Tax Corporate Governance (TCG) - Is it here to stay?

Kudos to the seven companies that were awarded the Tax Corporate Governance (TCG) status on 19 June 2024. Representing a diverse mix of local and international organisations, their participation signals a significant shift toward enhanced tax governance, transparency and cooperative compliance in Malaysia. This milestone marks the beginning of a new chapter in how businesses engage with tax practices and regulatory standards. 

Taxpayers may be wondering, 'What's next on the TCG agenda?' With the pilot phase now complete, phase 2 has just been launched on 1 July 2024 with the following key updates (based on learnings from the pilot period):

• Target audience: The pilot period of the programme focused on a select number of companies across different industries (i.e., banking, manufacturing), with a mix of companies being invited and voluntarily participating. For Phase 2, it will be centred on encouraging more companies to volunteer to participate, through continued guidance and open lines of communication with the Inland Revenue Board of Malaysia (IRBM) (enhanced by the good experience and progress of the pilot companies).

• Tax requirements: Based on the updated guidelines (dated 23 February 2024, released 5 March 2024), companies that would like to participate are encouraged to have an established tax control framework in place (i.e., with documented tax processes, tax controls and tax risk management measures) and a turnover of at least RM100 million. 

Cooperative compliance is about building trust with disclosures that can be substantiated (if required). It is a bilateral relationship between tax authorities and taxpayers based on trust and cooperation, enabling the highest level of voluntary tax compliance and certainty. The building blocks for an inclusive ecosystem in an organisation that supports the requirements of all stakeholders, including tax, include: 

1. Controls embedded to ensure that data is also relevant, timely and accurate for tax reporting compliance obligations.
2. Tax friendly data for ease of tax analysis and reporting.
3. Risk escalation and matrices aligned to support data governance and processes that are inclusive of tax requirements.

Driven by rapid changes in business and regulatory landscapes, we observe similarities in the way countries approach these building blocks and some key trends are outlined below:

In this same vein and in accordance with the global tax governance trends and practices adopted by other tax authorities, the IRBM has initiated measures to facilitate cooperative compliance. These include the TCG programme, the Special Voluntary Disclosure Programme (SVDP) and e-Invoicing amongst other initiatives, to support transparency and continue fostering a collaborative relationship with taxpayers in Malaysia. These efforts also support the overall push for more disclosure under sustainable best practices.

In recent years, there has been a steady push from other external stakeholders, such as business partners, customers, investors alike for more governance and transparency. These measures are not only represented within cooperative compliance focused initiatives from the tax authorities such as the TCG programme, but have also been included within the ambit of sustainability and ESG (outlined above).

This has resulted in companies looking at how they can effectively oversee and ensure compliance in their tax operations across different jurisdictions. This effort is driven by the need to meet both internal and external stakeholders’ expectations and to maintain robust and transparent tax practices. This further strengthens the case for robust tax governance practices, in line with the IRBM’s six key TCG principles. These include having an overarching tax strategy (that can be localised accordingly), which is operationalised through documented tax processes and an effective tax risk escalation process that is aligned to the enterprise-wide risk management framework. TCG may not be mandatory at present, however we note that companies that are considering the programme are also driven to do so, due to these other external factors.

The IRBM envisions and has taken steps to facilitate a culture of continuous growth of cooperative compliance in Malaysia. This will be spearheaded by the pilot companies (followed by the renewal of their TCG status, after the three year period), with other companies being encouraged to embark in this journey of tax governance and transparency. In supporting this vision, the IRBM has been focusing on the following key priorities interspersed from the introduction, development and implementation of the TCG programme:

Based on the tax authorities perspective and support from external drivers and needs of the taxpayers, we can see the TCG programme as a subset of the wider focus of cooperative compliance that is here to stay. 

In that same vein, we can expect to see further refinements and updates to this programme in line with future tax legislative changes and movements in the tax governance landscape as a whole. Whilst still voluntary at this juncture, the TCG programme is a key indicator of future expectations from a tax governance perspective, and it will be beneficial to start thinking about your next steps and preparing accordingly. Review your current position by considering the following:

1. Does your current enterprise-wide corporate governance framework include tax?

2. Would you be able to support disclosures on how tax is being managed in your organisation (in Malaysia or other countries of operation)?

3. Do your business partners or customers make disclosures on their tax management practices as part of GRI or ESG reporting?

Tax governance continues to move to the forefront of the global compliance and sustainability agenda. We will delve into the correlations and trends between TCG and other cooperative compliance focus areas such as e-Invoicing in our next blog.

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