluding tax considerations from their business strategy and decision making processes. A recent global survey conducted by Deloitte has shown that nearly half of the respondent organisations have no formal corporate tax governance policy in place and that only a third of those organisations that have a formal written policy have these signed off by the Board.
Anecdotal evidence further suggests that those organisations that have formal written policies have not reviewed these policies since they were put in place and may have limited to no processes in place for identifying, controlling or reporting tax risk.
We suggest a 4 step approach to strengthening your tax risk management framework. We can assist taxpayers to develop an initial assessment, or benchmark the current state of their tax controls, with our risk assessment tool called the Tax Cube. The Tax Cube is a comprehensive set of questions based on views of best practice in the area of tax risk management. It categorises and scores responses into four interrelated components that together form an integrated tax risk framework for internal controls over tax.
Governance encompasses the 'tone at the top' and defines tax objectives and the basis on which tax risk is addressed. Robust corporate governance practices aim to ensure transparency and accountability and are essential to lowering a taxpayer's risk profile.
This is paramount to the delivery of accurate, complete and timely tax compliance and financial reporting. The Tax Cube output gives an indicative assessment of risk based on the responses to the questions. This allows the tax manager, financial controller or CFO to understand and identify priorities for change and actions recommended. It can also reveal gaps between the stated tax governance position and the actual position.
The common steps taken to close the gaps identified by the Tax Cube is an update, refresh or preparation of a corporate tax governance policy that is endorsed by the Board and the preparation of a tax management plan to manage and mitigate where appropriate the tax risks and tax opportunities identified.
These steps should look to address the current tax risks and opportunities but should also include a proactive approach to assessing the impact of any future changes in the tax rules and the tax environment for both risk and opportunity. Deloitte is well placed to assist you in reviewing your tax risk and opportunity positions and can offer assistance in refreshing or developing forward looking business strategy oriented corporate tax governance documentation and tax management plans.
With the global attention corporate tax governance and tax risk management is receiving, now is a good time for taxpayers to reflect on their tax governance frameworks and tax controls and consider whether their current framework is robust enough in the current climate. Guidance on corporate tax governance Background. Guidance on tax control frameworks (TCFs) was released by the OECD's Forum on Tax Administration (FTA) in It followed two earlier OECD publications (Principles of Corporate Governance and Guidelines for Multinational Enterprises), and seeks to assist businesses in designing and implementing effective tax governance. Therefore, the impact of corporate tax avoidance on financial constraints is likely to depend on the strength of a firm’s corporate governance. In an article forthcoming in Financial Management , we examine how corporate governance affects the relationship between a firm’s tax avoidance and its financial constraints.