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Cooperative Compliance: A Multi-Stakeholder and Sustainable Approach to Taxation 

Posted on Sep. 6, 2021
Angelina Papulova
Angelina Papulova
Jonathan Leigh Pemberton
Jonathan Leigh Pemberton
Jeffrey Owens
Jeffrey Owens

The Global Tax Policy Center at the Institute for Austrian and International Tax Law at the Vienna University of Economics and Business (WU) issued the following policy brief for its project “Cooperative Compliance: Towards Improved Tax Certainty” and its final report “Cooperative Compliance: A Multi-Stakeholder and Sustainable Approach to Taxation.” It explains the relevance of cooperative compliance as an instrument for securing good tax compliance and delivering greater tax certainty and predictability, and includes a summary of recommendations in the key areas involved in designing cooperative compliance programs for their practical implementation.

The policy brief was prepared by Jeffrey Owens, the head of the WU Global Tax Policy Center; Jonathan Leigh Pemberton, project director at the WU Global Tax Policy Center; and Angelina Papulova, teaching and research associate at the WU Institute for Austrian and International Tax Law.

Copyright 2021 Global Tax Policy Center at the Institute for Austrian and International Tax Law at the Vienna University of Economics and Business (WU). All rights reserved.

Introduction

The corporate tax landscape has changed profoundly in the last two decades. Corporations are increasingly expected to engage more with society on corporate responsibility, corporate reporting, and “acceptable fiscal behavior.”1 There is a growing public demand to know “who is paying what and where.” There has been mounting political pressure in Europe and the United States to introduce public country-by-country reporting, which seems set to become the new global norm.2

A new element in this debate is that institutional investors have become a driving force behind these calls for greater transparency. This was reflected in the introduction of “GRI 207: Tax 2019”3 in December 2019, the first independent, voluntary sustainability reporting standard for public financial and non-financial tax reporting by the Global Reporting Initiative (GRI).4 Investors, civil society organizations, labor unions, and other stakeholders around the world have expressed support for this new tax standard as it will help meet their growing demand for fiscal transparency.5

Tax certainty and predictability are key components to providing a conducive tax environment for cross-border trade and investment. In the long term, it is in the interest of both government and business to minimize tax uncertainty as far as possible.

Achieving tax certainty may be particularly important in countries undergoing a rapid economic transformation and with only a limited experience with international tax issues.

Many stakeholders see Cooperative Compliance as a way to reconcile improvements in tax compliance and fair taxation with a good business environment. However, different stakeholders have very different views on how Cooperative Compliance could and should achieve that.

Essentially it does this by offering an exchange of transparency and disclosure on the taxpayer’s part for earlier and greater tax certainty. That exchange is critically underpinned by the integrity of the taxpayer’s in-house systems for reporting to tax administrations.

Cooperative Compliance is increasingly recognized as an effective way of securing good tax compliance. It can also deliver greater tax certainty and predictability, the critical components of a tax environment beneficial for cross-border trade and investment. Cooperative Compliance programs can also promote a more sustainable approach to taxation and meet the needs of different stakeholders, although some remain skeptical of this approach to taxation.

The first national cooperative compliance programs were implemented in OECD countries in the first decade of the 21st century. Such programs are now running in about a third of the OECD countries. Over recent years non-OECD countries as diverse as Honduras, Nigeria, Russia, Zambia, and others have developed programs of their own. In 2020, the EU Commission issued “An Action Plan for Fair and Simple Taxation Supporting the Recovery Strategy,” which included an initiative to create the EU cooperative compliance framework.

