Revenue's Large Cases Division - Co-operative Compliance Framework
Author:
David Fennell
“What Revenue is about is the battle for the hearts and minds of the key players in the biggest business enterprises and high wealth individuals in an attempt to ensure that a high tax compliance ethic is set firmly as a dimension of good corporate governance and good citizenship”1
If readers were in any doubt about Revenue’s desire to engage more with large corporate taxpayers then the recently published document, The Cooperative Approach to Tax Compliance; Revenue working with large business is worth the read. The document, which became publicly available in September 2005, outlines what Revenue means by cooperative compliance. It explains how Revenue believes tax compliance can be promoted with the cooperation of large businesses.
Various articles penned by Revenue officials over the past two years demonstrated a Revenue desire to establish linkages that, ‘might offer a framework to work towards the kind of agreement, which could provide substantial certainty on tax exposures’. In this regard initial meetings were scheduled with businesses to prepare the groundwork for ‘agreed compliance frameworks’ although Revenue gave little indication as to what specific terms these ‘frameworks’ might encompass. However, there were signs that compliance would encompass more than compliance with tax law.
More anon.
RATIONALE FOR THE NEW APPROACH
Revenue states that cooperative compliance is part of a strategy 'to copperfasten the flow of revenues from the small group of very large taxpayers responsible for up to two-thirds of all exchequer finances'. If ever there was a statement to debunk the myth that large companies pay very little tax this is it.
Large companies are most likely to be in receipt of tax advice and they are probably aware of their compliance and taxpaying obligations. Revenue accepts that most large businesses have a strong compliance ethos but recognise that tax is complex. Revenue states that in its experience, ‘even where there is no deliberate default, the volume of tax law and regulation, with which large business has to comply, can leave room for inadvertent error’. It’s a pity that this message doesn’t always filter down to Revenue auditors.
Revenue quite rightly states in its document that there is a public interest in tax equity. It observes that the view of fairness is driven by perceptions of the degree of compliance among large taxpayers. However, it is arguable that public confidence in the tax system, or lack thereof, is exacerbated by a number of factors not least the reporting of blatant tax evasion as if it were tax avoidance, the sensationalist, tabloid like reporting of routine tax provisions as ‘loopholes’ and the persistent failure to take social benefits into account when considering tax incentives generally. It is a sad indictment of the Irish legislative process that complex tax measures are frequently enacted without debate. Thus, the actual target of legislation is often a matter of opinion some years later.
In Ireland the differential in tax rates between individuals and companies can be a source of resentment. It is easy to claim that wealthy taxpayers not paying a ‘fair share’ means less hospital beds, conveniently ignoring the fact that governments also spend taxpayer money on less laudable matters. Nevertheless, 12.5% of a very large loaf is better than no bread (or should that be bed). The human psyche is to believe that everyone else pays too little tax. The cooperative compliance initiative will not change this perception. It may reinforce it.
Revenue states that a cooperative compliance approach is increasingly an international phenomenon that reflects, ‘the growing sense of a mutual interest in being as certain as possible about tax liabilities and in ensuring that there are no surprises in any later reviews of these liabilities’. In this regard Revenue is clearly aiming for the hearts and minds of the boards of directors of the larger organisations that in recent times have faced increasing demands for better corporate governance. This is reaffirmed by references to the US Sarbanes-Oxley Act. Revenue envisages the elimination of surprises thanks to regular open discussions on tax matters, including tax planning. Unfortunately tax problems arise due to a multitude of reasons, many of which are unforeseeable.
So far, there has been little reference to the practical aspects of the approach. Like any good marketing tool the 'carrots' are placed up front. Before considering whether the carrots are in fact worth nibbling, it is perhaps appropriate to outline what will be required of participating companies.
THE ACTION PLAN
As Revenue points out, there is no requirement that companies enter into any kind of legal agreement, the model being dependent on a high degree of trust. Earlier versions did envisage companies being asked to sign up to compliance agreements but this was withdrawn once it became clear that such agreements were unworkable.
