Large Businesses - Co-operative Approach
The Cooperative Approach to Tax Compliance - Revenue Working with Large Business
- The purpose of this Publication
- What is Cooperative Compliance?
- Why Cooperative Compliance?
- Are formal agreements necessary?
- Does engagement in Cooperative Compliance imply poor compliance?
- What if a business does not wish to engage in Cooperative Compliance?
- What benefits will Business get from Cooperative Compliance?
- What benefits will Revenue get from Cooperative Compliance?
- Tax Advisors and Cooperative Compliance?
- What is needed to make Cooperative Compliance work?
- How Cooperative Compliance will work in practice
- Monitoring the effectiveness of Cooperative Compliance
The purpose of this Publication
The publication explains what cooperative compliance is about and how Revenue and large business in Ireland can work together to promote tax compliance.*(See note)
The publication is intended primarily for -
- Large business taxpayers;
- Revenue managers and staff;
- Tax Advisors.
* Note: For the purposes of this document "tax" means all taxes and duties administered by Revenue
What is Cooperative Compliance?
Cooperative compliance envisages a new form of relationship between Revenue and large business, one where both parties work together to achieve the highest possible level of compliance across the taxes for which particular businesses need to account.
This cooperative model is increasingly becoming a feature of the relationship between large business and Revenue administrations across the world, reflecting the growing sense of a mutual interest in being as certain as possible about tax liabilities and in ensuring that there are no surprises in any later reviews of these liabilities. The most important feature of these relationships is the understanding reached about the actions that both business and the Revenue administration need to take to achieve high compliance standards.
The Irish model will involve voluntary understandings between individual large businesses and Revenue that will set out what each side needs to do to enable the business to achieve the compliance objective. These understandings, which will essentially be the platform for compliance, are outlined in this publication.
What cooperative 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 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.
Why Cooperative Compliance?
Worldwide, regulatory compliance and particularly tax compliance has become an increasingly important focus for business. The passage of the Sarbanes-Oxley Act 2002 in the United States and legislation and practice with similar objectives in Ireland and in a number of other countries have resulted in a heightened awareness of effective tax risk management as an important aspect of good corporate governance.
Regulatory requirements apart, Revenue's interaction with Irish large business management suggests that there is, in any event, a strong desire to have certainty in relation to the incidence of taxes of all kinds before accounts are signed off.
For businesses searching for ways of ensuring this kind of longer-term certainty in relation to tax exposure, the cooperative compliance approach opens a door to the kind of dialogue with Revenue that can help them to achieve this objective.
Cooperative compliance also offers an important opportunity to Revenue, business and tax advisors to work together to arrive at solutions that do not compromise the law or the interests of the wider community. Experience in Ireland for many years past has demonstrated the strength of public interest in tax equity and the extent to which the view of fairness is driven by perceptions of the degree of compliance among large taxpayers.
Are formal agreements necessary?
No. There is no intention to create any kind of legal commitment - the model depends on a high degree of trust. What is important is what both sides actually do to ensure high compliance. The Irish model will involve understandings worked out in discussions and in joint reviews of tax risk. These reviews will lead towards agreed compliance action plans. The willingness of both sides to engage and the actions which each proposes to take can simply be confirmed by letter.
Does engagement in Cooperative Compliance imply poor compliance?
No. Revenue accepts that many businesses already have a strong compliance ethos and would see themselves as broadly compliant while many others are pursuing a similar goal. Tax, however, is complex. Revenue's 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. This can be caused by lack of understanding, carelessness, poor systems, inexperienced staff, etc. any of which can mask significant unexpected tax exposure.
The proposed reviews of tax risk will allow Revenue to contribute its experience of risk areas that may need to be taken on board by a business in its assessment of the tax risk dimension of overall regulatory risk.
What if a business does not wish to engage in Cooperative Compliance?
There is no obligation to engage in the cooperative approach to tax compliance - this is entirely voluntary. Businesses which engage may also decide to opt out at any stage. Equally, Revenue may discontinue cooperative compliance with businesses that do not operate on the basis of the understandings reached.
What the cooperative model is offering is a partnership approach towards creating high compliance from which, of course, there can ultimately be no opt out.
What benefits will Business get from Cooperative Compliance?
- 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.
What benefits will Revenue get from Cooperative Compliance?
- A relationship with business based on trust, mutual understanding, openness and transparency;
- An ability to predict with reasonable confidence what the position of a business will be in relation to tax issues;
- A better understanding of business;
- Greater certainty in relation to forecasting tax yield;
- Business insights to inform the debate on the tax code and on its administration;
- Greater impact on non-compliance through focusing greater audit and enforcement resources on the cases presenting the highest risk;
- Accurate and timely tax returns and payments;
- The possibility of reduced administrative costs.
Tax Advisors and Cooperative Compliance?
Revenue recognises the very important role tax advisors play in the administration of the tax code and the significant contribution they make in leveraging tax compliance. The constructive relationship that exists between tax advisors and Revenue will not change because of the advent of the cooperative compliance approach or because of the direct interaction between Revenue and business management that this involves.
