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ATAF workshop: Developing a Compliance Program for Large Business Taxpayers

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Title: ATAF workshop: Developing a Compliance Program for Large Business Taxpayers


1
ATAF workshop Developing a Compliance Program
for Large Business Taxpayers
  • Andrew Okello IMF Fiscal Affairs Department

2
OUTLINE
  1. The self assessment business model
  2. The compliance model
  3. Steps in developing a compliance program for LBT
  4. Major compliance issues commonly associated with
    LBT
  5. Approaches to managing LBT compliance
  6. Summary Elements of a LBT compliance strategy
  7. References

3
  • The self-assessment business model

4
The self-assessment business model
  • The great majority of revenue agencies have or
    are moving away from administrative assessment
    systems to a system of self-assessment
  • A self-assessment system relies on most taxpayers
    voluntarily complying with their basic
    obligations without the intervention of a tax
    officer
  • Register for tax
  • Keep proper records
  • File complete and accurate returns
  • Pay tax on time

5
The self-assessment business model
  • Three 3 key strategies will optimize voluntary
    compliance
  • Helping taxpayers and their advisors understand
    their obligations and entitlements
  • Making it as easy and cheap as possible for
    taxpayers to comply
  • Verifying compliance using a risk management
    approach

6
The self-assessment business model
  • How do you help taxpayers and their advisors
    understand their obligations and entitlements
    (taxpayers cant comply if they dont know)
  • Publish guidelines and technical interpretations
    in plain language (paper, web etc)
  • Provide easily accessible taxpayer services
    (enquiries rulings etc)
  • Engage in meaningful liaison arrangements with
    professional and industry associations
  • Conduct targeted education campaigns tailored to
    specific taxpayer groups (industries new
    businesses etc)

7
The self-assessment business model
  • Making it as easy and cheap as possible for
    taxpayers to comply (taxpayers wont comply if it
    is too hard or too expensive)
  • Simple policy
  • Clear law and regulations
  • Simple procedures (user-based design)
  • Easy access to services (through preferred
    channels)
  • Accessible dispute resolution mechanisms
    independent of original decision maker

8
The self-assessment business model
  • Verifying compliance using a risk management
    approach
  • Taxpayers must perceive real risk of detection if
    they choose not to comply
  • Broader taxpayer community confidence in the tax
    administration must be maintained
  • No tax administration is funded to deal with all
    risks in the system at one time
  • Verification activities must therefore be
  • Targeted to the most severe risks
  • Effective in dealing with the identified mischief
    and must promote compliance (actual audit revenue
    accounts for only a small fraction of total tax
    collections)
  • Visible to the general community of taxpayers and
    regarded by them as fair and reasonable

9
  • The compliance model

10
The compliance model
  • The challenge for the administration is to get
    the right balance in its compliance responses
  • Audit is not the best response to ignorance of
    the law
  • Education is not the best response to deliberate
    evasion
  • Taxpayer penalties are not the best response to
    missed obligations where the fault lies in poor
    administrative policies and procedures

11
The compliance model
  • So, how do you determine the right intervention
    or mix of interventions?
  • Modern tax administrations develop Compliance
    Models to provide a structured way of helping
    them understand the factors that influence
    different compliance behaviour
  • This enables the administrations to choose the
    most appropriate intervention for the
    circumstances

12
The compliance model
  • A compliance model recognizes that taxpayer
    compliance behaviour is affected by many
    circumstances which influence whether they choose
    to meet their obligations
  • It reflects a continuum of taxpayer attitudes to
    compliance from willing to comply to hard core
    evaders and
  • It aligns the different sorts of interventions
    and support mechanisms that might be applied to
    different compliance scenarios

13
The compliance model
14
The compliance model - BISEP
  • Business profile
  • Structure, sole trader partnership
  • Business activities
  • Financial data
  • Business age
  • Industry
  • Industry definition
  • Region
  • Size, segment, participants
  • Profit margins
  • Cost structures
  • Industry regulation
  • Industry issues competition, seasonal factors
  • Psychological
  • Risk
  • Fear
  • Trust
  • Values
  • Fairness/equity
  • Opportunity to evade
  • Sociological
  • Norms
  • Reciprocity
  • Age
  • Gender
  • Educational level
  • Ethnic background
  • Economic
  • Inflation
  • Interest rates
  • Tax system
  • Government policies
  • International influences