The proposed action plan envisages the following measures:
- Revenue, the business and its advisors will agree an action plan for a review of tax risk and the ‘compliance actions’ for each tax;
- At a preliminary meeting Revenue will give an overview of the potential tax risks facing the business;
- The business will prepare and implement annual tax risk management plans focusing on the agreed risk areas;
- Revenue audits will, where considered necessary in particular years, be part of the overall action plan but the aim is that the areas of attention will be flagged in advance and that the audits will be the ‘least intrusive possible’;
- The risk review will determine the mix of self-audits and Revenue audits;
- As regards tax planning, the Revenue document states, ‘while Revenue recognises tax planning as an important dimension of financial management, it will nevertheless expect that a business will, as an element of cooperative compliance, be open with it in relation to its tax planning strategies. Being open in this way need not preclude different viewpoints on whether aspects of that tax planning constitute tax avoidance’;
- The document also states that, ‘Revenue will respond as quickly as possible, to requests for interpretation assistance from business and their tax advisors. Ideally this assistance would take the form of consultation at the earliest possible stage. This could be of particular benefit to businesses engaged in projects with potential major tax significance, such as mergers, takeovers, investment projects etc.’;
- Businesses are encouraged to whistle blow on their competitors who they believe to be in receipt of unfair tax-based competitive advantages.
Many of the above measures are uncontroversial although the self-audit and review elements continue a popular theme in recent years of shifting the compliance burden from Revenue to the private sector.
Any business evaluating the cooperative compliance approach will need to be very clear that in effect it will need to consult with Revenue before engaging in any tax planning. Revenue makes no distinction in the document between tax planning and ‘tax avoidance’. Surely all tax planning constitutes tax avoidance of some description.
In an environment of openness and trust it would be very difficult for a company to avoid discussing with Revenue tax planning strategies generally. If Revenue feels that a structure is abusive they have the power to issue a notice under s.811 Taxes Consolidation Act 1997. The conflict of interest should be obvious.
Revenue often sees itself as a ‘stakeholder’. Too much can be made of this. The most important stakeholders are the shareholders, which provide the risk capital for the business, and its employees. Compliance with the law, and not with what Revenue would like the law to be, might be in their best interest. The Advocate-General’s opinion in the Halifax case2 provides an interesting insight in this regard:
“… taxpayers may choose to structure their business so as to limit their tax liability … there is no legal obligation to run a business in such a way to maximise tax revenue for the state. The basic principle is that of the freedom to opt for the least taxed route to conduct business in order to minimise costs … within the scope of the legal possibilities.”
Tax is a cost, like any other and if the cost base becomes so high that Irish operations become less competitive, Irish jobs will ultimately be lost.
On the whistle-blowing front, it remains to be seen how many companies will take up Revenue's suggestion to report ‘tax-based competitive advantages’. Surely the first inclination for many businesses would be to replicate the tax advantage enjoyed by the competitor. In any case, many tax-based competitive advantages are State sponsored such as where a business faces a competitor located in an urban renewal area.
THE BENEFITS TO BUSINESS
Revenue highlights the following benefits for business:
- a relationship with Revenue based on trust, mutual understanding, openness and transparency;
- a Revenue approach based on a better understanding of the business and a recognition of the distinction between business-driven and tax-driven decisions;
- an ability to predict with reasonable confidence what Revenue's position will be in relation to tax issues;
- a better understanding of Revenue's approach and philosophy;
- the possibility of reduced compliance costs;
- less audit intrusion from Revenue since the audit and enforcement focus will be biased towards those not committed to high compliance standards;
- greater certainty in relation to tax exposure;
- the opportunity to highlight problems with the tax code or its administration.
By outlining the perceived ’benefits’ up front, Revenue clearly attempts to sell the concept to large businesses. However, while the ‘benefits’ might initially appear attractive it is evident, on closer examination, that they are very marginal and in any case should not be contingent on entering into a cooperative compliance arrangement with Revenue. It is quite apparent that Revenue will get much of what they want from the process upfront whereas the benefits for companies are difficult to measure and, at best, some way off.
Companies will identify interpretation support and the certainty that this might bring as a key benefit. However, the question remains as to whether or not certainty, if it can be achieved, will come at too high a price. Revenue is not an independent tax advisor and its position on many matters can already be predicted with reasonable confidence.