The cooperative compliance approach is structured so as not to undermine, in any way, the relationship between business taxpayers and their tax advisors. The dialogue with business that Revenue has developed will operate in parallel with its traditional relationship with tax advisors.
The extent of involvement of tax advisors in any aspect of the tax affairs of a business, including cooperative compliance, is a matter for the business and its advisors. In practice much of the discussion on tax risk analysis and on the formulation and implementation of action plans for tax risk management is likely to involve tripartite contact between Revenue, business and their tax advisors.
What is needed to make Cooperative Compliance work?
- Commitment to jointly build a positive professional approach to ensuring high compliance, based on mutual trust, understanding and openness;
- Recognition of the need to eliminate behaviour from either party that could undermine trust;
- Recognition that a co-operative relationship does not limit Revenue's right to test compliance through audit, with such audits being conducted in accordance with the Code of Practice for Revenue Auditors;
- Commitment by business to being open with Revenue in relation to its tax planning strategies;
- Recognition that, within a cooperative relationship, disagreement or differences of opinion on the interpretation of tax law may still arise and may have to be determined at appeal;
- Commitment by both sides to demonstrating that community expectations of compliance are being met and that the tax system is working effectively;
- Carry through of the commitments that each side makes to the other to support the attainment of high levels of compliance.
How Cooperative Compliance will work in practice
To begin the programme Revenue will engage with a number of the companies dealt with in Revenue's Large Cases Division with a view to seeking the agreement of these companies to put in place cooperative compliance arrangements. Depending on the results, Revenue may extend the approach to other companies.
- Internal responsibilities for compliance
Each side will define where responsibility lies for ensuring that the commitments that support compliance are honoured. At the business level, it will be clear how the compliance obligation is positioned as a dimension of good corporate governance and where responsibilities lie at Board, management and operational levels. In Revenue, there will be a similar outline of responsibilities and Compliance Managers will be assigned to each large business with responsibility for ensuring service and managing all aspects of the relationship between Revenue and the business.
- Action plans to achieve compliance
- 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 the implementation of a set of compliance actions for each tax.
- The first step, for each tax, will involve the parties engaging in a risk review meeting at which Revenue will give an overview of its perspective on potential tax risks for the business and its sector, and the business will point up 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 tax risk management plans focusing on agreed risk areas.
- Revenue audits will, where considered necessary in particular years, be part of the overall action plan. These audits will, as far as possible, be signalled to the business as part of each year's overall risk management plan and will be the least intrusive possible for businesses genuinely engaging in cooperative compliance. Risk analysis driven by profiling and business intelligence will, however, ontinue for all businesses and business sectors. Exceptionally, where necessary, audits beyond the programme envisaged in the cooperative compliance plan may be conducted.
- The audit dimension of the cooperative approach will therefore be reflected in a mix of self-audit and Revenue audit. The risk profile emerging from the engagement of both sides in reviewing risk will drive both forms of audit.
- While Revenue recognises tax planning as an important dimension of financial management, it will nevertheless expect that a business will, as an element of Cooperative Compliance, 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.
- Businesses will have the opportunity, as provided for in the Audit Code of Practice, to make unprompted disclosures of issues thrown up by its initial and ongoing compliance reviews. Where Revenue audit letters have already issued the rules applying to prompted disclosure will apply.
- Revenue will respond, as quickly as possible, to requests for interpretation assistance from business and their tax advisors. Ideally this assistance would take the form of consultation at the earliest possible stage. This could be of particular benefit to businesses engaged in projects with potential major tax significance, such as mergers, takeovers, investment projects etc.
- Revenue will respond promptly to well-founded complaints from business about potentially unfair tax-based competitive advantages allegedly being enjoyed by competitors.
- Feedback of difficulties with the tax code or tax administration
The interaction between Revenue and business in cooperative compliance will provide an important opportunity to crystallise and feed back views in relation to particular difficulties with the tax code or with how it is being administered.
- Compliance cost and efficient tax management
The dialogue can particularly facilitate ongoing exchanges of views on both compliance costs for large business and on the efficient use of resource in Revenue - leaving open the possibility of agreement on ways of working which can offer efficiencies in both areas.
Monitoring the effectiveness of Cooperative Compliance
- Dialogue between Revenue and business
The ongoing interaction between business and Revenue will provide a channel for constructive dialogue within an environment of trust where the positives or negatives that may emerge as cooperative compliance evolves can be resolved in a professional manner.
- Disagreements within Cooperative Compliance
Businesses engaging in cooperative compliance or their advisors will, of course, where they find it necessary, have full access to the appeal process and to the facility to seek internal review within Revenue or external review. Decisions by businesses and their advisors to opt for the appeal route or any form of review will be regarded as fully compatible with the cooperative compliance approach.
An additional feature, which can be brought into play to help solve emerging problems, will be the right of either party to escalate the problem issue to senior management in the business and in Revenue.
- Reviewing Cooperative Compliance
Structures will be put in place to provide for consultation between Revenue, business interests and the tax advisory bodies on cooperative compliance as it unfolds.