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Why we need to govern well: Speech to the International CFO Forum: Sydney: 19 October 2006



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Speech by Michael D’Ascenzo, Commissioner of Taxation, to the International CFO Forum - Sydney Australia, 19 October 2006.

In times of chaos, change, adversity, and even plenty - good governance should hold the centre, so as to hold things together. But the concept of ‘governance’ is not new. It is as old as human civilisation itself. Put simply, ‘governance’ means: the process of decision-making and the process by which decisions are implemented (or not implemented). And hence good governance is equally as relevant and important to the Tax Office, as it is to you.

In recent times, there has been a paradigm shift in the way that corporate governance, compliance, and business ethics are approached. It is a shift that continues to be driven by demanding performance expectations, increasing stakeholder demands and growing public scrutiny after some spectacular failures around the globe. Similarly, I’ve been advocating a

paradigm shift within the Tax Office, to better meet the expectations of the community - we also are striving to be open, collaborative, accountable and responsive.

Today I am talking about governance and tax, both from an administrative perspective, and also about what it might mean for you as chief finance officers of companies with global outlooks and competitive dispositions.

My starting point is that we all have a stake in the efficiency of Australia’s tax system, and of its administration. The reality is that the tax system belongs to all of us and we need to work together in its fair administration and effective management of the tax system. For example, it is important that we make the tax system as easy as possible to deal with1, that we reduce uncertainty and compliance costs2, and that we promote a level playing field for business.

A key relationship in the overall health of the system and a key contributor to the maintenance of high levels voluntary compliance is the relationship between large business and the Tax Office.

The outcomes of our recent Large Business Symposium3 have increased my optimism about this relationship. Discussion at the symposium was very constructive and the benefits of a more open working relationship will be welcomed by all parties. As a further sign of our healthy relationship, we recently signed our first Forward Compliance Arrangement with the ANZ, with another in train for November.

Our governance

We have a very comprehensive and well developed governance framework in the Tax Office, which embeds the ANAO’s public sector governance principles of leadership, accountability, efficiency, transparency, stewardship and integrity (as summarised by Diagram 1).

Diagram 1. Tax Office Governance Framework

Why we need to govern well

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Details of our governance framework are available on our website, but some of the key processes and products include the following:

z A Strategic Statement which provides a clear sense of direction and a framework for Tax Office activities over the next three years. z Our Outcome and Outputs Framework details our commitment to deliver goods and services to the government. It is also used as the framework for planning, budgeting and reporting performance within the Tax Office and

externally to government. z The ATO Plan which comprises the six sub-plans, translates our Outcome and Outputs Framework commitments into specific priorities and deliverables. Business and service line plans and branch plans, as well as individual

performance and development agreements underpin the ATO Plan. z Our plans are informed by a robust risk management process and health of the tax system analysis (see below) z Our Agency Agreements and Australian Workplace Agreements set out leadership requirements and development expectations. A range of communication mechanisms are also used to educate staff throughout the organisation

about the importance, and key elements, of good governance - these include SES/EL2 dialogue days, seminars and online learning programs, and the Employee Handbook. z Practice statements outline internal policies which underpin efficient, effective and ethical stewardship of powers and resources. z Financial management procedures are implemented to ensure proper use of money, public property and other

resources: { We issue Chief Executive Instructions to guide officials delegated or appointed to undertake financial tasks under the Financial Management and Accountability Act 1997. { Financial assurance processes include implementation of financial controls, and the preparation of

Certificates of Compliance in relation to these controls. { Business and service line managers assure me of Tax Office conformance with internal and external conformance obligations through Certificates of Assurance. z The Integrity Framework describes the arrangements that help us reach our goal of being an integrity-based

culture. The framework explains the behaviours, values, and ethics that underpin our approach, as well as key integrity processes and responsibilities. Integrity assurance arrangements include the appointment of an external Integrity Advisor. z We have an active Audit Committee and internal audit program, an integrity advisory committee and fraud control plans. z We also work cooperatively with a range of external review bodies, including the:

{ Australian National Audit Office. { Office of the Privacy Commissioner. { Commonwealth Ombudsman. { Inspector General of Taxation. z Convening consultative forums, which give a broad range of stakeholders a voice in how the revenue system is

administered. The forums include professional advisory committees, liaison groups, expert panels and industry partnerships.

