Same Game - Differing Goals - Revenue and Tax Practitioners Address by Revenue Chairman, Frank Daly, to the KPMG Tax Conference, 4 November 2005
Introduction
I would like to begin with a word of thanks to Liam Grimes for the invitation to speak at this conference. I greatly value opportunities for dialogue with practitioners. While forums such as Tax Administration Liaison Committee provide excellent liaison on an ongoing basis, I see today as an opportunity to meet directly with key players in a major practice, to put Revenues perspective on our relationship to you and to hear at first hand the concerns and issues that you may have.
Incentives Review
Ladies and Gentlemen, I believe that it is always appropriate to recognise when there is an elephant in the room. In the light of Constantine's presentation and with a budget looming, many of you will be waiting anxiously for news of the review of tax incentives which is being carried out jointly by Revenue and the Department of Finance. I trust that you will appreciate that the emerging results of this review will form the basis of very sensitive policy decisions and that it would not be in any way appropriate for me to comment at this stage. So beyond noting that the review has progressed well I am afraid that, for today, I can do no more than to recognise the elephant and leave him to graze quietly in the corner.
Role of Practitioners
To return to matters in which I can comment, can I begin by re-affirming the importance that Revenue attaches to practitioners such as yourselves as key players in the tax system. Your input is important on a number of fronts:
- You support your clients in negotiating the complexities of the tax code - and, despite everybody's best efforts, it is complex.
- You play a client advocacy role in negotiation with Revenue or in appealing particular decisions that ensures clear and professional representation of your clients' position.
- Very importantly from my perspective, you can really influence and guide your clients along the path of compliance. Not only ensuring that they meet their filing and payment obligations, but also encouraging and leading them to meet those obligations in a manner that is honest and comprehensive.
- Through your largely unpaid (and maybe sometimes unappreciated!) work on representative bodies such as TALC, ITI, and the CCABI you engage very effectively with Revenue in articulating more general concerns about aspects of taxation and influencing the way in which we structure and administer the tax code.
And it's fair to say that to the extent that you play the above roles with efficacy and enthusiasm, you advance the agenda of creating a more general climate of tax compliance in this country.
Mutual Goals and Mutual Respect
So it is clear that Revenue and Practice have many common goals and, in many respects, there is a firm foundation for a healthy working relationship between us. In reality too, I believe that for the most part that working relationship is defined by a mutual respect, an acknowledgement of the absolute validity of each other's roles and, as on occasions like this, a willingness on both sides to engage in open dialogue which can only be to the benefit of all.
Differing Goals
That's not to say that there won't be times when there are tensions. There will be times when while we may well be playing on the same pitch, we will have differing goals. There will be times when we will tackle each other - robustly (spear tackles are out!) - and never to the extent where one or other of us is either sent off or carried off! I believe that it is best to openly acknowledge these tensions and consider how we can work to minimise their impact on our relationship and on our mutual goal of a healthy, fair and effective tax system.
Revenue's Goal
Revenue's goal is clear and simple. It is to deliver compliance with tax and duty legislation. We want to ensure that all taxpayers, whether corporate or individual, meet their obligations and pay their fair share as defined by law. This is what the community rightly expects of us - that we collect the taxes and duties needed to fund essential public goods such as security, infrastructure and education. It is what business expects of us, not only so that public programmes are funded but also to ensure that the competitive marketplace is not unfairly distorted by fraud, evasion or avoidance.
Economic Development
But beyond simply delivering on our compliance goals Revenue also has a wider role - we play our game in the context of the economic development of Ireland. This means that we must remain sensitive to the impact of our actions on trade and investment and work alongside our colleagues in other Government Departments to ensure that Ireland remains an attractive destination for investment activity. While Ireland's tax policies have been, are and will continue to be, a key factor in our success in attracting investment, it is also true that access to advice and support at a senior level from Revenue and other Government agencies has been an influential factor in investment decisions. In this regard, it is important to remember that such advice and support takes place in a context which is increasingly transparent and open to scrutiny both within Ireland and elsewhere and in a context which must be sensitive to State Aids rules. It is also given in a context where there is an overarching concern about preserving Ireland's reputation with EU and Treaty partners. In any event it seems to me that certainty for business makes any other type of approach practically pointless.
