Three sides to the Tax Corporate Governance (TCG) coin

What do hot topics, such as the Special Voluntary Disclosure Programme (SVDP), e-invoicing, Pillar 2 and Transfer Pricing Documentation (TPD), have in common? The common thread running through these conversations is trust and transparency in how organisations manage tax risk and compliance obligations. As we approach the conclusion of the pilot period for the Tax Corporate Governance (TCG) programme on 30 June 2024, we delve into observations gathered during this phase.

Cooperative compliance has long been embedded in broader organisational policies, and in recent years, the net has expanded to include tax. To promote more  open communication between parties, there needs to be more disclosure (based on guidance and confirmations that information is consumed without prejudice) from reliable sources. All roads lead back to integrity, availability and accuracy of data.  

We laud the Malaysian Inland Revenue Board (IRB) for adopting a holistic approach to TCG, explicitly making tax part of the boardroom agenda and expanding leadership accountability for tax risk and compliance. This helps bring tax requirements and controls into business processes and policies, facilitating a more conducive ecosystem to manage tax risk and compliance obligations.

Since the pilot period, which commenced in June 2022, an increasing number of companies have started discussions with internal and external stakeholders, assessed their tax functions and participated in the programme. Through a number of roundtables and discussions with companies, we note that the needle has moved: 

1. Higher awareness: There is growing recognition of how the TCG framework can support ESG policies and other corporate governance practices. This includes a deeper understanding of frameworks such as the Global Reporting Initiative (GRI) 207, FTSE4Good and other sustainability indices. A strong tax governance framework is now a significant consideration for various internal stakeholders, including boards of directors (BODs) and corporate reporting teams, to cultivate a culture of accountability and transparency in tax affairs. 

2. Consideration for participation: Many companies are favourably considering participation in the TCG programme in the next one to two years, reflecting the framework’s objective to encourage proactive tax compliance and transparent reporting. 

3. Increased assessment of tax functions: Companies have increased efforts to assess the levels of maturity of their tax functions (as covered in our earlier blog) and how TCG is embedded in their organisation’s overall risk and corporate governance.  

Despite other compliance obligations during this period, many companies are looking into how to qualify for this status. There is a growing trend for having readily available data for business case scenarios, reputational risk management—as covered in our earlier article as well as conducting risk-based reviews of information submitted. It is no longer possible for manual interventions to meet last-mile reporting requirements, including tax compliance.  

As we gear up for the incoming mandatory e-invoicing, we note that companies are also leveraging their e-invoicing journeys to revisit their data profiles and business processes, ensuring that tax controls are embedded in line with their policies. ‘Killing two birds with one stone’, has proven to be more effective and sustainable, particularly as it involves the same stakeholders, managing ‘initiative fatigue’ and enhancing efficiencies in time and effort through the alignment of business processes.

A healthy number of volunteers (apart from those invited to join the programme) came forward. Key drivers included: 

1. Cooperative compliance adoption by the company and tax is viewed to be a subset of overall corporate governance.

2. No tax audit and a dedicated officer: This enables open communication to discuss and manage tax requirements/ obligations (as outlined in our earlier blog).

3. Alignment with ESG policies: The programme aligns with ESG policies, supporting reputation management, meeting the expectations of business partners such as supply chain partners and other stakeholders, as well as catering to the appetite for sustainable financing.

We noted some common lessons from each stakeholders’ perspective—taxpayer, the IRB and independent assessor. 

1. Collaboration and open lines of communication are key to ensuring alignment between stakeholders. Both IRB and businesses need to manage their stakeholders effectively, ensuring clarity about the purpose, approach and benefits of being part of the programme. Working together with regular engagement enabled effective management of their stakeholders. 

2. All parties must understand that it will take time and exposure to realign their approach of reviewing documents related to tax controls and governance. This involves a mindset shift from IRB being tax auditors in this programme to partners in tax compliance. For instance, engaging stakeholders at the onset about the purpose, review timeline and the approach adopted was key to a smooth and efficient review.

3. Clarity of expectations are important to facilitate a smooth application and review process. This involves regular engagement to ensure relevant documents are provided and objectives are aligned. It is important for a baseline to be determined to measure progress in managing tax risk and compliance. Maturity levels are based on best practices and vary between organisations, so it is key for the IRB to assess whether an organisation embeds and continues to enhance its tax controls and governance. 

These observations have enabled updates refining the guidelines (dated 23 February 2024, released 5 March 2024), which provides more detail for companies considering this programme. For instance, in addition to the IRB’s six principles, the refined guidelines expand on how the principles are expected to be adopted in an organisation’s TCG, aligning with frameworks such as the GRI 207 and the Committee of Sponsoring Organisations of the Treadway Commission (COSO). This will help companies plan and assess their readiness before deciding when to volunteer to participate.  

TCG is here to stay, and this is in line with the growing trend of transparency and disclosures (from Pillar 2 to the recent enforcement of beneficial ownership reporting in Malaysia). However, before deciding when to jump aboard the TCG bandwagon, you should consider the following:

1. Current corporate governance policies and initiatives in your organisation to identify any ongoing activities that can be leveraged on (e.g. e-invoicing, ERP migration/ upgrade, digital transformation, participation in the Public-Listed Companies Transformation programme (PLCT) programme  and disclosures).

2. What is already in place for tax risk and compliance obligations to determine if adequate and if there is an up-to-date tax strategy in place.

3. An awareness and expectations of your stakeholders to strategise how to kickstart the conversation.

We will delve into perspectives of each stakeholder, i.e. the taxpayer and IRB in our upcoming blogs, overlaid with our independent assessor’s lens of working with them. These will cover the lessons learnt from the pilot programme, and more importantly, tips for those who plan to embark on this journey.

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