1 November 2009

King III and Tax

The King Code of Governance for South Africa 2009 (the Code) was released on 1 September 2009. In light of this, directors need to be aware of what their responsibilities are in relation to the tax affairs of the companies they lead.

Over the past number of years, there has been increased attention to tax risk management in the context of corporate governance and especially after the introduction of the Sarbanes-Oxley Act in the United States. In South Africa, the Code highlights the company directors responsibilities regarding taxes payable by the company.

The Code will become operative on 1 March 2010 and will apply to all companies. The Code, as with the previous King codes, operates on the principle of "comply or explain". In other words, if directors do not comply with the principles they need to be in a position to explain why they have deviated. Their actions will be evaluated against the principles laid out in the Code.

The Code and compliance with tax laws

Compliance with tax laws poses a unique challenge to companies and their directors.

Compliance with laws and regulations, which includes tax laws, is dealt with in part 6 of the Code of governance principles. Under part 6, companies must comply with laws and the board and each individual director must have a working understanding of the effect of the applicable laws, rules and standards on the company and its business. Compliance should form part of the risk management process and the board should ensure that the company implements an effective compliance framework and processes.

Complexity

Tax is usually a significant cost for all businesses and is often a material item in the financial statements. Tax laws have become increasingly complex as the business and regulatory environment in which they operate has become more complex. Staying abreast of the latest tax developments has become a challenge, even for experienced tax practitioners, with an ever increasing volume of legislative changes, interpretation notes, court decisions and rulings. Understandably, compliance with tax laws is strictly enforced and the South African Revenue Service has wide powers and resources at its disposal for this purpose.

All of a business' activities including operating, investing and financing activities are affected by tax. Personnel at all levels of the organisation will, to some extent, need to understand the tax implications of their specific functions. IT systems also have a significant impact, especially in areas such as VAT.

All of these factors need to be kept in mind when the board performs its risk assessment and implements its compliance framework and processes.

The challenge

The challenge for companies and their directors is formulating and establishing a defendable framework and processes in relation to an area as complex as tax, without unnecessary complexity and expense.

Justin Liebenberg,
Director, Regional Practice Head: Tax

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