15
The compliance model
  • The compliance model aims for a more responsive
    form of regulation than traditional enforcement
    programs
  • It is based on the proposition that effective
    enforcement requires a dynamic application of
    less to more severe sanctions and regulatory
    interventions
  • It advocates a deeper understanding of
    motivations, circumstances and characteristics of
    taxpayers so that enforcement can be tailored to
    promote better compliance

16
  • Steps in developing a compliance strategy for LBT

17
Step 1 identify compliance risks
  • As a first step, risks should be identified and
    documented in an exercise coordinated by the risk
    management unit and involving staff at all levels
    of the organization. LTU should play a critical
    role in identifying LBT risks.
  • The risk identification process should bring
    together multiple sources of intelligence
  • Top down (macro economic/strategic analysis)
  • Bottom up (case-based/operational)
  • Experience of other administrations
  • Insights obtained from the audit program
  • Analysis of rulings
  • Analysis of frequently asked questions
  • Analysis of information in returns and financial
    statements
  • Data from external agencies (Customs, other
    regulatory agencies etc)
  • Intelligence from other jurisdictions, and from
    professional and industry liaison groups
  • Community based information
  • Key product A comprehensive register of all LBT
    risks

18
Step 2 assess and prioritize the risks
  • Identified risks must then be assessed and
    prioritised in a structured manner using a
    likelihood and consequence matrix
  • Consequence should not be measured only on
    revenue at risk but should include measures
    such as the impact on the integrity of the
    system, and the impact on the reputation of the
    government
  • The aim is to achieve a reasonable balance of
    risk management across all market segments with
    all severe risks under active management
  • Sufficient, accurate and timely data is
    essential utilize data analysis tools data
    matching data mining case review
  • Key products
  • A register of risks that have been quantified
    and prioritized according to the risk likelihood
    and consequence processes
  • Documented organizational compliance priorities
    that form the compliance programme for the year
    of effect

19
Typical risk rating matrix
20
Step 3 analyze compliance behavior
  • A critical element of strategy development is
    identifying the specific target population.
  • The intent is to target those who are not
    complying for attention while being as least
    intrusive as possible for complying taxpayers
  • Priority risks must be analysed using the
    compliance model to identify the drivers behind
    the attitudes and behaviours and to determine the
    appropriate mix of interventions
  • Look beyond symptoms to causes
  • Recognize the effect of the tax system itself
  • Legislation
  • Administration

21
Understanding taxpayer compliance behaviour
  • What drives specific behaviour?
  • e.g. Under reporting of income
    Characteristics of e.g. Lack of
    knowledge
  • Over claiming of expenses the
    taxpayer (group) Cost of
    compliance
  • Duplicate books Perceived
    inequality
  • Dishonesty

WHAT is occurring?
WHO is doing it?
WHY are they doing it?
22
Step 6 determine treatment strategies
  • Develop a balanced program based on sound
    principles
  • Key products
  • A compliance programme covering the current
    planning period
  • Products and tools tailored specifically to
    clients to be targeted through the compliance
    programme

23
Tailored Approach to Compliance Strategies
Attitude
Products / Strategies
EVASION FRAUD
Active Enforcement
Active Enforcement
Active Enforcement
Disengagement
Prosecutions, sanctions, investigations.
Resisting
Taxpayer management, monitoring, profiling,
reviews, audits.
Assisted self regulation
Assisted self regulation
Assisted self regulation
Resigned
Consultative forums, education, rulings, advice.
Self regulation - Cooperation
Willing
Self regulation - Cooperation
Create downward pressure
COOPERATION COMPLIANCE
24
Step 7 document the whole process
  • The whole process from risk identification to
    strategy implementation should be documented
  • This forms the basis of your Compliance Plan and
    provides context for your front line delivery
    staff
  • It also enables you to respond to questions or
    criticism from commentators on how you are
    deploying your scarce resources
  • The compliance program should set out
  • The risks you have identified for intervention
  • The nature and timing of the planned
    interventions
  • The resources allocated to particular tasks
  • Efficiency indicators
  • Quality indicators
  • Effectiveness indicators

25
Step 8 monitor performance and evaluate outcomes
  • Determine evaluation criteria at the time the
    treatment strategies are being developed
  • Developing an evaluation framework
  • Target (what behaviour are we treating?)
  • registration,
  • filing,
  • reporting,
  • payment of liability
  • Objectives (what are we intending to achieve?)
  • direct impacts
  • related impacts
  • impacts over time
  • Methodology (what broad approaches will we take?)
  • audit based studies
  • statistical techniques trend or time series
    analysis
  • qualitative techniques surveys, interviews,
    observation