This is the context in which in 2018, the WU Global Tax Policy Center (GTPC) at Vienna University of Economics and Business, in cooperation with the International Chamber of Commerce (ICC) and the Commonwealth Association of Tax Administrators (CATA), developed a project to examine how more countries could be encouraged to enter into or improve Cooperative Compliance programs. The program brought together over 200 people from 25 countries, including public officials, business representatives, and academics. The report (“Cooperative Compliance: A Multi-Stakeholder and Sustainable Approach to Taxation”) will be published in the first week of September and is the result of these two years of discussions. It focuses on the practical implementation of the principles underpinning the Cooperative Compliance concept and identifies best practices. It is intended to help taxpayers and tax administrations realize the full potential of Cooperative Compliance to increase tax certainty while also addressing the legitimate concerns of other stakeholders in society. The main focus of the report is on unilateral Cooperation Compliance programs. Still, it also refers briefly to multilateral Cooperative Compliance in integrated economic regions (e.g., the EU), which will be a subject of follow-up work.

The report sets out best practices in the five key areas involved in designing Cooperative Compliance programs, namely:

1. Identifying criteria for access to Cooperative Compliance programs;

2. Developing model legislation to facilitate the operation of such programs;

3. Developing an Audit Assurance Standard for Tax Control Frameworks;

4. Developing a methodology to measure the cost and benefits of Cooperative Compliance programs; and

5. Communicating the Cooperative Compliance model to obtain trust from the wider society.

This brief provides a summary of the main recommendations made by the report in each of those five areas.

Summary of Recommendations in the Report

It is convenient to summarize the main recommendations under each of the headings referred to above.

Recommendations for Identifying Criteria for Access to Cooperative Compliance Programs

The recommendations for designing entry conditions for Cooperative Compliance programs are:

  • A company should have an effective tax control framework in place and a commitment to comply with accepted international standards on tax compliance.

  • The program should ideally be voluntary rather than compulsory, and once a corporate taxpayer has entered such a program, it should be free to withdraw from the program.

  • Tax administrations should have discretion as to whether to accept taxpayers into a Cooperative Compliance program.

  • The criteria for entry should be publicly available.

  • Tax administrations should be free to decide which taxes to include in their Cooperative Compliance programs. However, ideally, they should work towards the inclusion of all a jurisdiction’s major taxes, including both direct and indirect taxes.

Recommendations for Model Legislation to Facilitate Cooperative Compliance Programs

There has been considerable debate over whether and to what extent Cooperative Compliance programs require statutory underpinnings. A majority of countries take the view that a lack of specific statutory underpinnings for Cooperative Compliance programs is not a problem. Nevertheless, in certain jurisdictions, legal provisions are seen as necessary.

Cooperative Compliance programs should not, however, be over-regulated by detailed statutory provisions to ensure there is a degree of flexibility for both the tax administration and the taxpayer. The following elements are regarded as suitable for regulatory underpinning:

  • The tax administration’s competence to enter into a Cooperative Compliance relationship;

  • The decision on the threshold to participate;

  • Measures to protect the confidentiality of information provided by the taxpayer;

  • The binding nature of decisions by the tax administration;

  • Opportunities for appeal; and

  • The use of information provided by the taxpayer during and after the termination of the Cooperative Compliance agreement.

Recommendations on an Audit Assurance Standard for Tax Control Framework

The Tax Control Framework (TCF) plays a crucial role in Cooperative Compliance by assuring the tax administration on the robustness of a companies’ approach to tax and the reliability and completeness of its disclosures.

The main recommendations here are:

  • Companies’ tax returns and disclosures should be accompanied by a “Tax-In-Control Statement” by the senior management as part of the disclosure and should be seen as integral to the Cooperative Compliance model. That statement should be subject to assurance by way of external audit. A TCF should be regularly reviewed to ensure it identifies risks and key changes in the company’s operating environment.

  • A one-size-fits-all approach to the design of TCFs is inappropriate given that countries have different constraints in their approaches to achieving good compliance. Nevertheless, it is desirable and possible to agree on an explicit Audit Assurance Standard for TCFs. The main elements of a possible standard and a “layer model” that visualizes the overall process of assurance, build on the six “essential features” of the TCF, formulated by the OECD in 2016, namely:

1. Tax strategy is established;

2. It is applied comprehensively;

3. Clear responsibilities are assigned;

4. Governance rules are well documented;

5. Regular testing is performed; and

6. Assurance provided.

These features ensure that the TCF is capable of providing assurance to all stakeholders.

