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The meeting in January this year took place under the auspices of the Organisation of Economic Cooperation and Development (OECD) Forum on Tax Administration (FTA).
The meeting considered the findings of a study commissioned by the FTA in September 2006 to look at the role tax advisers play in the increasingly complex tax environment, examining the work they undertake in helping their clients comply with the requirements of existing tax codes and complex tax legislation.
It concluded that “the vast majority of tax advisers help their clients to avoid errors and deter them from engaging in unlawful or overly aggressive activities.” However, the study points out that some intermediaries also act as designers and promoters of aggressive tax planning.
The communiqué stated that although the FTA remains concerned over the role of tax intermediaries in this form of tax planning, it recognises that companies determine their own appetite for risk. Its preferred approach is to reduce the demand among corporate taxpayers for complex tax minimisation arrangements.
It proposes that tax authorities do this by developing risk management techniques to differentiate between high and low risk taxpayers so that they can focus time and resources on dealing with the higher risks.
This will require more voluntary disclosure of information by taxpayers which, the FTA suggests, can be encouraged by developing “enhanced relationships” with taxpayers and their tax advisers.
Among other things, the communiqué stated that: “We are acutely aware that national revenue bodies increasingly need to consider international trends and developments and new models used by business when determining their priorities and areas of focus.
“As the corporate world continues to operate more globally and with a workforce ever more internationally mobile, it was timely for us, as heads of revenue bodies, to hear from senior business leaders on significant global trends in business and wealth management. Representing some of the world’s largest companies, they were also able to share with us their ideas on what implications these trends could have for revenue bodies and what they saw as the tax challenges emerging in the interaction between business and government.
“We agreed this dialogue should be an ongoing feature of the Forum and we will continue to encourage taxpayers and tax intermediaries to participate in this dialogue.
“The report of the Study Team, which focuses on large corporate taxpayers and those providing them with tax advice, acknowledges the diverse experiences of each country and therefore the recommendations set out in the report may be more relevant for some countries than others.”
The main conclusions which emerge from the report are the following:
• #Tax intermediaries play a vital role in all our tax systems by helping taxpayers understand and comply with their tax obligations in an increasingly complex world. However, some are also designers and promoters of aggressive tax planning.
• #Revenue bodies are using various approaches (e.g. registration and regulation of tax intermediaries and advance disclosure of aggressive tax schemes) to respond to the involvement of tax intermediaries in aggressive tax planning and they are continually reviewing their strategies to ensure they are robust and appropriate
• #Tax intermediaries may supply aggressive tax planning options to their clients but taxpayers set their own strategies for tax risk management and determine their own appetites for tax risk. Taxpayers are the ones who decide whether to adopt particular planning opportunities and there is significant scope to influence the demand by taxpayers for aggressive tax planning – at least in relation to large corporate taxpayers, which is the main focus of this report.
• #Risk management is an essential tool for revenue bodies to be able to respond quickly to changing circumstances, to ensure that risk treatment strategies are applied to the highest priority areas and overall, to ensure optimal use of a revenue body’s resources.
• #Current, relevant and reliable information is necessary to achieve effective risk management and clearly the most comprehensive source for this information is the taxpayer. Consequently, the report explored how a relationship between revenue bodies and taxpayers based upon early disclosure of potential tax issues and transparency could be developed.
• #Revenue bodies can achieve a more effective and efficient relationship in their dealings with taxpayers and tax intermediaries if their actions are based upon the following attributes:
- #Understanding based on commercial awareness
- #Impartiality
- #Proportionality
- #Openness
- #Responsiveness.
These attributes are fundamental for any revenue body and should underpin all their dealings with taxpayers.
• #If revenue bodies demonstrate these five attributes and have effective risk-management processes in place, large corporate taxpayers will be more likely to engage in a relationship with revenue bodies based on cooperation and trust, described in the report as an “enhanced relationship”.
• #An enhanced relationship offers benefits for revenue bodies as well as taxpayers. The report notes that taxpayers who behave transparently can expect greater certainty and an earlier resolution of tax issues with less extensive audits and lower compliance costs. An enhanced relationship between revenue bodies and tax intermediaries would also yield significant benefits.
• #Revenue bodies should consider the value of applying the enhanced relationship approach against traditional domestic enforcement actions when interacting with tax intermediaries and taxpayers.
The communique went on to state: “We do not believe that the demand for aggressive tax planning will disappear nor that all tax intermediaries will stop offering aggressive tax planning products. Further, some large corporate taxpayers may choose not to enter into the enhanced relationship. It is by continuing to refine our risk management processes to identify these taxpayers and to allocate the necessary level of resources that we can ensure they meet their obligations under the law.
“Large corporate taxpayers, and their advisers, who are unwilling to embrace transparency must learn they cannot expect to prosper at the expense of others.
“During our discussions we also noted that some banks, especially investment banks, play a significant role in developing and implementing aggressive tax planning both for clients and also for banks’ inter-bank and proprietary trading. The Study Team was not able to fully develop its understanding of how this sector operates which made it more difficult to explore the benefits of an enhanced relationship for these taxpayers.
“High-net-worth individuals may also participate in aggressive tax planning but time constraints precluded the Study Team from fully considering the most appropriate response strategies in this context.
“Follow-up studies in both these areas will be undertaken, building on the activities of the working groups of the OECD’s Committee on Fiscal Affairs (CFA).“
On the way forward the meeting stated that they moved forward on other issues referred to in the Seoul Declaration, concluding as follows:
• #They intend to complete this year the project launched in Seoul to enhance the training of tax officials in the area of international tax.
• #They noted the very good progress made to further develop the CFA’s directory of aggressive tax planning and encouraged the continuation of this important work.
• #They also noted the work in progress to explore opportunities for the application of the OECD’s Principles of Corporate Governance to the area of taxation and will continue to share experiences in undertaking dialogue with the Chairs and Boards of listed companies about the approach they take to managing taxation risks.
• # They also stated that they “are convinced that as business becomes more global revenue bodies need to improve international cooperation and increasingly share experiences so we can develop a shared understanding of the impact of globalisation on tax systems. The success of the FTA demonstrates that we are stronger when working together and we will continue to improve our international co-operation.”