It would be remiss of me perhaps at this time not to note that work is commencing on the so-called "post 2005" issues in relation to the IFSC. In my view a priority for Ireland will be to focus support on business activities that deliver real economic benefit and that also enhance the reputation of the IFSC internationally. Revenue, with the Department of Finance and the Department of An Taoiseach, will, as always, continue its support for the financial services industry fully recognising its strategic significance for Ireland - not to mention its specific contribution of in excess of €663million in taxes in 2004 and the employment (directly and indirectly) of over 21,600 individuals.
We will work to resolve issues where we can, we will offer advice and clarification on the tax issues of any business activities that become the focus of the new strategy. In turn, I would expect that practitioners and business would recognise that Revenue cannot, and should not, give any business carte blanche.
Before I leave this area of the economic development role of Revenue I should add quite definitely that the role of Irish tax professionals has also been hugely important in opening doors for inward investment; this is a reality which has not perhaps always been fully appreciated or sufficiently acknowledged.
Practice Goals
I believe that the broad goals I have outlined for Revenue are also ones to which you can easily subscribe. Your business and that of your clients can only benefit from a healthy economy, adequately funded public programmes, a level playing field for business and an environment that is attractive to investment.
However, and let's be open about this, your clients also have other expectations of you, in particular that you will contain or minimise their tax liabilities. In principle there is no conflict here. We in Revenue fully acknowledge that it is the right of taxpayers to manage their affairs in a tax efficient way and your job to advise your clients to this end. This must, of course, at all times be done within the constraints of the tax code. And I would have to remind you that measures to combat the use of artificial schemes to avoid payment, including Section 811, do form part of our tax code.
That of course is the strict letter of the law. But Revenue would maintain that something more is required than compliance with the strict letter of the law, where such strict compliance can be obtained only through artificiality or 'gymnastics'. We have already publicly stated, and I restate it here today, that we expect responsible taxpayers and responsible tax advisors to have due regard to the intent of the tax code - provided such intent is reasonably clear - and not to regard our tax laws as just something to be 'played with' and used artificially to outflank the objectives of a democratically elected Parliament.
This is an area that I will return to as it's one where I suspect there may not be a meeting of minds! But first I want to focus initially on areas of common and mutual benefit - where we may well agree!
Areas of Mutual Benefit
Revenue's business objective, as I have stated, is compliance. Our strategy to deliver on that is to maximise voluntary compliance. From the outset we recognise that for most taxpayers, voluntary compliance is not only the sensible, cost effective option, it is also a basic social responsibility.
Facilitation
So for our part we want to facilitate the compliant taxpayer to the greatest extent possible by providing easily accessible top quality services and through the continued simplification of taxpayers interaction with us. By minimising our interaction with compliant taxpayers, and by carefully targeting our compliance interventions, we not only make life easier for compliant taxpayers and their agents, we also free up our own resources to focus on the areas of highest risk.
In all of this, I believe that we have common cause with practitioners. The development of simplifications through the various TALC sub-committees, the provision of 24/7 filing opportunities and extended deadlines on ROS serve to smooth interaction between us. Co-operative approaches, such as the ongoing consultative process with regard to International Financial Reporting Standards serve both Revenue and practitioners very well. In that particular case we consulted with all of the major representative bodies both before and after the publication of the Finance Bill. Indeed I know that the second stage consultation included representatives from your firm - and I thank you for your constructive input.
Structural Change
The changes to Revenue's organisational structure were, inter alia designed to enhance the delivery of services to our compliant customers. By re-shaping the organisation around our customer base we are providing focussed and integrated services across the range of taxes and duties through our Regions and Large Cases Division.
Impact on Practitioners
The re-design has, of course, impacted on our relationship with practitioners. A key principle of how we now deliver of services is that, in general, the Region handling a case should be the first point of contact for queries, including interpretive issues. This was specifically intended to manage a particular risk that was inherent in our old structure, that of potentially conflicting advice being issued separately by the operational areas, technical services and the legislation Divisions.
I must be honest in acknowledging that this arrangement has given rise to difficulties in practice, in particular with regard to the skilling of front line staff to deal with interpretive issues. I can assure you that we are investing heavily in a programme of mentoring and training to ensure that front line staff will be in a position to give a top quality service on the vast majority of questions to taxpayers and practitioners.
