| Tax intermediaries - ‘enhancing’ Revenue relations |
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| Tom Woods takes a look at a study published by the OECD in January, which looks at the role of tax advisers and banks as ‘intermediaries’ in ‘aggressive tax planning’. |
The latest OECD report on the role of tax intermediaries was issued in January and delivers a far more positive message than the Seoul Declaration which mandated it.
The Seoul Declaration, which was developed by the Forum on Tax Administration, expressed concern about ‘mass-marketed’ ‘aggressive tax schemes’ promoted by intermediaries to satisfy an expanding demand by taxpayers. It provided a mandate ‘to examine the role of tax intermediaries in relation to non-compliance and the promotion of ‘unacceptable tax minimisation arrangements’.’ The OECD study group charged with this review broadened the focus from intermediaries to the tripartite relationship between revenue bodies, taxpayers and intermediaries.
The OECD group addressed the use of tax planning arrangements by large corporates in this report. The recommendations in the report are not required to be adopted by revenue bodies but do outline the group’s views on how revenue bodies should deal with aggressive tax planning. The report promised a follow up study focussing solely on banks acting as intermediaries as it claims ‘much aggressive tax planning involves the use of financial instruments…largely obtained from banks’. It also identified high-net-worth individuals as the second principal market for aggressive tax planning and requiring a separate review.
On the whole, however, there is a welcome move from the confrontational approach which the Seoul Declaration seemed to suggest to a more collaborative approach. The Irish Revenue are specifically cited in the report (and rightly so) as a good example of a revenue body that develop good relationships with tax payers and advisers.
What is a tax intermediary?
If you are a tax professional working in practice or in industry or you work in a financial institution which is involved in structuring, executing or acting as counterparty to transactions with tax planning implications, you probably are an intermediary.
Although the term ‘intermediary’ suggests a ‘middleman’ in a linear relationship between the taxpayer and the revenue body, the report acknowledges that advisers’ primary responsibility is to their clients and that they have no direct responsibility to revenue bodies other than to comply with the law.
Findings
The report acknowledges that ‘tax intermediaries play a vital role in all our tax systems by helping taxpayers understand and comply with their tax obligations in an increasingly complex world’. It supports this in its conclusion that there is no country where compliance with tax laws would be likely to improve if tax advisers did not exist.
The report also recognises that it is taxpayers who set their own strategies for tax risk management and determine their own appetite for tax risk. It is taxpayers who decide whether to adopt particular planning opportunities. Unfortunately, the report lends credence to the trend of making ‘moral’ judgements about how taxpayers plan and manage their tax affairs, about the professionals who advise them and, in certain cases, the financial institutions who transact with them.
Key Recommendations
The report acknowledges the diverse experiences of the 45 participant countries and accepts that the recommendations set out in the report may be more relevant for some countries than others. In particular, it quotes Ireland, Netherlands and the US as worthy examples of countries which have developed business models aimed at improving the tax system through greater cooperation. The report should therefore not have many practical implications for Ireland.
In summary, the report recommends that revenue bodies formulate their own strategies to deal with intermediaries who are involved in ‘aggressive tax planning’ (discussed separately below). It proposes that risk management techniques should be applied to ensure that the necessary resources are allocated to ‘aggressive tax planning’. Individual countries should decide whether this incorporates risk profiling of intermediaries.
Taking a risk management approach will require relevant and reliable information, the most comprehensive source of which is the taxpayer and so the study concludes that there is an opportunity to establish a more co-operative ‘enhanced’ relationship between taxpayers, intermediaries and revenue bodies, anchored on mutual trust rather than enforcement obligations.
The report recognises that such an improved relationship will require certain behavioural changes from the revenue bodies which should stem from understanding based on commercial awareness; impartiality; proportionality; openness; and responsiveness.
It notes that an enhanced relationship would have benefits for taxpayers as tax issues are likely to be resolved more quickly with less extensive audits and lower compliance costs while revenue bodies will be able to concentrate their resources on parts of the system where there are greater risks. This objective would clearly be in everybody’s interest.
Aggressive Tax Planning
The report focuses on intermediaries who are involved in aggressive tax planning. Two ‘areas of concern’ were identified as ‘aggressive tax planning’:
- Planning involving a tax position that is tenable but has unintended and unexpected tax revenue consequences.
In order to identify such planning the report proposes that advisers should maintain a level of ‘policy awareness’.
- Taking a tax position that is favourable to the taxpayer without openly disclosing that there is uncertainty whether significant matters in the tax return accord with the law.
The report proposes that disclosure should go ‘beyond information taxpayers are statutorily obliged to provide. It should include any information necessary for the revenue body to undertake a fully informed risk assessment.’
Over the last number of years we have seen an attempt to blur the line between what is legitimate tax planning, i.e. legal, and what is unacceptable tax planning.
Tax avoidance can now be perceived as tax evasion.
It has long been accepted by the courts that taxpayers may arrange their financial affairs in a manner that minimises any associated tax liabilities, provided that they do not contravene any provisions of the legislation (of which there
are many!). This was affirmed by Lord Clyde in Ayrshire Pullman Motor Services and Ritchie v IRC:
‘No man in the country is under the smallest obligation moral or otherwise, to arrange his legal relations to his business or property so as to enable the Inland Revenue to put the largest possible shovel into his stores’.
This has also been affirmed at EU level in the Halifax case. It seems that this right could be eroded based on some intention-based code. There is a moral expectation that taxpayers should commit to pay tax in accordance with the ‘spirit’ or intention of the law, which would be determined, but not necessarily articulated, by the legislator or revenue body. What is moral, however, is very subjective and means different things to different people in a culturally and socially diverse society. It is for this reason that we must solely look to the rule of law and not make moral judgements. The law must be operated as it is written by the legislator and interpreted by the courts. Rowlatt J confirmed this in Cape Brandy Syndicate v IRC TC 358
‘In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in. Nothing is to be implied. One can only look fairly at the language used’.
Tax advisers seek to ensure that their clients conduct their affairs in full compliance with the tax code. In Ireland, we have an objective mechanism for testing the operation of the tax system through the courts when disputes arise. We have also a significant body of general and specific anti-avoidance and related voluntary disclosure legislation. These provisions still respect the rule of law as central to the just operation of the tax system and do not invoke the abstract concept of interpreting the spirit of the law or the intention of the legislator.
Penalising intermediaries
Thankfully there seems to be a realisation of the inherent difficulties and risks associated with the risk assessment of intermediaries. The report does not take a firm stance on the risk profiling of intermediaries and leaves it open for individual countries to formulate their own methods of dealing with tax intermediary risk.
Conclusion
The reality is that advisers are engaged to ensure that the tax position taken by a client will be in compliance with the law - not to conjure up adventurous and alluring products. Market forces are already ensuring that advisers consider broader issues in terms of reputational risk to clients as tax risk management moves up the corporate governance agenda.
Some form of enhanced relationship in relation to administration of the law can provide benefits to revenue bodies and taxpayers, as seen in Ireland. The Irish Revenue has not only forged relationships with taxpayers and tax advisers to excellent effect but also engages in continuous dialogue in committees such as TALC where non client-specific issues are progressed in an open and productive manner.
Tax policy and the relative ease of its administration has been a building block of our economic success in the last couple of decades. As we face an uncertain economic outlook, it is vital that the pro-business environment, so carefully nurtured, is maintained. |
Tom Woods is a partner in KPMG’s Financial Services Tax department.
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| Article appeared in the February 2008 issue.
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