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 decision making and proactive planning. An effective approach to uncertainty and stakeholder expectations requires focus on TRM.
TRM includes judgemental and operational risk management techniques, regulatory requirements for transparency and disclosure, a balanced mindset for competing pressures, value proposition and reputation 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, which ensures the tax function’s independence.
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 with no valid commercial purpose other than obtaining a tax benefit. Exxaro has a low appetite for arrangements that could be to the detriment of the organisation in the event of external disclosure. Exxaro avoids tax practices that are misaligned with its approach to tax and tax strategy.
Risk can be defined as the chance of an event occurring and impacting on 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 includes estimating the likelihood of events occurring and the impact, financial or otherwise, on the group.
Exxaro has identified the key activities that drive tax risk and documented SOPs and controls to mitigate the identified risks.
The top four risks identified by the risk assessment process are captured in the ERM risk assessment and management tool – SAP GRC10.1 (SAP GRC). The SAP GRC allows group tax and the group manager: risk to monitor improvements and treatment plans.
It is important to keep the board, 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 | Group manager: risk and finance director |
| 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 | Group manager: risk |
| Identification of new risks with a moderate impact factor that is likely to occur where moderate controls are in place | Group tax manager assisted by TRM champion | Annually | As prescribed by the ERM framework | Group manager: risk |
| Unwanted events with an impact factor
greater than 35% (a tax impact greater than R30 million) |
Group tax manager and tax risk champion | Quarterly | Audit committee report | Executive and audit committees |
Relevant tax matters are identified by considering:
Our risks and opportunities (IR)
Our stakeholder-inclusive approach (ESG report) and engaging our stakeholders (IR)
Residual risk occurs when the likelihood of an event is reduced by controls that address the root cause and/or the trigger or driver of the unwanted event and, where the impact is reduced by controls, minimise those impacts.
Inherent risk does not consider any controls except baseline controls, which are intrinsic to the hazard.
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 risks were rated using impact scales as 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. These are outlined below.
| Impact scale | ||
| Description | Indicator | % Risk factor |
| Catastrophic | Tax impact>R75 million | 81 to 100 |
| Major | Tax impact>R50 million to R75 million | 60 to 80 |
| Moderate | Tax impact>R30 million to R50 million | 35 to 60 |
| Minor | Tax impact>R10 million to R30 million | 10 to 35 |
| Insignificant | Tax impact≤R10 million | <10 |
| Likelihood scale | ||
| Description | Indicator | % Risk factor |
| Almost certain | Potential to occur annually | 81 to 100 |
| Likely | History of occurrence | 60 to 80 |
| Possible | Has occurred in the past five years and is expected to occur again | 35 to 60 |
| Unlikely | Theoretically possible | 10 to 35 |
| Rare | Highly unlikely to occur or has not occurred to date | <10 |
The outcome of the ratings was as follows:
| Ranking | Risk name | Trend |
|
1 |
Tax and accounting disclosure differences |  |
|
2 |
Understatement penalties resulting from any prejudice to SARS | |
|
3 |
Document retention | |
|
4 |
Cash flow constraints due to adverse tax compliance status | |
|
The residual risk score decreased from the previous year |
Exxaro’s top four material tax risks are discussed below.
IR