|Cooperative compliance models; the future of tax administration|
26 May 2014
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.
“What was once seen as leading practice or a ‘nice to have’ on tax risk management and a tax internal control environment, could now become a necessity and requirement in the form of a Tax Control Framework,” says Marcus Botha, a Senior Manager at PwC Tax Services.
The increasing demands from tax authorities, governments and other interested stakeholders for more transparency and tax compliance on the tax affairs of large corporates, has led to higher levels of scrutiny from different stakeholder groups which could have a direct effect on a company’s corporate reputation, as well as shareholder value.
Tax has climbed up the corporate agenda at boardroom level over the last few years 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. “Tax has become closely tied to corporate reputation,” adds Botha. “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.”
Sharon Smulders, Head of Tax Technical at the SA Institute of Tax Professionals, points to the 2013 report produced by a panel headed up by Kofi Anan which showed that shifting profits to lower tax jurisdictions cost Africa $38bn a year in lost revenue. “It was like taking food off the tables of the poor,” concludes Annan in the report.
According to Smulders, this situation is clearly unfair and certainly unsustainable in the long term. 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 exploring measures to improve cooperation with taxpayers. One of these initiatives includes the implementation of a cooperative compliance model, which was outlined by the OECD in their 2013 Co-operative Compliance Report, and prefaced with the notion that cooperative compliance can “restore trust and confidence in the relationship between business and tax administrations.”The
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, 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.
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.
Investing in a Tax Control Framework is another way in which organisations can demonstrate that they are meeting their tax obligations. Including clear defined processes and controls around a tax strategy, business operations, tax operations, risk management, assurance activities and voluntary transparency and disclosure of information; a Tax Control Framework will provide answers to the questions about the amount of tax paid and assist organisations in gaining a better understanding of their tax position.
“As more and more Countries are moving towards co-operative compliance models, communication around tax will continue to be an increasing area of global focus, adds Smulders. “South Africa’s annual Tax Indaba, which takes place from 9-13 June in the Sandton Convention Centre, provides a much needed platform for robust dialogue between the tax industry, business and government in the effort to define a more systematic approach to tax risk and a deeper insight into proposed co-operative compliance models.