Study into the Role of Tax Intermediaries

Executive summary

All the countries participating in the OECD’s Forum on Tax Administration (FTA) recognise the impact aggressive tax planning has on tax administration, although in some countries this has been far more prevalent than in others. Aggressive tax planning is one of the risks revenue bodies have to manage in order to collect the tax due under their tax systems. Aggressive tax planning typically requires the involvement of tax professionals – in accounting firms, law firms or other tax advisory firms, in financial institutions or in large corporate taxpayers’ tax departments.

That is why the FTA commissioned a study of the role these tax intermediaries play in tax compliance and the promotion of tax minimisation arrangements.

As advisers, tax intermediaries play a vital role in all tax systems, helping taxpayers understand and comply with their tax obligations in an increasingly complex world. But some of them are also designers and promoters of aggressive tax planning, a role that has a negative impact on tax systems.

The Study Team considered the different approaches FTA countries are using to respond to tax intermediaries’ involvement in aggressive tax planning. All revenue bodies need robust strategies in this area.

However, the Study Team has come to the firm conclusion that to understand and, more importantly, to influence the behaviour of tax intermediaries, a broader view is needed. Tax intermediaries represent the supply side of aggressive tax planning, but large corporate taxpayers, tax intermediaries’ clients, set their own strategies for tax-risk management and determine their own appetites for tax risk. They are the ones who decide whether to adopt particular planning opportunities. Taxpayers represent the demand side of aggressive tax planning.

The report therefore considers the tripartite relationship between revenue bodies, taxpayers and tax intermediaries. The Study Team’s conclusion is that there is significant scope to influence the demand side – at least in relation to large corporate taxpayers, the taxpayer segment that is the principal focus of the study.

In addressing the demand side, risk management is an essential tool for revenue bodies, assisting with the identification and treatment of risks. It allows revenue bodies to assess the risk presented by taxpayers or groups of taxpayers and then allocate resources to respond to those risks.

Risk management relies on information, which makes it important to encourage disclosure from taxpayers. This means revenue bodies need to operate using the following five attributes when dealing with all taxpayers: understanding based on commercial awareness; impartiality; proportionality; openness (disclosure and transparency); and responsiveness.

If revenue bodies demonstrate these five attributes and have effective risk-management processes in place, this should encourage large corporate taxpayers to engage in a relationship with revenue bodies based on co-operation and trust, with both parties going beyond their statutory obligations. This is the enhanced relationship which is central to this report.

As well as benefiting revenue bodies, the enhanced relationship will also benefit many taxpayers. For example, taxpayers who behave transparently and who represent lower risks can reasonably expect a co-operative relationship with revenue bodies and therefore lower compliance costs, with increased certainty at an earlier stage.

The Study Team recognises that the demand for aggressive tax planning will not disappear completely, and some large corporate taxpayers may choose not to adopt the enhanced relationship. Revenue bodies will need to have effective risk-management processes in place to identify these taxpayers and allocate the necessary level of resources to deal with them.

The recommendations in this report have the potential, if fully implemented, to reduce the demand from large corporate taxpayers for aggressive tax planning and to give revenue bodies much better information about aggressive tax planning and therefore the opportunity to devise more effective responses. If the demand can be reduced, the supply of aggressive tax planning would also fall. In this way, the Study Team believes revenue bodies can best respond to the promotion of aggressive tax planning by tax intermediaries. More generally, the implementation of the Study Team’s recommendations should lead to a more constructive relationship between revenue bodies, taxpayers and tax intermediaries.

One particular category of tax intermediaries, investment banks, pose particular issues because some of them are involved in aggressive tax planning in the inter-bank finance market and in trading for their own account (‘proprietary trading’). This report does not fully explore these issues and the Study Team will therefore undertake a follow-up study on banks.

High-net-worth individuals (‘HNWIs’) are the second principal market for aggressive tax planning. Due to time and resource constraints, the Study Team did not have the opportunity to consider this market and recommends that further work should be undertaken to consider whether the enhanced relationship or other strategies are needed for addressing the risks posed by aggressive tax planning by these taxpayers.

Study into the Role of Tax Intermediaries