Enda Jordan Director Corporate Tax Services

Readers may recall from the last edition of Tax Watch that we commented on the developments in relation to the Revenue’s ‘Compliance Framework Document’. Over the summer, the Revenue has continued to work on the document, which is now entitled The Co-Operative Approach to Tax Compliance, with the subtitle Revenue working with large business. A draft was circulated on a limited basis and representations were made by professional bodies to the Revenue. Notwithstanding concerns raised regarding the nature of the proposal, the document was finalised in September 2005. The Revenue did take into account some of the representations made and toned down some of the more controversial comments in its earlier draft document.

Most people would agree that the objective of promoting high tax compliance by large businesses is a laudable one. However, most large companies do, in any event, strive for high tax compliance and will continue to do so regardless of the existence or otherwise of an agreement with the Revenue. The Revenue document is worth reading and is available on the following website
:http://www.revenue.ie/services/bus_large_business.htm

The Revenue believe that co-operative compliance reflects ‘the growing sense of a mutual interest in being as certain as possible about tax liabilities and ensuring that there are no surprises’. Certainly, most boards of companies would wish that to be the case and if the ‘co-operative approach to tax compliance’ can achieve such an objective it would be welcomed. Revenue stress in the document that ‘co-operative compliance’ is a voluntary process and that there is no intention to create any kind of legal commitment. Their intent is that it ‘will involve understandings worked out in discussions and in joint reviews of tax risk’. However, Revenue also stress that co-operative compliance is not any special treatment for an elite group of taxpayers, but instead ‘it is essentially a hard-edged practical element of Revenue’s overall compliance strategy that seeks to copperfasten the flow of revenues from the small group of very large taxpayers responsible for up to two-thirds of all Exchequer finances’. That statement seems somewhat at odds with the ‘co-operative compliance’ concept, but it certainly is something companies will need to bear in mind before entering into one of these voluntary arrangements.

The Revenue lists the benefits it believes businesses will get from co-operative compliance as follows:

• a relationship with Revenue based on trust, mutual understanding, openness and transparency;
• a Revenue approach based on a better understanding of the business and a recognition of the distinction between business-driven and tax-driven decisions;
• an ability to predict with reasonable confidence what Revenue’s position will be in relation to tax issues;
• a better understanding of Revenue’s approach and philosophy;
• the possibility of reduced compliance costs;
• less audit intrusion from Revenue since the audit and enforcement focus will be biased towards those not committed to high compliance standards;
• greater certainty in relation to tax exposure;
• the opportunity to highlight problems with the tax code or its administration.

In reality, the main interest for companies is the comments regarding less audit intrusion since any readers who have had the pleasure of a Revenue audit will be aware how long drawn-out and time-consuming for management such an audit tends to be. The remainder of the ‘benefits’ to companies would appear to be somewhat nebulous and in any event are available to any taxpayer regardless of size. The final ‘benefit’ — the highlighting of problems with the tax code or its administration — merits some comment. It is not clear whether the Revenue is suggesting that it will do something about the problems highlighted in the tax code or its administration. Quite often in the past, the Revenue’s response in relation to approaches on legislative anomalies would be to refer the questioner to the policy-makers, i.e. to the Department of Finance.

Obviously, there must be a quid pro quo for the benefits that Revenue perceives the arrangement provides to large business. To this end, Revenue highlights a number of commitments that must be made by the taxpayer:

Of these, the commitments of particular note are those numbered 3, 4 and 6.

• The 3rd commitment makes it clear that Revenue will continue to audit, albeit on a less intrusive basis as they have stated earlier in their document.
• The4th commitment is to be open with Revenue in relation to the company’s tax-planning strategy. Essentially, this is a key benefit for the Revenue to be privy to a company’s tax planning strategy. For example, this could include the Revenue being made party to the tax strategy in the structuring of acquisitions or indeed disposals of businesses. The question is will the Revenue expect to be made aware of such tax strategies while a transaction is underway. If so, we can envisage significant delays in concluding transactions.
• The 6th commitment is somewhat idealistic in that it introduces the concept of ‘community expectations of compliance’. This is a very subjective area and indeed ‘community expectations’ are quite often driven by the media. Readers will be aware how, in recent times, tax incentives which were introduced by legislature (such as artists’ exemption, various property reliefs and film reliefs) are now being vilified as akin to tax avoidance, or even worse as tax evasion. Therefore, it would seem impractical to expect a business to sustain such a commitment based on volatile ‘community expectations’.
  

