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Saturday, 27th April 2024 |
| Co-operative compliance |
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| The Revenue Commissioners have published a document on Co-Operative Compliance and issued it to some large taxpayers. It is copied from a campaign launched by the Australian Revenue. Like the Australian model, the Irish document is a mixture of good sense and potential dangers. |
The Large Cases Division Document
The Large Cases Division (“LCD”) publication “The Co-operative Approach to Tax Compliance” has the merit of brevity, in contrast with the Australian model from which it was culled, which runs to 19 pages. At the outset the LCD document states that it is primarily aimed at large business taxpayers.  | | Mr Pat McDaid |
The following quote is critical to understanding the rationale behind the document:
“What co-operative compliance is not is any kind of special treatment for an elite group of taxpayers. It is essentially a hard edged practical element of Revenue’s overall compliance strategy which seeks to copper fasten the flow of revenues from the small group of very large taxpayers responsible for up to two-thirds of all exchequer finances”.
Ireland is comparatively lightly taxed. Despite the loud protests against bin charges, the truth is that a significant proportion of all taxation is paid by a very small group of mainly corporate taxpayers. The taxes in question are not simply corporation tax but also Customs Duties, Stamp Duty, Insurance Premium Tax, to name but a few of the taxes. Additionally a large part of the taxation paid by the rest of the community is paid through VAT and PAYE which is administered largely by the corporate sector, and in particular by the larger corporates.
There is an old rule of thumb applicable to many situations that 80 per cent of output is produced from 20 per cent of sources, and the other 20 per cent of output comes from the 80 per cent of sources. A relatively small group of corporate taxpayers matter far more to the Revenue, as sources of taxation, than do the rest of the community taken together.
Against that background it is only sensible of the Revenue to pay close attention to that small group of taxpayers since changes in the economic plans and fortunes of that small group can have a disproportionate effect on total taxation yields.
Just as businesses have key customers who are their “crown jewels” so too the State has key taxpayers who are the “crown jewels” of our Republic.
Notwithstanding that the LCD document goes to some lengths to present the co-operative compliance approach as being for the mutual benefit of Revenue and taxpayer, as that opening quotation makes clear, the reality is that co-operative compliance is about copper fastening the security of tax flows to the Revenue and not about making life easier in any way for the large taxpayer.
Elsewhere in the document various carrots appear to be offered to those taxpayers who sign up to co-operative compliance but those carrots are not what the co-operative compliance programme is about. It is about controlling the tax flows from those taxpayers.
It would be disingenuous to suppose that it is the aim of any taxpayer to pay more than the minimum amount of tax that the law demands of them. It is the objective of the Revenue to extract from them the maximum amount that can be extracted within the law. Any sensible taxpayer will organise their affairs to minimise their tax liabilities, provided the cost of doing so is reasonable, whereas it is quite clear from the LCD document that it is the intention of the Revenue to actively discourage taxpayers from doing any such thing.
The Australian Model
The Australian Taxation Office (“ATO”) pioneered the “co-operative compliance” approach.
The ATO are up front in identifying an attack on tax avoidance as a central element of co-operative compliance. It is mentioned in the opening paragraph of the part of the document which sets out the objectives of co-operative compliance where they say “Compliance activity that reduces tax avoidance helps to keep general rates of taxation lower”. Of course what that statement is saying is no more than that if some taxpayers paid more taxes than they need do if they took a sensible approach to minimising their tax liabilities, others might not have to pay as much. This is very true, but, to paraphrase a Dublin tax practitioner, it is the function of the Revenue to collect taxation, rather than to encourage the making of gifts to the State.
There is a sense in which the LCD’s co-operative compliance campaign may run counter to our economic development policy of half a century, and indeed counter to the thrust of tax legislation which could hardly be said to be aimed at maximising the tax collection from individual corporates.
The ATO is explicit in its threat to those exercising their right to tax plan. They say, “We will keep cases that have a history of aggressive tax planning under continuous audit until the compliance risk is reduced”. That sounds awfully like a threat to camp on the taxpayer’s premises and be a costly nuisance until they agree to stop doing what they are legally entitled to do.
It is to be hoped that the Revenue Commissioners in Ireland will not take their borrowings from the ATO too far, as the ATO approach would sit uneasily with Irish law, and with Irish economic policy.
Irish Tax Planning
Under the heading quoted “What is needed to make co-operative compliance work?” the Revenue include the following statements:
• “Commitment by business not to engage in tax planning which attempts to circumvent the spirit of the law and which has the potential to undermine the integrity and the legitimacy of the tax system in the wider community
• Commitments by both sides to demonstrating that community expectations of compliance are being met and that the tax system is working effectively.”
Taxation is imposed by law. It is imposed by the letter of the law and not by any supposed “spirit of the law”. The operation of the tax system is frequently tested in the courts. The courts operate on the basis of interpreting legislation in accordance with the canons of interpretation.
Tax planning is effective only if it is strictly in accordance with the law. Tax planning which is not in accordance with the law is a contradiction in terms, because it cannot have successfully minimised taxation liability which is determined by the law. So what then are the Revenue suggesting in the quotation above? It seems that they want business to commit to pay tax not merely in accordance with the law as written, but with some perceived spirit lying behind the law, which spirit the Revenue will interpret for business.
If that is what is being suggested, it would involve the Revenue Commissioners engaging in activities beyond their legal remit. Their remit is to collect the taxes imposed by the law, and not taxes which they would deem to have been imposed by some spirit. If it is the view of the Revenue Commissioners that the law as enacted does not reflect some underlying spirit, then they might reflect on the fact that it is they who drafted the law. If they have a problem with the drafting of the law, perhaps they should focus on that problem.
There is another echo in the quotation above which is worth looking at. That is the reference to “legitimacy of the tax system in the wider community” and “Community expectations of compliance”. The last number of years have seen public discussions on radio, television, the newspapers, and even in the D?il focused on taxation. Indeed, certain political figures have made use of statistics, to promote the notion that some high earners have made improper use of the tax system to avoid tax payments. This furore has led to the current review of all tax incentives. What has rarely been explained in the media soundbites is that any person who minimises their tax liability through the use of tax incentives is doing so entirely within the law. If politicians have some problem with the notion that tax incentives reduce tax liabilities, perhaps they need to spend a bit more time thinking about the legislation they enact, and the nature of tax incentives.
Conclusion
As said at the outset, there is a legitimate need on the part of the Revenue for advance information on factors likely to have a significant impact on overall tax collections of the State. Since tax collections are concentrated in the hands of a small number of corporates, that necessarily involves a dialogue with those corporates. That is entirely legitimate and sensible. What would not be legitimate and would be quite dangerous is any attempt by the Revenue Commissioners to mis-use their administrative powers to discourage taxpayers from their legitimate right to lawfully minimise their tax liabilities. Hopefully that will not be part of Co-operative Compliance. |
Pat McDaid is a tax partner at KPMG
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| Article appeared in the January 2006 issue.
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