- Most businesses pursuing aggressive international tax strategies are not breaking the law.
- Businesses undertaking justified trust will need to demonstrate the framework to prove it.
- Businesses are now moving away from manual to automatic systems, which reduce error rates and risk.
A fair international tax system is one of the main areas of focus for the Organisation for Economic Co-Operation and Development (OECD), and its Base Erosion Profit Shifting (BEPS) initiative sits at the heart. With a backing of more than 100 countries, BEPS works to identify businesses that try to avoid tax and benefit from the arbitrage of rules.
Most businesses pursuing aggressive international tax strategies are not breaking the law, though at the same time are also not meeting expectations paying an appropriate amount of tax.
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While the OECD monitors tax systems in different countries, most Australian corporations are underway with actions and strategies to address BEPS initiatives, including the establishment of “justified trust” on a path to total transparency.
Understanding justified trust
The concept of justified trust dates back to 2013, and has significant implications for the way businesses are required to structure finance and tax teams, as well as their approach to data and technology across these areas.
It’s clear that the Australian Tax Office (ATO) has the resources to leverage against companies that don’t engage. Commissioner Chris Jordan (pictured below) detailed in a 2017 hearing that a total of 70 businesses were being reviewed, with the ATO compliance programme reaping A$3.7b over four years.
A tailored approach is designed for each company, and while every programme will be different, justified trust covers the understanding of tax and risk management through knowledge and review. There are significant implications for the way businesses should structure finance and tax teams, and the approach to data and technology across these departments. More collaboration is required in justified trust environments, and organisations must ensure adaptability to a tax landscape based on this mindset.
From December 2015 to 2017, the OECD and ATO have followed a timeline to ensure companies meet tax reporting expectations, resulting in compliance with the national tax office.
Transparency across teams
KPMG’s Tax Management Consultant James Gordon explains the right approach to governance is achieving a position of justified trust, requiring board oversight and accountability starting with a gap analysis while stakeholders develop an action plan.
With businesses moving away from manual to automatic systems, error rates and risk are both lowered. Further, developing a justified trust position will help organisations benchmark and make comparisons.
Establishing the right foundation
With trust predicated on constancy, congruity, reliability, and integrity, the ATO will look to these qualities to justify trust in organisations.
As the ATO pursues a more active compliance programme, businesses undertaking justified trust will need to demonstrate the framework to prove it.
While this sounds simple, the reality is much more complex, and businesses must maintain ongoing focus or risk heavy fines and penalties.
Partnering with the correct technology partner is the first step for Chartered Accountants Australia and New Zealand members in proving a justified trust position.
This article was first published by Thomson Reuters.
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