26
  • Major compliance issues commonly associated with
    LBT

27
Major compliance issues commonly associated with
LBT
  • Related party cross border and tax haven dealings
  • Complex structures and intra group transactions
  • Tax avoidance
  • Customs fraud
  • Permanent establishment issues
  • Structured financing
  • International arbitrage
  • Entity classification
  • Valuation of derivatives
  • Loss importation transactions
  • Abusive trust arrangements
  • Inter-company financing
  • Foreign tax credit intermediary arrangements
  • Offshore deferral arrangements
  • Income gain on sale of assets
  • Excise fraud

28
  • Approaches to managing LBT compliance

29
Building a better relationship
  • Critical in promoting transparency and a
    cooperative approach to compliance
  • Building a relationship based on transparency,
    trust, and mutual understanding will have a
    positive impact on LBTs
  • Understanding the expectations of both the tax
    administration and LBTs a good start
  • Tax administrations expectations more openness,
    full disclosure, compliance with the tax laws,
    open dialogue, and timely response to inquiries
    and requests for information
  • LBTs expectations increased openness and
    dialogue, greater certainty, consistency, clarity
    of roles and accountability, timely response and
    good guidance, sharing of audit plan and risk
    assessment, early settlement and speedy
    resolution of issues

30
Real-time management approaches
  • Trend is to move from post-filing of tax return
    examination to real-time evaluation of risk and
    compliance issue resolution
  • Instituting programs to provide greater certainty
    to LBTs crucial e.g.,
  • forward compliance arrangements
  • advance rulings (binding and non-binding)
  • advance pricing agreements
  • pre-filing agreements or advance agreements
  • contemporaneous documentation requirements (for
    cross-border transactions)
  • use of client or relationship managers to provide
    clarity
  • compliance assurance programs to resolve tax
    issues prior to the filing of a tax return

31
Impact of corporate governance on tax compliance
  • Tax administrations are increasingly using the
    corporate governance principles to improve tax
    compliance believe that
  • The responsibility for a companys tax policy
    should be at Board level since tax is an
    important financial element as well as a major
    potential risk to the LBT both financially and in
    terms of reputation
  • Bringing tax policy to the Board level will
    foster more compliance and lessen likelihood of
    engagement in aggressive tax planning
  • The ATO for example has published a governance
    guide for board members and directors. Directors
    can use this to self-assess the type and degree
    of tax risks in relation to the overall
    performance

32
Building capacity and skills
  • Commitment to enhancing the technical and
    professional skills necessary to deal
    confidentially with the complexity of LBT as well
    as to improve focus on customer understanding and
    commercial awareness
  • Enhancing enforcement and customer service also
    requires training and retention of highly
    qualified workforce capacity
  • Complexity of the tax laws, business structures
    and transactions have created a need for
    specialized knowledge and expertise in certain
    areas.
  • Also succession planning programs required to
    maintain qualified and highly skilled workforce

33
Use of technology
  • Technology can be used not only to improve the
    quality of service to LBT but also to manage
    compliance
  • Several electronic tools have been developed to
    assist
  • improve the early identification of risk and
    increase the efficacy of operating processes in
    the LBU
  • in performing risk assessment and to better
    control and manage compliance and to collect
    critical data
  • LBU staff, irrespective of location, communicate,
    share information and work collaboratively
  • E-filing

34
Summary Elements of a LBT compliance strategy
  • The taxpayer population and its segments
  • What is the taxpayer population under the purview
    of the LBU?
  • How is it composed, for example individuals,
    (high net wealth individuals) sector/industry
    non-profit organizations public institutions
    etc.
  • Compliance patterns, trends, and the tax gap
  • What are the taxpayer compliance patterns and
    trends?
  • What is the tax gap and how is it composedby
    economic sector, type of taxpayer?
  • Key compliance risksidentification and treatment
  • What are the key compliance risks and to taxpayer
    groups do these risks relate?
  • Are any of the major risks caused by weaknesses
    in laws and regulations or the administrative
    capacity of LBU?
  • How should these risks be treated to achieve the
    best possible outcome?
  • Organizing for and managing taxpayer compliance
  • How should resources be organized and allocated
    across the LBU to achieve the best possible
    compliance outcome?

35
References
  • IMF Technical Note (2010), Developing a
    Compliance Strategy
  • OECD Guidance Note (July 2009), Compliance
    Management of Large Business
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