Enhanced relationship to co-operative compliance

CO-OPERATIVE COMPLIANCE: A FRAMEWORK – FROM ENHANCED RELATIONSHIP TO CO-OPERATIVE COMPLIANCE © OECD 2013

Executive summary

In 2008 the Forum on Tax Administration published a Study into the Role of Tax Intermediaries (the 2008 Study) which encouraged revenue bodies to establish a relationship with large business taxpayers based on trust and co-operation; the so-called “enhanced relationship”. This report is based on a detailed study of the practical experiences of countries that have developed co-operative compliance programmes and the views of the business community. The report thoroughly reviews and updates the FTA‟s thinking about the relationship between revenue bodies and large business taxpayers in the light of these findings.

Overall the report concludes that the value of the co-operative compliance approaches has been established and it is notable how many countries have developed a programme of this kind in the past five years. The main pillars of the relationship identified in the 2008 Study remain valid but subsequent experience has shown that some additional features are also of central importance. The report sets out a revised framework for co-operative compliance.

The report discusses why the original terminology of an “enhanced relationship” is no longer an entirely accurate description of the approach. The report adopts the term “co-operative compliance”. This makes it clear that the approach is based on co-operation but with the purposes of assuring compliance, which is to say payment of the right amount of tax at the right time.

The report is based on a survey of 21 FTA members and consultations with the Business and Industry Advisory Committee (BIAC). The results of the survey and additional input provided by countries during the preparation of this report shows that since 2008, collaborative and trust based relationships have been widely established between large corporate taxpayers and revenue bodies; the report lists 24 countries and the numbers are growing. This survey revealed a wealth of experience gained by revenue bodies and that is reflected in the report. The importance of high level commitment and staff training in the implementation of cooperative compliance is clearly demonstrated. Co-operative compliance is fully integrated into the coherent compliance risk management strategies that more and more revenue bodies have adopted, and reflects an increasing focus on the need to understand and influence taxpayer compliance behaviour.

Since the 2008 Study was published some commentators have expressed concerns about the compatibility of the co-operative compliance approach and the principle that taxpayers are entitled to equal treatment before the law. The report addresses that concern directly and sets out why there is no conflict with this fundamental principle.

More recently, greater emphasis has been placed on the importance of compliance with the spirit as well as the letter of the law and this is reflected in the 2011 revision of the OECD Guidelines for Multinational Enterprises. Some concerns have been expressed about the definition of the spirit of the law and whether it affects the rights of taxpayers unduly. This issue is also addressed and the need for taxpayers to be able to take a different view from the revenue body they are dealing with, even in the context of a co-operative relationship, is recognised.

The report also reflects the business community‟s experiences of the co-operative compliance approach, highlighting the importance of transparency and disclosure on the part of both parties in a framework of co-operative compliance to reduce uncertainties over companies‟ tax positions more effectively and efficiently. The importance of good corporate governance systems that support transparency and disclosure has emerged much more clearly over the past five years as an integral part of co-operative compliance. Tax is increasingly more important in the boardroom.

The newly emerged framework therefore not only consists of the five pillars established in 2008, but also encompasses a systematic approach to tax risk as established in the tax control frameworks of MNEs. The report highlights the central importance of these frameworks in bringing rigour to the co-operative compliance concept, demonstrating that the relationship between the taxpayers concerned and revenue bodies is based on objective criteria and justified trust.

Good governance within the revenue body is also important, particularly in providing assurance to the wider community of stakeholders that the co-operative compliance approach is achieving its primary purpose, which is improved compliance. The report discusses this in some depth and describes a number of governance models and good practices.

As this new framework emerges, so does the question of how to demonstrate the value of co-operative compliance approaches. This report describes tools and experiences of determining costs and benefits for revenue bodies, indicators for measuring effectiveness and their practical application. The study also describes the evaluation of main benefits of co-operative compliance for both revenue bodies and businesses. Co-operative compliance is primarily aimed at ensuring that the correct tax is paid when it is due and consequently does not score well when measured against traditional measures of yield from compliance interventions. The report outlines an approach to the measurement of the success of these programmes that recognises that they provide objectively justified assurances about the reliability of the tax returns submitted by the taxpayers involved. The report also outlines how data about the remaining disputes that do arise could be used to inform more strategic thinking about the tax system.

The report concludes with some thoughts about the future direction of the co-operative compliance concept. It suggests that the concept of the tax control framework could be developed further and that further work on measures of effectiveness may be needed. It also looks forward to the emergence of more multilateral co-operative compliance relationships, involving an MNE and two, or more, revenue bodies.

Full report