Co-operative Compliance
I want to touch on an initiative which I believe can significantly enhance our relationship with compliant taxpayers. That is the development of Co-operative Compliance Agreements. These agreements, initially focussed on businesses dealt with in the Large Cases Division are intended to form the basis for a new and very positive relationship between Revenue and businesses. The agreements provide a means whereby we can work together to achieve high levels of compliance balanced with greater certainty for business in relation to tax exposure.
The programme relies on a very simple principle, one which reflects recent trends in improving corporate governance. That is, that businesses have systems in place which ensure their tax compliance. We want to see responsibilities for tax compliance clearly defined at Board, senior management and functional levels.
Revenue is currently in discussion with a number of taxpayers, across a range of business sectors, who have expressed interest in participating in the programme. We hope to be at an advanced stage of engagement with at least 25 customers before the end of the year, working to implement full cooperative compliance programmes with them in 2006.
Co-operative Compliance and Practitioners
I would like to emphasise one key point here. Contrary to some speculation, these agreements are not, in any way, intended to squeeze the tax practitioner out of the relationship between your clients and Revenue. Co-operative compliance agreements do not magically simplify the tax code or eliminate filing obligations. The role of the practitioner will continue to be valued and respected.
Impact on Avoidance
There is, of course, an area in which these agreements may impact on the relationship between Revenue, practitioners and taxpayers. An important aspect of the agreement is that Revenue expects a degree of openness in relation to tax planning strategies - where these are in place or are being considered. I realise that you may have concerns about what may arise from that openness, but I do believe that ultimately we can all only stand to benefit from enhanced transparency and certainty.
Special Investigations
Moving away a little from the facilitation dimension I want to touch on another area where I believe we will have no difficulty in agreeing that we have common goals, that is the challenge of rooting out fraud and evasion and establishing a culture of tax and duty compliance.
The legacy of entrenched evasion revealed in recent years presented Revenue with both a huge challenge and major opportunity in terms of public perceptions of tax compliance.
The opportunity lay in the hardening of public attitudes to tax evasion that these revelations generated. The challenge lay in how we responded. In order to re-assure compliant taxpayers of the even-handedness of our administration of the tax code, it was vital that we were seen to vigorously pursue these frauds.
Successes and Impact
It's no secret that Revenue is quietly satisfied with our successes in dealing with this legacy of non-compliance. To date we have collected over €2.114 billion. More importantly we have demonstrated that we mean business. These investigations have sometimes been slow and tedious, but by sticking to persistent defaulters until we collect what is due, we are driving home the message that there is no hiding place.
Showing Determination
I have no doubt that the scale of response to the deadlines in the Offshore Assets and Insurance Products cases was in no small part due to fact that we had proven our determination to follow through on the original deadline for bogus non-resident account holders. In that case there were certainly people who believed that, if they kept their heads down, we would not have the resources or the will to find them. But we did. A mere 3,750 cases came forward voluntarily in 2001. But through the use of High Court orders to gain disclosure from financial institutions we expanded the investigation to encompass a total of over 12,500 cases and pursued these. This investigation is now almost complete but the lessons were not missed by those engaged in evasion. Revenue has demonstrated that we have the will, the skill and the persistence to tackle large-scale complex investigations. As I speak we have secured 6 High Court orders against financial institutions requiring them to give us details of offshore account holders and we expect to be in Court to secure similar orders against the remaining relevant institutions before the year end. The information flow which has already commenced as a consequence is the basis for follow through on the post voluntary disclosure phase of the Offshore Assets Investigation. You will also be aware that we have commenced enquiries with Insurance Companies with a view to following through on the post voluntary disclosure phase of the Life Assurance Products investigation.
Moreover, we have the powers, and I would be remiss if I did not acknowledge of the support of Ministers for Finance and the Oireachtas in getting the powers necessary to deliver successfully on these investigations.
Role of Practitioners
I also want to acknowledge the role played by practitioners. The scale of the investigations an the various disclosure deadlines put many practitioners under pressure. I want to recognise the importance of your role in helping clients bring their affairs up to date and re-establishing themselves on a compliant footing.
Improved Approaches to Evasion
Establishing that Revenue means business is about more than cleaning up the legacy of past scandals. Along with gaining improved powers, we have invested heavily in enhancing our ability to rapidly identify, investigate and prosecute tax evasion.
We have established a dedicated Investigations and Prosecutions Division with a clear mandate to bring increased numbers of criminal prosecutions for tax evasion. The work of this Division is now bearing fruit with four custodial sentences handed down so far this year for tax offences and 78 cases currently in the prosecution pipeline.