In view of the inherent conflict of interest, will businesses get an impartial view of a particular piece of legislation? Revenue drafts most complex tax legislation. In Hilder and Others v Dexter3, the Earl of Halsbury LC aptly observed: “I have more than once had occasion to say that in construing a statute I believe the worst person to construe it is the person who is responsible for its drafting. He is very much disposed to confuse what he intended to do with the effect of the language which in fact has been employed. At the time he drafted the statute, at all events, he may have been under the impression that he had given full effect to what was intended, but he may be mistaken in construing it afterwards just because what was in his mind was what was intended, though perhaps it was not done.”
The experience to date is that legislative enquiries directed at the right people get a fair hearing. Nevertheless, businesses may prefer to manage their tax risks by obtaining independent technical opinions from their advisors or by availing of the expression of doubt facility when filing tax returns.
In any event, serious question-marks exist over the ability of Revenue to provide the service level intimated. The reorganisation of Revenue has spread technical resources quite thinly. Revenue will need to ensure that devoting additional technical resources to large cases does not create a perception that large taxpayers will receive a ‘gold plated’ service that is not available to the ordinary PAYE worker that has to face the gauntlet known as the Revenue telephone system.
A second perceived benefit might be the promise of ‘less audit intrusion’. Without establishing a base line for audit intrusion it is difficult to evaluate this statement. One might take the view that a series of ongoing (real-time) audits of an as yet unspecified nature may be little better than the current audit programme. Management resources in large organisations are scarce and ongoing communication between a business and Revenue staff may quickly become a nuisance if not properly managed. Given the level of self-review and management time required under an ‘agreed’ approach it is doubtful if compliance costs will actually reduce.
Most of the other stated benefits are already available to businesses through their tax advisors and representative bodies. Some, such as gaining a better understanding of the company’s business, would appear to be more beneficial to Revenue, unless Revenue actually uses this knowledge to alleviate the pressures companies face when seeking to comply with a myriad of complex tax rules. It is interesting to note that the Company Law Review Group (CLRG) report on the directors’ compliance statements requirements of the Companies Auditing and Accounting Act 2003 is expected to recognise the considerable extra burden and costs imposed on business by excessive regulation and suggest changes to the Act, despite Revenue submissions to the contrary.
TAX ADVISORS
A tactical approach in the document is the pursuit of direct access to top management. Studies in Australia indicate that higher compliance levels are achieved by those businesses that engage more with Revenue authorities. This research also noted that if a Revenue authority encounters resistance at one level in an organisation there will almost always be someone else more senior in the organisation that will be more willing to compromise.
Tax advisors are far more likely to engage Revenue on a technical issue and ensure that Revenue does not exceed its powers, so from Revenue's perspective, bypassing tax advisors makes sense. Tax advisors are far too adept at spotting the proverbial banana skin. Yet proper representation is an important part of the checks and balances when one party is negotiating from a position of inherent strength.
THE ROLL OUT
Correspondence issued by Revenue earlier this year revealed that the new approach was introduced partly ‘as a result of requests from several of our larger customers’. It was stated that the first phase of the project involved 9 groups. This was expected to expand to 25 groups by the end of 2005. It is unclear why the first wave of invitations to participate in compliance agreements did not focus exclusively on the several large customers referred to; unless of course ‘several’ means a number a lot less than nine.
Despite the likely compliance costs many companies will undoubtedly prefer to self-audit rather than face the threat of a more adversarial approach. The potential stigma of being considered uncommitted to ‘high compliance standards’ will also occupy the minds of senior management. One can safely predict that few of the star pupils will engage in any form of tax planning whatsoever that will require discussions with Revenue.
Notes
1 Sean Moriarty Large Cases Division, Irish Tax Review January 2004
2 Halifax Plc., Leeds Permanent Services Development Ltd., Countywide Property Investments Ltd. V Commissioners of Customs & Excise (case C-255/02)
3 1902 AC 474
David Fennell FCA is a Tax Director in Ernst & Young. Email: David.Fennell@ie.ey.com. The opinions expressed in this article are the author's own.