Tax risk management

Framework

Exxaro's ERM framework considers today's uncertain operating environment in effective risk management to achieve our strategic objectives. Embedding risk management in existing processes is important for informed decisions and proactive planning. An effective approach to uncertainty and stakeholder expectations requires focus on TRM.

TRM includes operational risk management techniques, regulatory requirements for transparency and disclosure, a restrictive mindset in tax planning and a focus on good corporate governance. It is a proactive, systematic analysis of possible unwanted events and responses (including controls and treatment plans) rather than a reactive mechanism for detected events.

TRM is part of Exxaro's ERM structure to ensure the tax function's independence.

Tax risk appetite

Although Exxaro views tax planning as a legitimate business lever within the parameters of tax legislation, the group has zero tolerance for evading any tax liability or facilitating the evasion of any tax liability on behalf of a third party. Exxaro has no appetite for transactions that have no valid commercial purpose other than obtaining a tax benefit. Exxaro avoids tax practices that are misaligned with its approach to tax and tax strategy.

Tax risk identification and assessment

Risk can be defined as the chance of an event occurring and impacting objectives. The objective of risk assessment is to identify, analyse and evaluate the impact of events and associated risks on the strategic objectives of the company. Analysing and assessing risks include estimating both the likelihood of events occurring as well as the impact, financial or otherwise, on the group.

Exxaro has identified the key activities that drive tax risk and documented standard operating procedures and controls to mitigate the identified risks.

The five top risks identified by the risk assessment process is captured in the ERM risk assessment and management tool - SAP GRC10.1 (SAP GRC). The SAP GRC allows group tax and the chief risk officer to monitor improvements and treatment plans.

Tax risk reporting

It is important to keep the board, the audit committee, executive management and other internal and external stakeholders abreast of TRM activities.

The following TRM information will be reported:

Type of information	Reporting responsibility	Timing	Format of the report	Forum for discussion and evaluation
The initial formal TRM framework	Group tax manager assisted by TRM champion	Once off	TRM framework	Chief risk officer and chief financial officer
Feedback on the effectiveness of the TRM process	Internal audit department	Ad hoc	Internal audit reports	Audit committee
Feedback on changes to the TRM process	Group tax manager assisted by TRM champion	Significant changes are reported on an ad hoc basis	TRM memorandum	Chief risk officer
Identification of new risks with a moderate impact factor that has a possibility of occurring where controls are in place	Group tax manager and tax risk champion	Annual	As prescribed by the ERM framework	Chief risk officer
Unwanted events with an impact factor greater than 35% (thus a tax impact greater than R10 million – increased to R30 million from 2023)	Group tax manager and tax risk champion	Quarterly	Audit committee report	Executive committee and audit committee

Material tax risk, opportunity and strategic response

• Relevant tax matters are identified by considering:

  	Our business risks and opportunities (IR)
  	Stakeholder management (ESG report) and creating value through stakeholder engagement (IR)

Risk can be defined as the probability of an event happening that will impact your objectives and it can be quantified as the:

• Likelihood of an event occurring and the impact thereof

Inherent risk does not consider any controls (except baseline controls, which are intrinsic to the hazard).

Residual risk is where the likelihood is reduced by controls that address the root cause and/or the trigger/driver of the unwanted event and, where the impact is reduced by controls, minimising those impacts.

Risks are prioritised based on inherent risk, a predetermined risk appetite, the likelihood of the matter arising and its impact on value creation. Exxaro's top four material tax risks are discussed below.

These risks have been rated using the impact scales below which have been approved by the board in Exxaro's TRM policy. The impact scales for tax were specifically reduced from those set in terms of group ERM in line with Exxaro's reduced appetite for tax risks.

Impact scale
Description	Indicator	% risk factor
Catastrophic	Tax impact >R75 million	81 to 100
Major	Tax impact >R50 million to R75 million	61 to 80
Moderate	Tax impact >R10 million to R50 million	36 to 60
Minor	Tax impact >R5 million to R10 million	10 to 35
Insignificant	Tax impact <= R5 million	<10

Likelihood scale
Description	Indicator	% risk factor
Almost certain	Potential to occur every year	81 to 100
Likely	History of occurrence	61 to 80
Possible	Has occurred in the last five years and is expected to occur again	36 to 60
Unlikely	Theoretically possible	10 to 35
Rare	Very unlikely to occur and/or has not occurred to date	<10

The outcome of the ratings was as follows:

Risk trend

1	Understatement of penalties for non-compliance
	Drivers		Strategic performance KPIs
	The scope of "prejudice" defined by the Tax Administration Act is broad with potential for inadvertent errors and non-disclosure		Core operating profit
	Impacts		Treatments
	Financial losses Reputational damage Loss in stakeholder confidence		Group tax manager conducts detailed reviews of SARS submissions Automation of income tax return packs VAT dashboard that indicates potential VAT errors for proactive follow-up Automation of VAT apportionment calculation
	Lines of defence		1 and 2

2	Tax and accounting disclosure differences
	Drivers		Strategic performance KPIs
	International Financial Reporting Standards (IFRS) and tax law disclosures misaligned		Core operating profit
	Impacts		Treatments
	Financial losses Reputational damage Increased audits by SARS Capacity constraints on tax personnel to deal with increased audits rather than focus on value-add initiatives		Detailed reviews of transaction source document IFRS training to understand classifications and disclosures Communication between financial reporting and tax on changes in IFRS
	Lines of defence		1

3	Negative tax adjustments due to inability to supply documentary evidence
	Drivers		Strategic performance KPIs
	Documentary evidence is not available as documents are retained for seven years in line with the Companies Act, 2008 (Act 71 of 2008), as amended, but SARS requests older information		Core operating profit
	Impacts		Treatments
	Financial losses Reputational damage Increased audits by SARS Capacity constraints on tax personnel to deal with increased audits rather than focus on value-add initiatives		Adherence to SARS requirements for tax submissions to ensure return prescription periods do not exceed the seven-year documentation retention period
	Lines of defence		1 and 4

4	Cash flow constraints due to delay in obtaining tax clearance certificates
	Drivers		Strategic performance KPIs
	Delay in obtaining tax clearance certificates results in delayed receipt of income from customers State-owned entities use different systems to check supplier tax status and not the SARS e-filing system		Core operating profit
	Impacts		Treatments
	Financial losses due to increased interest charges Increased burden on treasury function to plan cash flows		A tax compliance dashboard is being developed and implemented to inter alia alert Exxaro to tax status changes on e-filing Maintain good relationships with dedicated SARS relationship officers and large business centre to resolve issues Timely submission of returns to stay compliant
	Lines of defence		1