The Revenue document goes on to detail the action plan which the participant company is expected to comply with. Some highlights of these are (italics indicate the author's emphasis):

• Revenue, the business and, where necessary, its tax advisors will draw up and agree a set of action points for each side, with timeframes, for a review of tax risk and implementation of a set of compliance actions for each tax.
• The first step for each tax will involve the parties in engaging in a risk review meeting at which Revenue will give an overview of its perspective of potential tax risks for the business and its sector, and the business will point out risk areas of which they are aware — essentially working towards an agreed view of an initial tax risk profile for the business.
• The business will then prepare and implement annual risk tax management plans focusing on agreed tax risk areas.
• The audit dimension of the co-operative approach will therefore be reflected in a mix of self-audit and Revenue audit.
• While Revenue recognises tax planning as an important dimension of financial management, it will nevertheless expect that a business will be open with it in relation to its tax-planning strategies. Being open in this way need not preclude different viewpoints on whether aspects of that tax planning constitute tax avoidance.
• Revenue will respond as quickly as possible to requests for interpretation assistance from businesses and their tax advisors. Ideally, this assistance would take the form of consultation at the earliest possible stage.
• Revenue will respond promptly to well-founded complaints from business about potentially unfair tax-based competitive advantages allegedly being enjoyed by competitors.
  

Firstly, as readers will fully appreciate, such an 'action plan' will mean management time being expended in engaging with the Revenue and in following through on the various items. The emphasis is very much forcing companies to self-audit, with the Revenue following through then with its own audits. Of note also is the requirement that businesses will point out risk areas so that these management plans can be put in place. One suspects that as any company highlights a tax risk to the Revenue, such risk will become part of the Revenue’s menu of tax risks for subsequent invitees to the co-operative compliance agreement. The last point, about Revenue responding promptly to well-founded complaints in relation to competitors, is of note. Quite often such concerns are based on misinformation, e.g. the competitor may not be misusing tax law, but instead may have adapted its business to minimise the potential impact of a particular tax provision. One wonders whether such complaints will automatically lead to Revenue audits of the competitors. Presumably such an audit, with its resultant demands on management time of the competitor, whether the complaint is legitimate or otherwise, will assist in levelling the playing field.

The Revenue states in its document that engagement in the co-operative approach does not indicate poor compliance. It makes the comment that its experience is that ‘even where there is no deliberate default, the volume of tax law and regulation with which large business has to comply can leave room for inadvertent error’. Any companies that have had the pleasure of Revenue audits will be aware that ‘inadvertent error’ is not a phrase in the vocabulary of most Revenue auditors. Perhaps this will change?

The Revenue document also states that companies do not need to engage in the co-operative compliance programme. Unfortunately in the short term, such a position may lead to more risk of a Revenue audit, human nature being as it is.

In summary, from a large business’s point of view, there is probably more down-side than up-side in agreeing to participate in the Revenue’s Co-operative Approach programme. While, as already stated, the objective of high tax compliance is laudable, the time commitment in formulating and implementing agreed tax risk management plans should not be underestimated. In addition, the intrusion of the Revenue into a company’s tax strategy seems to be something most companies could do without. In recent weeks, the Revenue has made contact with some companies about implementing such plans. While the author believes it would be appropriate for companies to attend such meetings, great care should be taken before committing to what seems a very one-sided bargain.

For an instructive story of tax cuts read an extract from Mr Charlie McCreevy’s Dáil Éireann speech on 4 March 2003.