The TCF Layer Model is made up of five pillars, comprising the first five features listed above, and these are underpinned by three layers of additive assurance processes.

There is more work to be done to translate these ideas into a formal Audit Assurance Standard.

At the EU level, this could take the form of a soft law instrument, such as the EU Code of Conduct.

Recommendations on the Methodology to Measure Costs and Benefits of Cooperative Compliance

It is essential to establish a methodology for measuring the costs and benefits of such a framework, which should cover, inter alia:

  • The stability of the tax system, tax certainty, transaction costs, long-term investment framework, dispute resolution channels, the need for the tax administration to provide guidance to large taxpayers, and the recognition of legitimate expectation as a legal concept.

  • Recognize that the capacity to measure the cost efficiency and effectiveness of a Cooperative Compliance framework will influence the willingness of taxpayers to enroll in such programs.

  • When assessing these costs and benefits, it is essential that the interests of all stakeholders and the wider civil society should be considered.

Yet many of the current indicators used by governments are primarily internally driven managerial indicators that focus on the compliance process. It is not clear that measuring process efficiency is sufficient as a means of evaluation since it says relatively little about the compliance outcomes achieved.

Some alternative measures, which could provide a first evaluation of the efficiency of a Cooperative Compliance program, are the frequency and length of tax audits and access to advance pricing agreements and advance rulings, cost efficiency measures such as the cost in terms of time taken to risk assess the return and full-time-employee input into the compliance management of the taxpayer.

When it comes to measuring the effectiveness of programs, some relevant factors are tax revenue collected by the tax administration, looking at how large taxpayers outside of the program compare with large taxpayers enrolled in the Cooperative Compliance framework, tax revenue per Full-Time-Employee input (FTE).

Since improving the quality of the relationship with the tax administration and levels of trust is an essential goal of Cooperative Compliance frameworks, these could be assessed by regular surveys of large taxpayers and staff working within the large taxpayer function of the tax administration.

There is considerable skepticism in using an effective tax rate for taxpayers enrolled in a Cooperative Compliance program compared with that of taxpayers outside the program as a yardstick of effectiveness. In principle, the ETR of taxpayers within the program should be no different from that of those outside; it is the time and effort taken to get there that will vary.

The risk assessment score of the taxpayer by the tax administration could also be considered. However, it is not clear that this is a helpful metric. A tax assurance indicator is perhaps a better measure of success. This would be made up of the total tax payable by taxpayers in the Cooperative Compliance program, less any amounts that are subject to discussion/dispute and that could consequently be regarded as correctly declared and paid.

Any evaluation of the outcomes from these programs should ideally use a basket of indicators:

1. Tax compliance/risk;

2. Legal certainty;

3. Tax risk management of the taxpayer;

4. Costs;

5. Trust and relationship; and

6. Customer satisfaction.

Whatever specific measures a tax administration chooses to track the efficiency and effectiveness of its Cooperative Compliance program, it is essential to establish prior to the introduction of a Cooperative Compliance program the current state as a benchmark against which it is possible to compare subsequent performance as it is affected by the program.

Recommendations on Communicating Cooperative Compliance — Obtaining Trust From Society

Companies and tax administrations need to develop a coherent reporting and communication strategy on Cooperative Compliance. This may include engaging with multi-stakeholder groups to test and challenge existing approaches and views. The following recommendations for best practices are suggested:

A) For action by the tax administration

  • Publish periodical tax administration Cooperative Compliance impact assessments.

  • Invest in stakeholder engagement and dialogue regarding the design, evaluation, and improvement of Cooperative Compliance programs.

  • Invest in tax administrations’ resource capacity, communication skills, knowledge of tax controls and risk management (including TCF), business models and realities, and education.

