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