Ahead of the European Commission Anti-fraud tax package, Accountancy Europe and CFE Tax Advisers Europe, leading European associations for tax professionals, highlight three areas for policymakers in which the current tax system could be improved whilst longer term reforms are being developed. Policymakers, taxpayers, and tax professionals need to work together to make tax systems more resilient and fit for purpose for the 21st Century.
- Member States should co-operate with the help of the European Commission to develop effective co-operative compliance programmes suitable for all sizes and types of businesses and that facilitate cross-border trade and reduce the possibilities for double taxation. We call on the European Commission to encourage and enable exchanging best practices on co-operative compliance in Europe, and to issue recommendations for co-operative compliance fit for SMEs.
- Cooperative compliance programmes should be subject to transparency of tax administrations and respect of taxpayers’ rights, as set out in national and international / EU law.
- Businesses should consider the advantages that voluntary public tax transparency – as an integral part of their sustainability policies – could bring to their business and its relationship with tax authorities and other stakeholders. The European Commission should monitor and assess the effectiveness of voluntary tax transparency initiatives.
- Businesses and tax authorities should invest in the latest IT solutions to improve the quality of data, communication, and remote access to services. We look forward to the European Commission’s initiatives aiming to promote IT solutions in tax administrations and stand ready to help.
The coronavirus has resulted in a very large number of private sector businesses receiving public subsidies and there are calls for such support to be linked to how well they govern their tax affairs.
We believe that there are very good reasons, for both businesses and tax authorities, to move voluntarily towards improved tax good governance. We see this as coming from three main areas that we will explore below:
- co-operative compliance
- tax transparency
- investment in technology
1. Co-operative compliance
Tax compliance is enhanced more by improving the tax morale of taxpayers than by implementing additional measures to punish non-compliance. Co-operative compliance improves tax morale.
Co-operative compliance, also often known as horizontal monitoring, recognises that most businesses wish to be compliant in their tax affairs. It wastes tax authority resources to closely monitor compliant businesses. Consequently, a growing number of tax authorities are offering co-operative compliance programmes for businesses that are willing to:
- commit to fulfilling their tax compliance obligations to the best of their abilities
- implement a strong system of risk analysis and internal controls over the tax function, known as a tax control framework (TCF)
- actively engage with tax authorities in an honest and positive manner
- be transparent with tax authorities about the business’ tax strategy and tax planning
Benefits for Tax Authorities
The main advantages for tax authorities are:
- earlier and more complete information about the business’ affairs – some programmes rely on real-time reporting of accounting information
- increased trust with compliant taxpayers allows focusing scarce resources on non-compliant businesses or those presenting a higher risk profile
- increased efficiency and reduced tax audit costs
Currently it tends to be the more developed, larger countries that offer co-operative compliance programmes to the largest businesses. However, the experience in Slovenia indicates that smaller tax authorities may gain the most advantage from such programmes. Lacking the resources to perform tax audits on a substantial percentage of taxpayers, they rely on good tax morale for tax compliance.
Co-operative compliance programmes often focus on corporate income tax but there is no reason why such programmes cannot apply to all taxes – especially indirect taxes such as Value Added Tax (VAT).
The advantages for tax authorities can be heightened by external assurance of the TCF, which provides an additional level of trust for the tax authorities that tax controls are adequate and correctly operated. See more on external assurance in Accountancy Europe’s publication Providing support in tax controls and assurance (May 2018).
Benefits for businesses
The main benefits for businesses are:
- greater confidence coming from a robust tax risk assessment and TCF
- having a single point of contact at the tax authority who has sector specific business knowledge
- faster response for tax related queries, resulting in greater tax certainty
- a tax audit regime tailored to the business and its complexity, resulting in reduced compliance costs
- improved public image as a compliant taxpayer and a reduced risk of reputational loss due to tax controversies
Issues with co-operative compliance programmes
Implementing co-operative compliance programmes will result in short-term costs for both tax administrations and businesses. Systems need to be implemented by both parties, staff need to be trained and the culture, in some cases, fundamentally changed. However, in the long run, we believe that there should be long-term cost benefits for both parties.
Co-operative compliance can also be characterised as socially unfair if it could not be applied to large businesses and small\medium enterprises alike – as one group of taxpayers is advantaged over the other. It is true that current co-operative compliance programmes are typically targeted at only the largest businesses, but we believe that all compliant businesses should be allowed to participate in such programmes – with an appropriate scaling of requirements. This has already occurred with the Netherland’s ‘horizontal monitoring’ programme, which was extended in 2007 to cover medium and small companies, tax intermediaries and other industry organisations.
The overriding purpose of a more co-operative approach towards paying taxes is to foster a relationship of mutual trust, respect and responsibility between businesses and the State. It reinforces business’ obligations to the State and, clarifies the State’s obligations as to the rights of taxpayers and the duties of the tax administration.
Through these means, the long-term benefits of co-operative compliance programmes should outweigh the costs – by reducing the costs of compliance over time, increasing the quality and efficacy of willing compliance, and ensuring that all businesses are treated equally and without bias or preference. This benefits all stakeholders and society at large. Equally, it is expected that the cooperative compliance programmes are subject to transparency of tax administrations and respect of taxpayers’ rights, as set out in national and international/ EU law.
