Towards more collaboration: Evolving relationship with large taxpayers
October, 10th 2008
A recently released report, Study into the role of tax intermediaries by OECDs Forum on Tax Administration (a body that aims to improve taxpayer service and compliance) confirms that relationships between large corporate tax payers and tax authorities tend to be confrontational. However, the study hastens to point out that in recent years, both parties have seen the benefits of a more co-operative approach. Heads of tax authorities from 35 OECD and non-OECD countries (including India) participated in the discussions leading to the release of this report.
Large corporate taxpayers place a high value on the ability to finalise their tax positions in real time, which in turn helps minimise unpredictability and uncertainty of earning projections, and aids a more accurate assessment of business valuation. In recent years, with increasing emphasis on corporate governance, financial/ public disclosures, and also evolving accounting standards (such as FIN 48 in the US) that requires public companies to disclose their tax uncertainties, the decision making process as regards tax planning and tax risk management has decisively changed. Tax authorities of a few countries have consciously focussed on their relationships with large tax payers and have sought to elevate it to the next level that of an enhanced relationship . This involves : tax authorities demonstrating an understanding in dealing with the taxpayers based on: commercial awareness, impartiality, proportionality, openness through disclosure and transparency and responsiveness; and in turn, taxpayers making the required disclosures and being transparent.
The report states that countries such as the US, Netherlands and Ireland have taken steps in this direction. It helps both taxpayers and tax authorities in managing their risks. It reduces tax uncertainty for the former, and enables the latter to deploy resources into high-risk issues, resulting in lower compliance costs for lower risk taxpayers. The success of the enhanced relationship based projects in these countries stems from the fact that it is not rule-based , but rather it has been left to the parties to determine the appropriate level of disclosures. Here are some illustrative examples.
Ireland: in September 2005, the Irish Revenues Large Cases Division (LCD) introduced Co-operative Compliance. Within three years, over 80 large corporate taxpayers had signed on. The first step here involves the Revenue LCD case manager and the large corporate taxpayer agreeing to a compliance plan it covers key activities and a timetable. Each plan is flexible and suits the needs of each taxpayer and each case. It results in a constructive dialogue, facilitates real time solutions, and enables the tax authorities to resort to selective checks and audits only. While it has so far catered to those taxpayers who were perceived to have past records of high compliance, this may be reviewed and the plan widened.
Netherlands: in 2005, the tax and custom authorities began a pilot with 20 very large corporate taxpayers to conclude supervision agreements. Here the tax authorities expected the companys board to commit itself to full transparency on current tax issues, in return for expedient and binding opinions on such issues. Unlike the Irish model, it is the tax high risk companies that were selected to be part of the projects and past pending issues were also cleared up. The project is growing in strength.
United States: the Compliance Assurance Program (CAP) began as a pilot project in 2005, with just 17 taxpayers and now covers more than 70 taxpayers. Taxpayers having low compliance risks and no tax shelter issues participated in the first collaborative approach towards ensuring compliancy. Here, the roles for successful completion of the CAP are agreed upon through an MOU signed by both parties, which even contains the coverage of monitoring . This MOU is, however, not legally enforceable. The pilot program is to be continued in the US.
India commenced its thorough process around managing large taxpayers with a proposal in 2005 to introduce the Large Taxpayer Units (LTU) scheme, albeit in a phased manner. These units are active in certain cities and act as a single window facilitation centre for both direct and indirect (excise and service) tax returns. It is for the eligible corporate entity to opt for such scheme and the aim is to reduce tax compliance costs and delays and bring out uniformity in tax determination.