This document is a summary of a longer paper, also published in November 2008, in which KPMG’s Tax Business School
® in the UK summarizes each chapter of the OECD report and suggests topics for discussion, in order to encourage continued dialogue between taxpayers, tax intermediaries and revenue authorities. That document also proposes a means of measuring progress towards the goals set out in the report, in the hope of encouraging action as well as dialogue (see section 2 of this paper).
Access the longer paper published by KPMG International or the full text of the OECD report:
The study that gave rise to the report commenced in September 2006, shortly after the third meeting of the OECD’s Forum on Tax Administration (FTA) in Seoul, Korea. It is one of the outputs of the ‘Seoul Declaration’ which was developed to address the FTA’s concerns about ‘non-compliance with tax laws in an international context’; in particular, ‘concerns in relation to the spread of aggressive tax planning marketed by some tax intermediaries’.
The mandate of the OECD study team was to ‘improve understanding of the role tax intermediaries play in the operation of tax systems and specifically to understand their role in 'unacceptable tax minimization arrangements.’ In addition, the team was ‘to identify strategies for strengthening the relationship between tax intermediaries and revenue bodies’. However, the study team concluded that the role of tax intermediaries in the ‘supply side’ of aggressive tax planning could not be understood or addressed without considering the role of large corporate taxpayers, who represent the ‘demand side’ of such tax planning. Despite its title, therefore, the report considers the tripartite relationship between tax authorities, large corporate taxpayers and tax intermediaries.
The study team also determined that it would not be ‘appropriate or feasible’ to attempt to reach a definition of ‘unacceptable tax minimization arrangements’. Instead it identified two areas of concern which together it referred to as ‘aggressive tax planning’.
These were:
- ‘Planning involving a tax position that is tenable but has unintended and unexpected tax revenue consequences.’ The report refers to the ‘misuse’ of the legislation to achieve results that were not foreseen by the legislators.
- ‘Taking a tax position that is favorable to the taxpayer without openly disclosing that there is uncertainty whether significant matters in the tax return accord with the law.’
The report suggests that in many countries the relationship between large corporate taxpayers and revenue bodies has tended to be more confrontational than collaborative, although in recent years more collaborative approaches have developed in some jurisdictions. It indicates that taxpayers place a high value on the ability to finalize their tax positions quickly, particularly if this can be done in ‘real time’. This makes earnings and cash flows more predictable, allowing more accurate assessment and reporting of the value of the business. However, taxes are still viewed as a cost to be managed, with pressure on tax executives to control the effective tax rate and other tax-related measures of shareholder value.
The report recognizes that ‘the overall impact of tax intermediaries on the risks presented by their clients, through the tax compliance advice they provide as well as broader business and accounting advice is very positive’. Nevertheless, revenue bodies remain concerned about the involvement of some tax intermediaries in aggressive tax planning, and the report identifies various forms that this involvement may take: designing and promoting such schemes; advising on schemes devised by others; and advising on taxpayers’ legal duties once such schemes have been implemented, including disclosure obligations. The report considers various strategies used by revenue bodies to respond to such advisory activities.
The report indicates that risk management is an essential tool for revenue bodies, and suggests that this consists of two elements: ‘risk assessment’, which involves revenue bodies in identifying, analyzing and prioritizing the risks that might otherwise prevent them from carrying out their function; and ‘risk-led resource allocation’, which involves using such risk assessment to make informed decisions on which risks to respond to and what will constitute appropriate responses. Such an approach is seen as benefiting ‘low-risk’ taxpayers as well as tax authorities. Two key elements of risk assessment are identified: understanding the taxpayer; and understanding the tax issue.
Revenue bodies can only manage risk effectively if they have current, relevant and reliable information, obtained either under statutory powers or on a voluntary basis. The report considers the relative merits of various means by which information can be obtained from large corporate taxpayers and tax intermediaries, in particular in relation to aggressive tax planning: rulings systems; statutory advance disclosure of tax avoidance transactions; international cooperation between tax authorities; and external sources such as press reports and company websites. It makes the point that the existence of an effective system for gathering information may act as a deterrent to aggressive tax planning, irrespective of the information gathered in particular cases, because there is then an expectation that aggressive tax planning will be detected quickly and the authorities will act against it.