Over recent years we have built, and are maintaining, community trust by increasing our administrative openness. I’ve

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been emphasising the core values of fairness and professionalism; transparency and accountability; and consultation, collaboration and co-design.

In making our tax system work fairly and effectively, we have found that we achieve the best outcomes by pursuing these values.

In this context I am publicly releasing today, for the first time, the complete results of our community and business perceptions surveys, and our health of the system assessment.

We conduct the community and business perceptions surveys to measure our performance and guide our future initiatives in providing the best possible tax administration. It’s important that we maintain our focus on taxpayers’ measures of our performance. After all, it’s the community’s tax system we’re administering.

The Business Perceptions Survey

The Business Perceptions Survey of 1500 businesses captures the views of business across the micro, small and medium enterprise segments.

The full report is available on our website, but some of the key results from our latest wave include the following:

Diagram 2. Agreement with the statement ‘Overall I think the Tax Office is doing a good job’

We have seen steady improvement over time, in business ratings of our performance overall.

Table 3. Image measures

W1 W2 W3 W4 W5 W6 W7 W8 W9 Sig Change

Tax Office image

Attitudes towards the Tax Office’s administration of the tax system (% agree)

Tax Office administers tax system fairly 70 73 64 70 71 73 64 73 72

Hearing more about what Tax Office is doing to businesses who don’t do the right thing

59 48 48 49 55 53 48 49 52

Attitudes to fairness of the Tax Office (% agree)

The Tax Office treats 85 85 82 84 84 88 85 89 88

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Most measures of Tax Office image remained steady this wave, consolidating the positive gains made in recent waves.

On a positive note, there was a significant decline in agreement with the statement ‘I feel uncomfortable asking the Tax Office when I need help’ this wave (26%, down from 30% in Wave 8).

Diagram 4. Attitudes to compliance effort

Attitudes towards the effort required for compliance remained fairly stable this wave, consolidating recent slight gains in these measures.

Diagram 5. Ease of meeting all tax obligations

me in a fairs and impartial way

Attitudes to Tax Office’s receptiveness (% agree)

Tax Office values feedback from businesses

47 51 45 46 49 45 46 55 53

Tax Office acts on business’ suggestions to improve

35 36 31 33 34 32 34 43 39

Attitude to Tax Office’s demeanour (% agree)

I feel uncomfortable asking the Tax Office when I need help

23 29 31 27 31 34 25 30 26

Tax Office is arrogant 25 25 26 21 23 - 20 21 16

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There was a statistically significant fall in the proportion of business operators describing the process as hard (18%, down from 26% in Wave 8), balanced by a significant rise in the proportion describing the process as neither easy nor hard (32%, compared to 27% in Wave 8). The proportion reporting the process as easy remained relatively stable at 48%.

The Community Perceptions Survey

The Community Perceptions Survey monitors community attitudes to the Tax Office, taxes and the revenue system.

The Community Perceptions Survey has some insightful things to say about attitudes to the tax system. For example, those people who have actually dealt with us directly, rather than through tax intermediaries, have a more favourable attitude towards us.

Again, the full report from this year’s survey is available on our website. One of the key findings is that most respondents were positive about the overall performance of the Tax Office, with 73% of respondents agreeing that ‘overall, I think the Tax Office is doing a good job’. This is a major improvement in positive perceptions on this measure compared to all other time periods (see Diagram 6).

Diagram 6. Overall the Tax Office is doing a good job?

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We are generally seen by the community to be active in the area of enforcement of compliance although there is a level of perceived inequity in relation to the ability of large companies or high-income earners to avoid paying their fair share of tax. This finding confirms that the perceptions about the compliance behaviour of large business also impacts on how the wider community views the fairness and integrity of the tax system.