We have also developed sophisticated Intelligence and Risk Identification tools and established Special Compliance Districts. At an international level we have worked to build our network of treaties and exchange of information agreements, enhancing our ability to follow hot money wherever it goes.
Looking at sectors, supply chains and taxpayer segments
I should mention that, as well as risk scoring each corporate and individual taxpayer for purposes of selecting the most appropriate cases for audit or other Revenue interventions, we are also looking at compliance risks from a 'top down' perspective. This can involve close scrutiny of an entire industry sector, a supply chain within a sector, or other taxpayer segment that appears to present particular risks.
As an example of a sectoral approach, in 2006 we will be assigning 25 per cent of our available audit resource (apart from those involved in the 'legacy' projects) to the examination of the construction and property development sectors. And an example of one of our supply chain projects for 2006 is the oil distribution chain - with a particular focus on the illegal use of laundered, marked and 'stretched' oil products.
I should also mention than many of these sectoral and supply chain projects will increasingly involve the use of computer audit techniques as more of our auditors become trained in 'e-audit'. (e-Auditing is already being used extensively - and very successfully - in some of the sectors dealt with by our Large Cases Division.)
It would be naïve for me to suggest that we have reached a point where there is nowhere for the tax evader to hide, but I consider it a key task in Revenue's role of serving the community to work relentlessly to root out and close off all hiding places - and we are getting very good at it! Perhaps the really naïve individual now is he who believes Revenue will never find his hidey hole!
Avoidance
Let me get back to an area where I think there is (as yet anyway) no great meeting of minds between Revenue and Practitioners - I refer of course to the area of avoidance. I'm sure you would be quite disappointed if I didn't mention it! And I'd like to avoid the well-ploughed terrain of our differing views on what constitutes avoidance or where this crosses the threshold into what might be labelled aggressive or abusive or unacceptable avoidance. We'll not get far by trying to define labels although I would reiterate that the line in the sand has a lot to do with whether particular interpretations of tax law depart from what the legislators clearly intended - and I would have to say that Revenue's very long experience of the avoidance battlefield suggests that there is rarely doubt about whether or not certain interpretations breach the spirit of the law. Instead I'd like to concentrate on two aspects - why Revenue takes avoidance so seriously and what we are doing about tackling it.
What's the impact of avoidance?
First of all something basic - avoidance offends the spirit and purpose of the law. Government develops programmes of capital and current spending, including social spending and long term infrastructural development based on expected Exchequer funding largely provided by projected tax revenues. These revenues are based on Government and Parliament approved taxation policies and taxation rates - these elements define the tax base. It's a democratic process in this country - we elect the Government and by doing so we give them the authority to make decisions - including defining the tax base - the base from which they can reasonably expect to fund their plans and programmes for the common good.
It is a key responsibility for Revenue to protect that tax base and, where it is eroded by resort to schemes that rely on "artificiality" or "gymnastics" and that seek to set aside the intent of the law - where that is reasonably clear - it is our responsibility, and our intention, to challenge this. In doing so we are ensuring that our tax laws are not just something to be played with and that the clear objectives of our democratically elected Parliament are not artificially outflanked.
It's obvious that if the tax base is eroded Government does not have the funding which it expected in order to deliver its services and programmes and at it's simplest there are two possible direct consequences - either those services and programmes are curtailed or the tax burden on everybody else is increased to make up the difference - many others have to make up the shortfall caused by a small few not paying their fair share.
Apart from direct erosion of the tax base it is also arguable that avoidance has a corrosive effect on the economy, creating distortionary effects for business and putting pressure on them to join the "avoidance club" to even up the competitive distortion which is created.
And of course, the perception that a rather narrow group of individuals or entities create a position in which they can artificially massively reduce their tax bills is offensive to the general population of taxpayers and leads to an attitude of "why should I pay when these people are getting away with it" - leading to erosion of compliant activity and an undermining of Revenue's key goal of promoting a compliant culture.
[You'll notice I'm keeping this at a practical level - I haven't even referred to morality or corporate and individual social responsibility or ethics! - that perhaps is for another day!]
Avoidance Strategy - Structural Issues
So what are we doing about tackling avoidance?