Disclosure of such information will be encouraged if tax authorities themselves demonstrate five attributes: understanding based on commercial awareness; impartiality; proportionality; openness; and responsiveness. The required ‘openness’, the report suggests, can be shown through the operation of rulings mechanisms, by disclosure to taxpayers of how revenue bodies approach risk management, and by involvement of taxpayers in consultation on proposed changes to tax law and administration.
As regards openness on risk-management issues, the report recommends that revenue bodies should make available details of their broad approach, including the types of behavior or transaction that they see as risks, and how they will respond to them. However, it does not recommend that they publish full details of the mechanisms by which taxpayers or issues are selected for audit, including the algorithms used in computerized risk engines, because this could ‘invite inappropriate behavior’ by some taxpayers. On the question of disclosing to individual taxpayers how their risk assessments have been reached and how they translate into particular responses, the report recognizes that some authorities already adopt an open approach in this area. It states that it sees this as an important element in building mutual trust under the enhanced relationship (see 1.7), and recommends that individual countries decide whether and how to pursue this.
A central proposal of the report is that large corporate taxpayers should engage in an ‘enhanced relationship’ with revenue bodies, based on establishing and sustaining mutual trust between the two parties. This would involve revenue bodies demonstrating the five attributes identified in 1.6, while taxpayers would have to demonstrate disclosure and transparency. In particular, an enhanced relationship might well involve ‘real-time’ discussions of issues.
Three strands of ‘transparency’ are identified:
- Individual. The relationships by which taxpayers (and advisers) interact with individual revenue officials.
- Cultural. The collective manner in which taxpayers and revenue bodies, at the institutional level, view the other party to the relationship.
- Structural. The protocols by which taxpayers and revenue bodies communicate.
The disclosure that the tax authorities would expect from a taxpayer company in an enhanced relationship would go beyond statutory requirements to include any information necessary for the authorities to undertake a fully informed risk assessment; for example, details of any material degree of uncertainty as to the correct tax position, and information on any transactions of a type where the authorities have publicly indicated particular concern from a policy standpoint. It would also involve comprehensive responses to enquiries from the authorities.
The report indicates that in consultations respondents frequently suggested that revenue bodies should provide rules as to what was required in an enhanced relationship. However, the study team considered that a relationship of trust and openness could not be based on detailed rules; it must be based on broad principles.
From the point of view of the tax authorities, such enhanced relationships should lead to more effective risk assessment and resource allocation, as well as facilitating faster responses to developments, including remedial legislation. The benefits for taxpayers, the report suggests, will take the form of improvements in the management of tax risk; in particular, earlier certainty as regards their tax position. Thus it may be possible for them to avoid the need to make disclosure of tax uncertainties in accounts, or for additional audit time to be spent investigating them. Additionally, there may be reduced compliance costs as tax authority resources are directed away from lowrisk taxpayers, and it may be possible to integrate tax issues more efficiently at the time that mergers and acquisitions are being structured.
The report makes clear that taxpayers who choose not to enter into an enhanced relationship are nevertheless entitled to be treated in accordance with the five desired attributes of revenue authorities identified in 1.6. However, they will be risk-assessed on the basis of the information available, which will be less than in cases where an enhanced relationship exists.
The report suggests that there is also potential to build an enhanced relationship with advisers on the foundation of the mutually beneficial dialogue that already exists in many countries. The principal benefit for revenue bodies will be a ‘greater understanding of how advisers go about their business, what drives their business practices, how they can be equitably influenced and, most importantly, what impact they have on the decisions made by their clients in relation to tax’. For advisers the benefits would come in terms of ‘policy awareness’, which the report defines as ‘the ability to predict which transactions and issues the revenue body will want to be disclosed’. They should then be better placed to give best advice to their clients. There would also be opportunities for cooperation on the development of new legislation.
Where advisers are unwilling to enter into an enhanced relationship, the report adopts a somewhat more aggressive approach than it does in the case of taxpayers, recommending that ‘revenue bodies should use a risk-based approach to direct significant attention to such advisers, with a view to making it apparent that there are consequences for advisers of behaving in this way.’
Three possible mechanisms for instituting enhanced relationships are identified.
- A unilateral statement or declaration by the revenue body, setting out how it intends the enhanced relationship to work; taxpayers would then have to decide how they wished to respond.