Health of the System Assessment

We have developed a framework as part of our governance arrangements that allows an annual ‘health of the system assessment.’ This is based on our effectiveness to meet our corporate objectives, and the management of existing and emerging risks. Importantly however, it also looks at stakeholder engagement, as well as our capabilities and the capabilities of others, including the various segments of the taxpaying community and key intermediaries. However, it is based on the current legislative framework and does not comment on the existing policy parameters. We are releasing the diagnosis for the first time, and I’m pleased to report that overall we are in good health.

Our record on tax administration and our engagement with stakeholders over the past three years have shown both steady improvement and solid achievement. However, there are aspects of the system where we need to continue improving. We need to work with taxpayers, agents and other government agencies to find ways to reduce the administrative burden of compliance. We also need to prepare our workforce for new ways of working with each other and with our stakeholders.

Underlying our assessments is the need for continuous improvement. There is no room in our organisation for complacency. We are trying to anticipate and develop responses to emerging risks and issues in a constantly-changing operating and increasingly global environment.

Through these system assessments, we not only analyse and assess our risks but also our administrative capabilities, stakeholder engagement, threats, sustainability and strategies.

Our 2005-06 Annual Report which was tabled in Parliament yesterday contains an overview of the 2006 health of the system assessment.

Risk Management

Our ‘health of the system assessment’ is part of our integrated cycle of risk, planning, budgeting and reporting as shown by Diagram 7.

Diagram 7. Tax Office integrated cycle of risk, planning, budgeting and reporting

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Through these processes we identify risks and develop appropriate strategies for their management. This would in essence be similar to corporate processes for managing material risks.

OECD and taxing issues in governance

Last month, representatives of more than 30 countries committed to expanding the OECD 2004 Corporate Governance Guidelines. This is expected to strengthen the links between corporate tax arrangements and good governance.

Corporate governance was one of four areas OECD representatives agreed to work on together on to improve tax administration and address the significant problem of international non-compliance with national tax requirements.

Representatives expressed significant and collective concerns about corporate governance, particularly the role played by tax advisors and investment banks in relation to non-compliance, and the promotion of unacceptable tax minimisation arrangements.

Concern was also expressed about the increased capital flows into private equity funds and the issues this may raise for revenue collection bodies.

It is salient that the OECD is seeking to be more expansive and proactive on this issue. Previously, the thrust of the dialogue around tax and governance has been largely driven by the incidence of corporate collapses in major economies over the past few years, and promoters aggressively marketing tax shelters to unsuspecting clients.

The OECD is confident that the recent spate of corporate scandals, the success of a number of tax administrations in challenging aggressive tax schemes and the general change in attitudes towards tax planning, will all combine to produce a greater awareness in the boardroom of the importance of tax issues.

In good conscience

A United States Security and Exchange (SEC) Commissioner has noted in borrowing from ‘Henry David Thoreau that "a corporation of conscientious men is a corporation with a conscience.”4 Put bluntly, those who act on behalf of a corporation - its officers, directors and employees - must be its conscience.’5 This view tends to reflect the attitudes that have been expressed over a number of years in our community surveys.

The SEC Commissioner goes on to say, ‘Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets. In a recent study, for example, three-quarters of the institutional investors surveyed6 were willing to pay a substantial premium for shares of companies that adopted good governance practices, and conversely more than 60 per cent might avoid investing in individual companies based on governance concerns.’7

This view supports growing evidence that well governed companies can provide significantly better returns to shareholders.

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Large business, governance and the Tax Office

As chief financial officers, you have a key role in your companies as advisors on tax arrangements and corporate governance.

Most large businesses have appropriate corporate governance processes in place. They ensure that there is appropriate oversight of systems to provide the correct level of integrity and risk assurance relative to the importance of the tax issues involved.

We know that most large businesses seek to:

z closely manage and scrutinise material issues z make a reasonable assessment of compliance risks, and z properly apply the law.

In August, we released our new Strategic Statement. The statement emphasises our main role as one of optimising voluntary compliance. This is not to ignore our statutory obligations in relation to revenue collection. It is a re-alignment consistent with our strategy to deliver the very best tax administration.

