In some markets, particularly the Netherlands and the UK, Enhanced Relationships can represent a viable and valuable way to increase trust, reduce complexity and minimize the potential for disputes. Essentially, Enhanced Relationships call for tax payers to be more open and transparent about their transactions and, in return, they can expect to receive faster responses, reduced audit requirements or – in some cases – lower taxes from the authorities.
This panel discussion started with a semiformal debate between Andre Boekhoudt, who strongly supports the concept of Enhanced Relationships, and Lewis Lu, who believes that these agreements bring unnecessary risk to tax payers.
Mr. Boekhoudt, who practices in the Netherlands where a special scheme called the Horizontal Monitoring Scheme has somewhat formalized the Enhanced Relationship concept, noted that the practice has led to greater cooperation between tax payers and authorities. As a result, he added, complexity has decreased overall, as has the cost of compliance for many of the companies subscribing to the scheme.
Mr. Lu countered by noting that Enhanced Relationships had only seen success in more mature jurisdictions with a long tradition of collaborative relationships. In China and other developing world countries, tax directors would be wise to follow the precise rule of law to ensure that all of their dealings with tax authorities are above reproach and beyond debate.
Following this debate, the panel was joined by Massimo Ferrari who, from the point of view of a tax director, suggested that tax payers decide whether to pursue an Enhanced Relationship on a country by country basis depending on the maturity of the tax authorities and their track record for building successful collaborative relationships.
The panel also discussed the potential for Enhanced Relationships to be misperceived by the market and the public as collusion rather than cooperation, thereby creating even greater mistrust in tax authorities. And, although the panel agreed that this may be one potential outcome, they reasserted that this would largely depend on the culture of cooperation within each market and whether agreements were governed by rule of law.
Participants also noted that the success of Enhanced Relationships also depended on the education and understanding of individual tax officers; those with a sound understanding of how international tax operates would be more likely to develop mutually beneficial relationships, while those with only domestic or regional experience may easily misunderstand the complexity of corporate tax filings and therefore be more likely to enter into disputes when questions arise.