Co-operative compliance and the European Union
We believe that a more harmonised approach to co-operative compliance across the EU would be beneficial for the following five reasons:
- cost savings and improved effectiveness by exchanging experience in designing such programmes and implementing the systems required to run them across Europe
- greater commonality of the requirements would assist cross-border businesses to join such programmes
- requirements of different-sized economies could facilitate developing a scaleable programme suitable for smaller businesses. THe UK’s HRMC’s recent study indicated that most smaller businesses do their best to comply, and avoid conflict, with tax authorities and would welcome measures to improve the relationship
- a common approach to co-operative compliance across the EU would:
- facilitate cross-border trade as a business would be able to demonstrate that it was considered a trusted taxpayer in one country when dealing with the tax authority in another EU member state.
- reduce the possibility of double taxation. Developing a universally accepted audit standard for TCFs would greatly contribute to the success of such a programme.
- improve the Single Market’s efficiency and result in a level playing field amongst EU Member States
We understand that the European Commission is planning to encourage co-operative compliance across the EU. We call on the Commission to promote the use of co-operative compliance by national tax administrations, to study and exchange best practices and to issue guidance or recommendations on how co-operative compliance programmes could be tailored for smaller businesses.
2. Tax Transparency
Enhanced transparency with the tax authority is a cornerstone of co-operative compliance. We are also seeing an increased push towards businesses being more publicly transparent on their tax affairs. For example, there have been repeated attempts to introduce mandatory public country by country reporting of tax information and the UK has introduced a mandatory requirement that certain companies disclose their policies for complying with UK tax laws, for example Mastercard.
There also been the long-standing requirement in the Capital Rights Directive IV for certain financial institutions to provide a public country by country report on their tax affairs.
We believe that voluntary public transparency in respect of tax, as an integral part of their sustainability policies, can have significant benefits for businesses, improving how they are perceived by the public and allowing them to clearly state their tax policies and transactions – thereby avoiding public misperceptions. This is a particular benefit for consumer facing businesses, where reputational damage can have a severe impact on financial performance.
Voluntary public transparency would also lead to businesses and their advisers giving greater consideration to the ethical dimension of their tax planning and compliance strategies to ensure that they are aligned with the changing demands of legislators and other stakeholders.
Consequently, we support the Global Reporting Initiative in the development and promotion of its GRI 207: Tax 2019 global standard for public reporting on tax, which allows companies to:
- show the total tax contribution that they make to the countries in which they operate
- promote confidence and credibility in the tax practices of organisations and in tax systems
- enable stakeholders to make informed judgments about an organisation’s tax practices
- help inform public debate and support the development of socially desirable tax policy
We encourage the European Commission to initiate the debate at international level (e.g. OECD) in order to build a level playing field on tax transparency to avoid negative impacts on EU businesses and to leverage market-led tax transparency initiatives such as GRI 207. These may prove to be an effective solution to addressing different stakeholders’ demands for more tax transparency.
3. Investment in Technology
Co-operative compliance programmes, tax transparency and tax compliance in general are greatly facilitated by automation and digitalisation of processes.
As mentioned, some co-operative compliance programmes (such as that of the United States) are contingent on real time reporting of accounting and tax transactions and this is only possible where both tax authorities and taxpayers invest in IT solutions. For example, the tax authority of the Netherlands is working with software suppliers as part of its horizontal monitoring programme.
The operation, monitoring and audit of TCFs is greatly assisted by automation and the adoption of such technologies as ‘blockchain’, which provide an immutable record of who inputs information and when. Cloud based technologies allow easy exchange of data globally, which is very important for tax transparency where information is required from many different departments, often at a global level.
The current coronavirus crisis has also highlighted how lack of investment in IT infrastructure can impair organisation’s operations when forced to work remotely. It has also highlighted shortcomings in some jurisdictions’ digital resources, hampering citizens’ and taxpayers’ ability to access services and meet their reporting and other compliance obligations.
Finally, investing IT enables staff to be freed from mundane clerical tasks. It allows staff to be retrained to perform the more analytical and relationship-based work required to deal with co-operative compliance and tax transparency. It would benefit businesses and tax authorities by improving efficiency and quality of data, communication, and remote access to services.
We understand that the European Commission intends to investigate digital tools and solutions – in particular to improve data analysis capacities of tax administrations and switch from the exchange of information to a model where tax data can be shared in real time. We look forward to the Commission’s initiatives and possible proposals in this area and stand ready to help.
 ‘Tax morale’is defined as an intrinsic motivation to pay taxes (Frey & Torgler, 2007). More generally, ‘tax morale’surveys measure taxpayer perceptions and attitudes towards paying and evading taxes http://taxadviserseurope.org/wp-content/uploads/2019/05/GTAP-Submission-to-the-OECD-Tax-Morale-Consultation.pdf
 ‘Some evidence for implementing an enhanced relationship in Slovenia’ – 2014 Miroslav Verbič, Mitja Čok, Darija Šinkovec POSLAV VERBIČ, PhD*MSc*
 Cadesky, M., Hayes, I. and Russell, D., 2016. Towards Greater Fairness in Taxation: A Model Taxpayer Charter. IBFD.