We’re moving away from an adversarial ‘cat and mouse’ relationship to one that is more constructive and collaborative. The success of the recent Large Business Symposium is a good example of this. The announcement of the first forward compliance arrangement is another.

We take our commitment to help make it easy for business to comply with their tax obligations very seriously.

As a large business, entering into a forward compliance arrangement, you can reduce your risk of an audit by demonstrating reasonable care, access remissions to administrative penalties (where applicable) and interest charges in the event of tax shortfalls. You also get have a level of confidence that your tax risk has been effectively mitigated.

These arrangements include an initial health check of the corporate’s systems, governance framework and controls to effectively manage tax risk. It requires ongoing disclosure by the corporate to provide an environment less likely to produce compliance surprises.

We expect to sign a second forward compliance arrangement with another large corporate business in the next month.

I am certainly not a lone federal officer voicing concerns about governance. ASIC Chairman, Jeffrey Lucy recently said: ‘ASIC is investigating a number of allegations in relation to alleged breaches of directors’ duties and corporate governance issues. The matter is of considerable significance to us because it highlights the need to have proper internal governance controls in place, as well as appropriate external audit controls.’8

It has become clear to us in the Tax Office that the promotion of good governance and, by implication, responsible corporate tax behaviour should be the cornerstone of our tax compliance strategy for large business. We are, of course, not forgetting our responsibility to provide better and more responsive service, and our efforts to ensure a level playing field.

For example, we are committed to reducing audit timeframes to two years through more efficient processes, including better communication and agreed project plans. In order to facilitate a good working relationship we recently released our ‘Large business and tax compliance’ booklet which should help chief executive officers better understand our processes and how we are seeking to foster a good relationship with large business. I commend the booklet to you.

It is also clear to us through our community perception surveys that many Australians want assurance that large business continues paying its fair share of tax9.

I believe good tax administration is founded on trust between sections of the community and the Tax Office. In Australia, we have a system of self-assessment. Therefore if one group believe that another group is getting away with things, it undermines confidence in the system and leads to lower levels of voluntary compliance.

We want to work with you, within the limits of our brief, to raise community confidence in the Australian tax system.

As you know, the contribution to tax revenue by large business is significant. The ‘Large business and tax compliance’ booklet sought to put the record straight by concluding that “there are generally high levels of voluntary compliance with the tax laws by large business in Australia”.

However, we also acknowledge that the dynamic and globalised nature of large business enterprises, and the value, volume and complexity of their transactions, creates challenges for both your own governance and potential risks for tax

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compliance. We also recognise that the balance between legitimately minimising costs (and associated tax planning) and pushing the interpretative envelope beyond its proper limits is sometimes a fine one to judge.

For the large business taxpayer, non-compliance carries risks to their financial situation in terms of the cost of dealing with intensive auditing, civil litigation and paying interest and penalties - and to their reputation for competent governance and management.

We, at the Tax Office, get the impression from our consultation and industry liaison, that large business in Australia is paying more attention to tax risk in their governance processes.

The CFO’s role in tax compliance

In your role as the key risk advisor in your organisation, the Tax Office suggests that, in the interest of good governance, you may want your directors and senior management to:

z have a broad understanding, at least from a financial and business perspective, of the major tax issues that arise in the normal ongoing operations of the business z be able to identify material risks in order to be confident that corporate processes promote tax compliance z consider, at least from a financial and business perspective, the tax implications of major transactions, business

structures and strategies z oversee the overall amounts of different taxes paid by the business and be aware of the reasons where there are material changes in these amounts z understand the trends for key indicators such as effective tax rates, and the extent to which dividends can or

cannot be paid and (if desired) franked (and reasons for these outcomes) z be aware of the relationship the company has with the Tax Office, and the level of our scrutiny of its business

affairs10, and z understand the stance the business and its advisors adopt in relation to tax compliance and tax planning.

All the above factors have a bearing on whether the business has a high, moderate or low tax risk.

