Cooperative compliance models expected to take administration of tax into next era
25 February 2014
Posted by: Author: PwC
The implementation of cooperative compliance models and risk-based audit methodologies is expected to take the collection and administration of tax compliance into the next era of managing tax and risk, says PwC. "Cooperative compliance models will have a significant effect on an organisation’s approach and internal management of its tax affairs, particularly with regard to the newly amended Tax Administration Act, requiring what was seen as leading practice or a ‘nice to have’ on tax risk management and a tax internal control environment, to what has now become a necessity and requirement in the form of a Tax Control Framework,” says Marcus Botha, a Senior Manager at PwC Tax Services.
Worldwide there have been increasing demands from tax authorities, governments and other interested stakeholders for more transparency and tax compliance on the tax affairs of large corporates. As governments look for ways to raise revenue to deal with deficits, the tax paid by large corporates has become a matter of increasing scrutiny from a number of different stakeholder groups. "This matter can have an effect on a company’s corporate reputation, as well as shareholder value,” says Botha.
Tax has over the last few years gradually climbed up the corporate agenda at boardroom level and became a top priority for many CEOs. The results of PwC’s 17th Annual CEO Survey substantiate the increasing prominence of tax as a CEO priority. CEOs are concerned about the increasing tax burden, but are also aware of a changing public attitude to tax that is threatening to evolve into an even more stringent tax regime. Tax has become closely tied to corporate reputation.
"Managing tax risk and reputation have assumed greater prominence and corporations can no longer just point to their good compliance behavior, proclaiming that they are not only complying with the law but also the spirit of the law. In the new tax era this must be demonstrated though the corporation’s approach and internal management of tax in terms of an acceptable Tax Control Framework,” adds Botha. This no longer satisfies the external stakeholders’ needs for moral corporate taxpayers and enhanced tax information disclosures.
In the current climate and until the world’s governments tackle an outdated international tax system, there are more risks around tax – reputational and strategic – than ever before.
Politicians, tax administrations, NGOs and supra-national organisations like the EU, G8, G20 and the Organisation for Economic Co-Operation and Development (OECD) have committed themselves to fighting tax evasion and tax fraud. A number of countries are in the process of reviewing and amending their tax laws, as well as their tax treaties. Other areas of focus include tighter enforcement of existing laws, and more emphasis on substance and the exchange of information.
A number of tax administrations are looking into measures to improve cooperation with taxpayers. One of these initiatives includes the implementation of a cooperative compliance model.
The OECD’s Forum on Tax Administration released a report entitled ‘Cooperative Compliance: A Report on a Framework for Cooperative Compliance in Tax Matters’. The report sets out the progress made and the next steps in cooperation between tax administrations, taxpayers and their advisers on tax compliance. The report emphasizes that cooperative compliance depends on transparency from both the tax administration and the taxpayer.
In addition, the OECD defines the focus of the Tax Control Framework in their recent report (Co-Operative Compliance: A Framework – From Enhanced Relationship to Co-Operative Compliance, OECD 2013) as:
"… the internal control of all processes and transactions with possible tax consequences. This means that the specific requirement to be "in control” of all tax issues – able to detect, document and report any relevant tax risks to the revenue body in a timely way - needs to extend to all processes in scope of the ICF (Internal Control Framework).”*
The co-operative compliance model can best be defined as a relationship between the tax authority and the taxpayer based upon justified or demonstrable trust and transparency, co-operation and collaboration. It is a form of voluntary disclosure, whereby the taxpayer promises to notify the tax authority of any issues regarding a possible tax risk and to disclose all facts without hesitation or reservation.
In return for such disclosure, the tax authority undertakes to provide timely advice on significant positions, taking into account commercial deadlines. The approach provides the taxpayer with certainty.
The preface to the report sets out the belief that cooperative compliance can "restore trust and confidence in the relationship between business and tax administrations”.
In 2008 the OECD published a report on the role of intermediaries. Since then, much has taken place, explains Botha. The Co-operative Compliance Report sets out how the new framework for co-operative compliance will incorporate a more systematic approach to tax risk. "There is also a strong link between the OECD BEPS project and co-operative compliance as tax administrators seek to improve levels of compliance. In addition, more countries are now moving towards co-operative compliance models.
As tax authorities globally work towards a cooperative compliance model, taxpayers will also need to consider their approach regarding the management and risk of tax affairs. The advantages of a tax co-operative compliance model are that a company is ultimately in control of its internal processes and controls, resulting in fewer and/or less detail audits from the authorities, says Botha.
There are also other ways in which organisations can demonstrate that they are meeting their tax obligations. For example, investing in a Tax Control Framework, which is COSO based and includes clear defined processes and controls around a tax strategy, business operations, tax operations, risk management, assurance activities and voluntary transparency and disclosure of information, will provide answers to the questions about the amount of tax paid and enhanced tax information. "It is essential that not only the tax department must be assured of the quality of the tax control environment but also the other stakeholders in and outside the organisation,” adds Botha.
A Total Tax Contribution Framework can also assist organisations in gaining a better understanding of the tax position of the company and ultimately to help with the reporting and communication of tax data.
"Communication around tax will continue to be an increasing area of focus. Aligning the organisation’s tax strategy with the overall corporate strategy as well as having relevant data to interact with the tax authorities around tax are all key to ensure that tax matters are properly addressed,” concludes Botha.
This article first appeared on pwc.co.za.