Tax Certainty Tools
I have been writing in recent days about the new IMF/OECD on fiscal security. Part I provided an overview of Project Certainty and the report, while Part II examined some of the sources of tax uncertainty. Today, I will look at what the IMF/OECD report proposes in terms of instruments to promote security. If the EQA is based on such rules and has proven to be effective, the tax administration could even agree to exclude the tax reporting from other reviews, audits or other compliance activities for one or more given periods, thereby increasing tax certainty. In case of high tax risks, the tax administration can further develop risk mitigation strategies in consultation with companies. However, these programs would provide that if a taxpayer has not fully and truthfully disclosed material risks, or if the tax administration considers that there has been tax evasion or evasion, it would have the legal right and mandatory obligation to reopen the closed years for audit. In detail, the report describes the following practical tools to improve tax security when (still) the 724 respondents are taken into account: Table 1 below presents the 10 most important tools to promote tax security for companies and tax administrations. Respondents were asked: “The following instruments were identified as possible solutions to increase the security of the tax system with respect to legal systems, tax administration, dispute settlement and specific international dimensions. Please determine from your perspective to what extent, in your opinion, each instrument could improve tax security in your country`s tax system, whether or not the instruments are subject to control by the tax administration. The instruments for increasing tax security are the same as those proposed in the business survey. Achieving an acceptable level of security in your business and tax affairs is a remarkable achievement in any period. But in the current search for a “new normal,” it is doubly important, not least because many jurisdictions are increasingly imposing penalties for tax offenses.
Table 2: Three key instruments that could best improve tax security for multinational enterprises operating in more than 10 countries However, the technical solutions offered by the instruments can only be effective if the new legislation is implemented quickly. This requires political support for the implementation of changes, which are not always granted for various reasons. Much remains to be done to secure this political support and raise political awareness of the importance of these issues. All this does not bode well for business security. Taxpayers should therefore continue to consider all means to increase security in domestic and cross-border environments. Cross-border transactions by multinational enterprises increase both the risk of double taxation for the taxpayer and double non-taxation for the state. Resolving these issues, which can create uncertainty for both taxpayers and governments, is very complex. It is therefore essential that national tax rules and double taxation conventions are clear and transparent. Most developed countries have based their national tax legislation on international tax issues and tax treaties on OECD global standards. The continued implementation of these standards helps to create consistency across jurisdictions and greater certainty.
However, the implementation of these standards is often very complex and difficult for tax administrations in developing countries with limited capacity. Due to the complexity of new tax risks, ensuring proper compliance goes beyond people, and the companies we work with increasingly rely on global technology platforms to identify and manage risk. But not everyone realizes that existing tools are ready to work in this landscape. And while systems can be modified, it`s probably not desirable to constantly subject the CIO and his IT department to fire drills. While the report does not provide new minimum standards, it outlines a number of practical approaches and solutions to improve tax security in G20 and OECD countries. While recognizing that governments and tax administrations are already taking a wide range of measures to ensure tax security in domestic and international contexts, the report highlights the benefits of reducing or eliminating uncertainty at the earliest opportunity. However, if problems cannot be avoided or resolved at an early stage, effective dispute resolution mechanisms are needed. In terms of enhanced engagement programs (EEP), there are similar models around the world: HM Revenue & Customs` (HMRC) Customer Relationship Manager (CRM) model, the Inland Revenue Authority of Singapore`s (IRAS) Enhanced Taxpayer Relationship (ETR) program, the Spanish National Agency for Tax Administration`s Forum for Large Companies and the Australian Tax Office`s Annual Compliance Arrangement (ACA). These models are based on effective compliance risk management systems designed to identify taxpayer needs and risks and positively influence taxpayer behaviour. They categorise taxpayers according to their responsibilities and behaviour, allowing tax administrations to tailor their responses accordingly.
With regard to the preparation of model laws, regional tax organizations have already taken steps to develop such instruments. In late 2016, for example, ATAF provided a tool called “A Sug-gested Approach to Drafting Transfer Pricing Legislation”. This is based on the international arm`s length framework, but also includes policy simplification options, such as capping the amount of royalties paid to related parties, which are tax deductible, to combat abusive profit shifting. A model African tax treaty, which combines the most appropriate elements of the OECD and UN models and adds some options to address the specific challenges faced by African countries, has also been developed by ATAF. It is known as the ATAF Model Tax Convention for the avoidance of double taxation and the prevention of tax evasion in the area of taxes on income. CIAT`s activities in the areas of tax collection, behavioural models, tax laws, exchange of information, etc. have been cited in the above text and are available to tax administrations as a reference for legislative reforms. By developing a strong relationship with large companies based on mutual trust and transparency, the EQE would provide greater certainty for businesses through a cost-effective approach to dealing with tax issues with quick resolution of issues and clarity through effective engagement. The EQA would prioritise the main risks in order to find the most cost-effective way to reach an appropriate tax agreement between the two parties. From the point of view of applying such systems to countries with limited state capacities and economic diversification, the EQA can be simpler and more practical in its application than fully-fledged cooperation agreements.
Table 2 presents the three main tools that can best improve tax security for multinational corporations operating in more than 10 countries for each of the four categories of potential tax uncertainty (tax design and legislation, tax administration, dispute settlement and specific international dimensions) for which the report was consulted: In this context, it should be clear that tax security is not synonymous with Cessation of all tax reform activities. Nor should it be confused with a toolbox for individual transactions between investors and governments to reduce the tax burden on private sector companies. Rather, tax certainty should be understood as a common framework of procedural rules and standards aimed at creating a level playing field and long-term conditions for investment. The alignment of national rules with international standards and bilateral conventions includes, for example, the development of rules on permanent establishments in accordance with the revised wording of Article 5 of the OECD Model Double Taxation Convention. This gives tax administrations and taxpayers certainty as to when the business activity of a foreign company in a country constitutes a permanent establishment and creates a taxable presence in the source country. In the context of Africa, for example, countries will receive bilateral support on this issue through ATAF`s country programmes, and ATAF will develop a proposed approach to developing establishment legislation for its member countries. We explain that tax certainty is intended to stabilize the expectations of taxpayers and governments. We propose three measures through which international cooperation can contribute to enhancing tax security. The first step is enhanced engagement programmes, which provide platforms and procedures for dialogue between large taxpayers and tax administrations at an early stage of investment projects.