- A charter adopted jointly by or on behalf of the revenue body, taxpayers and tax advisers.
- Formal or informal agreements between the revenue body and specific taxpayers.
The report also identifies three steps that may need to be considered in designing any of these mechanisms: a statement of intent; an assessment of capability; and high-level endorsement. It also draws attention to the importance of having procedures for monitoring the relationship, evaluating its success, and challenging failures by either party. It suggests that revenue bodies should indicate how they will be accountable for their actions.
The report’s conclusion reiterates the importance of risk management for tax authorities, the importance of accurate information for this purpose, and the benefits of an ‘enhanced relationship’ in facilitating the provision of that information and providing taxpayers with the benefits of earlier certainty. It suggests that if such arrangements can be successfully implemented aggressive tax planning will become less attractive to large corporate taxpayers and that all parties, including intermediaries, will benefit from more constructive relationships.
The Study Team intends to conduct a follow-up study on investment banks. It also proposes that further work should be carried out (though it does not say by whom) on high-net-worth individuals.
Measuring success in achieving the goals of the report will not be a straightforward matter. One possibility may be to focus on trends: not to ask, ‘How many companies have entered into an enhanced relationship?’ but ‘How many more than last year?’; not to ask what proportion of participants have expressed satisfaction, but whether that proportion is rising or falling.
In such matters the best may be the enemy of the good. A regular and comprehensive report analyzing extensive data from all over the world might be ideal. Here, however, in an attempt to suggest a practical approach, KPMG proposes 10 questions that may be used in a number of different ways to assess perceptions of developments in individual jurisdictions. They might, for example, be posed by the FTA to individual tax administrations, by global tax advisers to their member firms, by multinational groups to their subsidiaries or by trade organizations to their members. If the same questions are used in these different settings, valid comparisons of the results will be possible. Where the results show widely differing perceptions among the three parties to the tripartite relationship, or between one global organization and another, it will often be possible to draw helpful conclusions as to where the root of any dissatisfaction lies; for example, whether this arises from simple failures of implementation or from problems of communication or from different presuppositions as to what it is reasonable to expect from such arrangements.
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The longer document produced by KPMG suggests a number of questions for discussion in relation to each chapter of the report (amounting to nearly 50 questions in total). Some of the more significant of these are set out below:
1. Is it reasonable for taxpayers to position themselves to best advantage where there are uncertainties in the law or in interpretations of the law? Is this an ethical or legal question?
2. If it is the intention underlying the law that is to prevail, how can tax authorities, taxpayers or advisers determine, under the constitution of the particular jurisdiction concerned, what the intention of legislators was, and thus whether the result contended for by the taxpayer is ‘unintended and unexpected’?
3. Are taxpayers more likely to engage in aggressive tax planning if they perceive unfairness in the tax system? How can perceived unfairness be identified and tackled?
4. Is the relationship between large corporate taxpayers and revenue bodies collaborative or confrontational in the jurisdiction in question? In which direction is it moving? Is it perceived in the same way by taxpayers and the authorities?
5. Is it correct to say that taxpayer transparency alone cannot be grounds for a complete exemption from investigation?
6. How practical is it for tax authorities to form reliable judgments on the quality of taxpayers’ processes and accounting systems?
7. Rulings systems are generally seen as a service to taxpayers. Can they be made to work to the benefit of the tax authorities (as a source of information) without diminishing the taxpayer benefit or increasing the taxpayer burden?
8. What possibilities exist in the jurisdiction in question for the adoption of alternative dispute resolution procedures?
9. To what extent should the authorities in the particular jurisdiction disclose their approach to risk management, the risk assessments of particular taxpayers, and the criteria for selecting taxpayers for audit?
10. Is there open consultation in the jurisdiction in question on proposed changes to the law? Do taxpayers and tax advisers feel that the changes made in response to their comments are sufficient to justify the resources they devote to this process?
11. Do taxpayers and tax advisers feel that the behavior of tax authority staff involved in operational matters is consistent with the pronouncements of senior management on improving relationships?
12. Should the enhanced relationship be implemented by means of a unilateral statement from the tax authorities; a tripartite code or charter between tax authorities, taxpayers and advisers, or agreements with individual taxpayers?
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