The recent publication of the King IV™ code will act as a catalyst for formal tax governance and spearhead a level of tax scrutiny in the boardroom not seen before in South Africa. The focus of tax management will shift from basic tax compliance to how organisations are managing all taxes, the related value created in the societies they operate in, and how this is communicated in their annual and integrated reports. The tax responsibility in terms of King IV™ will reside with the governing body, who will have a duty to ensure that the organisation’s tax policies are ‘transparent’ and ‘responsible’. Tax transparency has been a key driver for governments, politicians, tax administrations and civil society alike, post the era of tax evasion and tax scandals. This has resulted in regulated enhanced tax disclosure requirements and the implementation of tax control frameworks in many countries like the UK, Australia, Italy, China and Spain. Similar developments can be expected in South Africa over the short term as a measure to discharge the governing body’s King IV duties in a new regulated tax landscape with enhanced tax transparency and disclosure being foremost on the agenda of our regulators and tax administration i.e. the FSB, SARB and SARS.
Advancement of the South African tax landscape has seen an incremental move towards the formalisation of the tax function’s operations to allow direct tax management performance management. This will put many tax functions on the back foot requiring a significant change management process to discharge their new tax governance duties. Once tax executives have implemented these measures they will be able to play a significant value-adding and strategic monitoring and oversight role, as has been seen internationally over the last five years. The combination of Automatic Exchange of Information (AEOI), BEPS, TP, Country-by-Country Reporting and tax governance under King IV will ensure enhanced transparency. Addressing these developments in isolation will result in significant increases in tax compliance cost. This can be efficiently managed and curtailed with a holistic and strategic approach that employs a tax control framework based on the principles of good tax governance and should deploy a tangible standard and pragmatic approach that incorporates the ‘responsible’ and ‘transparent’ tax policy requirements in King IV™. To remain relevant in today’s ever-changing socio- economic and technology environment, organisations will need to apply sound corporate governance and business principles. The variety of tax scandals – most notably the recent Panama Papers - spotlights less transparent and irresponsible tax practices. The tax stakeholders of today are not the same stakeholders of 10 years ago. People now have enhanced awareness levels, and growth of social and civil organisations and tax administrations, requires organisations to reconsider tax management, tax policies and tax reporting. Employees are also pressurising employers to increase good corporate citizenship. These pressures also require tax functions to decide on appropriate information flow, disclosure, and tax governance. Governing bodies need to create and maintain tax policies that demonstrate clear compliance with laws and regulations, responsible corporate citizenship, and tax morality and ethical behaviour.
King IV™ introduces a great shift in the tax landscape in South Africa which is informed on people’s and organisations’ interpretation of King IV™’. Undoubtedly, transparency will create issues as this leads to enhanced scrutiny and, as such a balance will need to be struck between increased transparency and the increased risk resulting from greater scrutiny. This will no doubt result in additional compliance costs.
King IV™ leaves the interpretation of ‘responsible’ to discretion of the organisation. To demonstrate responsible value creation, organisations will need tangible or proper guiding principles. King IV™ requires organisations to “apply” AND “explain” which implies that organisations should apply integrated thinking, value creation principles and enhanced tax disclosure across tax types in their integrated reports, highlighting how they have achieved responsible good tax governance through value creation and transparency.
Tax governance and tax management have seen tremendous developments in other territories and developed countries, mostly driven by tax administrations to instil good tax governance through regulated transparency requirements, e.g. requirements to publish your tax policy and/or strategy. South African organisations should consider those territories in defining concepts such as and implementation of transparency. The Forum on Tax Administration (FTA), part of the Organization for Economic Cooperation and Development (OECD), has published a report on General Administrative Principles: Corporate Governance and Tax Risk Management, to guide tax payers and tax administrations on the building blocks of a tax control framework. A tax control framework assists in operationalising the tax reporting process. A framework demonstrates and substantiates that tax function control, good governance, and responsible corporate citizenship.
In a nutshell, the following should form the platform of implementing King IV:
- Clearly defining and communicating the tax strategy
- Tax alignment with the business as a support and not a profit centre
- Respecting the spirit of the law, with tax compliance being the norm
- Knowledge and management of tax risks
- Ensuring that tax controls are monitored and tested
- Providing tax assurance
The BDO tax control framework incorporates these points and provides guidance on King IV™’s tax requirements. It guides clients through the King IV™’ process and the relevant touch points, from policy drafting, to implementation and communication (internally and externally). Organisations need to reconsider their current practices and begin the journey to good corporate governance.
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