Of course it's not news to you that we tackle avoidance schemes in a twofold way - we challenge individual instances as they arise and we simultaneously re-examine the relevant legislation with a view to its amendment if necessary. This if course inevitably leads to an array of technical provisions in Finance Acts, each designed to plug the latest hole burrowed by the creative designers of avoidance schemes. A direct consequence of this is an undesirable level of complexity in the tax code.
On the structural front however a number of dimensions of our new organisational structure are now specifically intended to facilitate the identification and combating of avoidance. In particular, our anti-avoidance activity has been strengthened through the establishment of two specialist units focusing on direct and indirect taxes.
These units have built very close links with their colleagues in Large Cases Division and in the Regions, ensuring that they have the capacity and processes to identify and tackle avoidance schemes.
Increasingly too, our Investigations and Prosecutions Division is becoming involved in avoidance cases. Where there is any indication that a Revenue offence may possibly have been committed in relation to any particular element of an avoidance arrangement, we fully intend to change the nature of our investigation with a view to obtaining a conviction in the courts. Some avoidance schemes do involve elements of fabrication and 'sham' transactions, and where we consider that the illegality line may have been crossed, we will go down the criminal investigation route.
We are also ensuring that companies or individuals who engage in aggressive avoidance will be classified as high risk, which means that all aspects of their tax compliance will regularly be subjected to very close scrutiny by Revenue.
Balancing Need for Clearer Legislation
On the other hand, we fully accept that the need to combat avoidance must be balanced with clear and comprehensible legislation which is as accessible as possible. In this regard, you are probably aware that Revenue are currently undertaking a significant review of VAT on property. The aim of this study is to recommend a simple but robust system that would replace the existing legislative maze which both Revenue and practitioners recognise has become challenging to say the least - although we might not agree on why! Certainly our view would include the view that some of the complexity has evolved from years of plugging avoidance opportunities.
We are approaching this Review in an open and consultative manner and I would like to acknowledge the constructive engagement from tax practitioners in the process - the submission from the Irish Taxation Institute on behalf of practitioners is practical and considered. I hope it will be possible for us to develop our proposals for change in as constructive an atmosphere but bearing in mind that one of the requirements is that the outcome has to be Exchequer neutral - submissions which seek to create avoidance opportunities will make that difficult.
Current Cases
In view of the increasing importance of VAT in financing the Exchequer, the current debate about VAT avoidance and the cases going through the ECJ are of more than passing interest. We await with great interest - as no doubt you do also - the Court's ruling in the joined cases of Halifax, BUPA and Huddersfield.
Advocate General's opinion in Halifax
The Advocate General's opinion in the Halifax case is important because it identifies a possible new element in our armoury against aggressive tax avoidance i.e. the doctrine of abuse of rights. As the Advocate General graphically puts it, this doctrine represents a "last frontier against a wild west" in which every sort of opportunistic behaviour is acceptable if it merely conforms to a strict formalistic interpretation of the law.
Attitudes
Before I conclude I would like to touch briefly on the question of attitudes to taxation. It is an area in which I believe that practitioners, through your contacts with clients and your public statements can have a very positive influence.
Tax is not simply a dead cost on business. I mentioned earlier that tax is essential to the provision of public goods such as security, infrastructure and even Government. Tax is, in many ways, the price we pay for the privilege of living in a civilized and democratic society or, to present a corollary to the rallying cry of the Boston Tea Party - it is unreasonable to expect representation without taxation. We can, of course, debate and argue about appropriate levels of taxation, and we enjoy the freedom to influence these through the democratic process. But grumbles about the level of taxation should never be regarded as an excuse for not paying our fair share. This is an area in which both Revenue and practitioners have a role to play, establishing a positive attitude and a general understanding that tax compliance is a basic corporate and social responsibility - perhaps we don't articulate this enough - perhaps we could (and maybe even together at times) do some more in this area.
Conclusion
Ladies and gentlemen, we're definitely in the same game. We may on occasion have differing goals and employ different tactics. But I do believe that when it comes to the fundamentals, we are very much on the same side. We are certainly going to disagree at times on the interpretation of elements of the tax code. We may, on occasion, disagree about where the line is between tax efficient business planning and avoidance. But we can agree that a society in which everyone pays their fair share of tax and duty in accordance with law (and I would say in accordance with the intentions of the Oireachtas where that is clear), is surely an objective worthy of the support of both tax advisors and tax collectors.
Thank you