I am writing to the CEOs and boards of the ASX200 to reiterate the key commonsense approaches to governance and tax suggested in the ‘Large business and tax compliance’ booklet, and hope to engage further with large business on this topic.

The way forward

At a national level, the quality of government depends on the extent to which it improves in a sustainable way the wellbeing of its residents. “Political scientists have tended to give pride of place to governmental systems that embody democratic principles and practices supported by the rule of law. Economists have tended to evaluate systems of government, and institutions in general, in terms of their perceived ability to foster economic growth (sometimes with regard also for the distribution of the resulting goods and services). We employ survey measures of life satisfaction as though they were direct measures of utility, and use them to evaluate alternative features and forms of government”11. Against these benchmarks, Australia generally does well.

Similarly for large corporates, the goal is to add sustainable value to your stakeholders. Increasingly, good business sense is linking good governance and corporate responsibility with competitive advantage.

For example, Dave Hartnett from HM Revenue and Customs (UK) recently compared statements of corporate responsibility from what he termed the unimaginative to the promising and the way forward:

...the unimaginative (but necessary):

“All documents prepared by any group company must be accurate and complete.”

...the promising and way forward:

“Our company operates according to certain key business values: A commitment to complying with the spirit and letter of all laws and regulations wherever we conduct our business.”

“Objective - minimising the tax burden...in a manner consistent with commercial objectives, legal obligations and ethical standards.

Artificial transactions whose sole purpose is to reduce tax should not be undertaken, particularly those that have no economic effect other than tax savings...”12

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According to a CFO of a multi-national enterprise, “Overly aggressive tax policies create a tension between a corporate’s obligations to governments and shareholders and force corporates to assess the reputational impact of any dispute...with a tax administration”13.

Conclusion

I chose the theme, ‘Why we need to govern well’, because I firmly believe it is the community’s tax system, and one in which we are all governors. As I said at the beginning of this speech, good governance holds things together in adversity and plenty.

Australia’s tax system belongs to all those who live and do business in Australia. Given the significance of large business to the efficient and effective operation of Australia’s tax system, and the inherent uncertainty in the application of the tax law to complex arrangements, it is critical that we develop a close and constructive working relationship with large business.

I look forward to working with business to build an approach of cooperative compliance and good governance that allows you to add value to your stakeholders and to Australia.

Thank you.

1 The Honourable Peter Costello MP, Federal Treasurer, `Tax Reform, not a new tax, a new tax system', 1998, p.18.

2 Ibid, p.26.

3 Held in Sydney on 30 August 2006. For a short synopsis refer to our media release.

4 Henry David Thoreau, 'Civil Disobedience,' in The Writings of Henry David Thoreau, vol. 4, p. 358 (Houghton Mifflin 1906).

5 SEC, Commissioner Speech, `Sarbanes-Oxley and the Idea of "Good" Governance', Cynthia A. Glassman, American Society of Corporate Secretaries, 2002.

6 McKinsey & Company, Global Investor Opinion Survey: Key Findings (July 2002).

7 SEC, Commissioner Speech, `Sarbanes-Oxley and the Idea of "Good" Governance', Cynthia A. Glassman, American Society of Corporate Secretaries, 2002.

8 ASIC: `Facing Regulatory Challenges in 2006', Jeffrey Lucy AM, The West Australian Events Program: Leadership Matters, l 2006, Perth

9 Millward Brown, Community Perceptions Survey, 2006

10 Note the opportunity for `relationship visits' with senior Tax Office representatives, as outlined in the `Large business and tax compliance' booklet, p.68 and p.34.

11 John F. Helliwell and Haifang Huang, `How's your Government? International Evidence Linking Good Government and Well-Being', National Bureau of Economic Research, Working Paper 11988, January 2006, http://www.nber.org/papers/w11988.

12 Dave Hartnett, `Corporate Responsibility: The Tax Dimension', OECD Forum on Tax Administration, Seoul, September 2006.

13 Ibid, p.2.

Last Modified: Friday, 20 October 2006

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