  • Ensure democratic scrutiny of Cooperative Compliance programs and periodical reviews to ensure that such programs and existing laws and regulations remain fit for purpose and justifiable from a societal perspective.

  • Develop a global assurance standard for tax administrations that is internationally accepted to enhance the transparency and accountability of and public trust in tax administrations.

B) For action by companies

  • Publicly and voluntarily disclose more relevant and meaningful corporate income tax information, including non-financial (ESG) information.

  • Use a global tax reporting standard that is internationally accepted, e.g., OECD BEPS 13 or GRI 207: Tax 2019, for disclosing more relevant and meaningful corporate income tax information, including non-financial (ESG) information, publicly and on a voluntary basis.

  • Provide tax assurance (internal and external) on corporate disclosures made and the figures in the tax return.

C) For action by both

  • Shift from “Tell Me” to “Show Me” when reporting on and making a case for Cooperative Compliance systems and their benefits for tax administrations, companies, tax advisers, and wider society.

  • Change the “tone at the top” in the tax administration and multinational, which is crucial for the required behavioral change toward the general public.

  • Upgrade good tax governance to an investor screening criterion in its own right to raise the bar for responsible tax behavior and investments further.

  • Consider tax transparency not only as an external risk forced upon the organization but also as an opportunity for building trust with wider society.

Concluding Comments

The project participants gained greater insights into the conceptual and practical issues that arise for governments and businesses that have already entered or are considering entering into Cooperative Compliance programs. The report set out a number of best practices. While there remain different views on how these programs should be designed, all participants agreed that these programs provide a valuable complement to the existing ways in which tax administrations and taxpayers interact and encourage a move away from an adversarial to more open and constructive engagement. It is hoped that the best practices identified in this report and the country examples will encourage more countries, including economies in transition and developing countries, to explore how Cooperative Compliance programs can be designed to meet their specific needs. The group recognized that some stakeholders would remain skeptical of this approach to taxation, but it is hoped that the report will provide a firmer basis for an ongoing discussion.

Next Steps

The participants in this project believe that the report will contribute to the ongoing dialogue on the usefulness and design of Cooperative Compliance programs. The group intends to continue with its work focusing on the following aspects:

(1) Monitoring the experience of countries with the recommendations by inviting feedback from both governments and businesses and using the knowledge gained to develop further the recommendations in, for example, the legal framework within which programs operate and their applicability to small and medium-size enterprises.

(2) Deepening the analysis of the methodologies used to evaluate the costs and benefits of such programs based on countries’ experiences, especially those that have recently introduced such programs and using new academic research. An effort will be made to extend the methodology to the experience of business since the report focused only on that of tax administrations.

(3) Pursue the idea of developing an external Audit Assurance Standard for Tax Control Frameworks by entering into a dialogue with the accounting standard bodies.

(4) Exploring the design of multilateral Cooperative Compliance programs, particularly in the context of the recently launched work of the European Commission in this area.

In addition to these topics, the group will continue to work with those countries that have recently launched Cooperative Compliance programs (e.g., Belgium, Honduras, Kenya, Nigeria, Zambia) and those that have indicated that they are interested in exploring how such programs would work in their environment (e.g., Columbia, Ghana, Malaysia, Peru).

The next group meeting, which will take place in spring 2022, will review the progress made in implementing such programs and discuss how to address the new issues identified above.

FOOTNOTES

1 H. Gribnau, “Why Social Responsible Corporations Should Take Tax Seriously,” in: K.K.E. Elgaard et al. (eds.), Fair Taxation and Corporate Social Responsibility (Copenhagen: Ex Tuto Publishing, 2019).

2 B. Van der Made, “The Revival of Public CbCR Amid New Interest in ESG Transparency,” International Tax Review, Mar. 30, 2020.

5 Global Reporting Initiative, “Backing for GRI’s Tax Standard” (Dec. 5, 2019); E. Van der Enden and B. Klein, “Good Tax Governance, Govern Tax Good,” SSRN (2020).

END FOOTNOTES

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