Tax Governance: A Crucial Element in ESG Strategies

While Environmental and Social aspects of ESG often take centre stage, Governance, particularly in tax matters, plays an equally significant role. Tax governance, the framework that ensures adherence to tax laws while optimising outcomes within legal boundaries, is increasingly becoming a cornerstone of responsible corporate management, aligning seamlessly with ESG principles.

Global drivers increasing the need for Tax Governance

In recent years, global entities have witnessed a surge in regulatory requirements, compelling businesses to reinforce their tax governance structures. In the UK, for instance, the HM Revenue & Customs (HMRC) has implemented stringent governance and reporting obligations, emphasising transparency and fair tax practices. Large businesses are mandated to comply with regulations such as the Senior Accounting Officer (SAO) regime, disclose their Tax Strategy, undergo Business Risk Reviews (BRR+), and address Corporate Criminal Offence (CCO). These measures aim not only to ensure compliance but also to foster trust between businesses, regulators, and stakeholders, echoing the principles of good governance and accountability inherent in ESG frameworks.

What does good Tax Governance look like?

Effective tax governance is more than compliance; it involves the establishment of robust processes and structures that align tax strategies with overarching business objectives. A pivotal tool in this endeavour is the Tax Control Framework (TCF), which is a structured system of internal controls that ensures accuracy, completeness, and compliance of an organisation’s tax-related activities. It serves as a guide for managing tax risks effectively. Guided by the OECD's six essential building blocks, a comprehensive TCF encompasses aspects such as clear documentation of tax strategy, delineation of responsibilities, robust governance mechanisms, regular testing, and assurance processes. Moreover, fostering a culture of compliance and ethical behaviour through employee training and awareness programs is instrumental in embedding tax governance within organisational DNA.

Benefits of Tax Governance

Effective tax governance offers numerous benefits to organisations:

1. Compliance Assurance: Robust tax governance frameworks help organisations comply with tax laws and regulations, reducing the risk of penalties and reputational damage associated with non-compliance.
2. Risk Mitigation: Proactive identification and management of tax risks help organisations navigate complex tax landscapes and avoid potential pitfalls, safeguarding against financial losses and regulatory scrutiny.
3. Stakeholder Confidence: Transparent tax governance practices instil confidence among stakeholders, including investors, customers, and regulatory authorities, fostering trust and credibility in the organisation's tax affairs.
4. Operational Efficiency: Streamlining tax processes and implementing efficient tax governance structures enable organisations to allocate resources effectively, minimise administrative burdens, and focus on core business activities.
5. Future value maximisation: Tax governance is now a standard question on due diligent questionnaires, and a lack of appropriate policies is indicative of other issues and can lead to price chipping.