Address to the Chartered Accountants in Banking Group, Institute of Chartered Accountants in Ireland
By Frank Daly, Chairman, Revenue Commissioners, 28 October 2004
Introduction
When Marie Barr invited me to speak to you today she expressed a hope that I could indicate that from Revenue's viewpoint "the worst is over for the banks". Given the difficult history of Revenue's relationship with the financial services sector in recent years it is easy to appreciate the nature of Marie's concern - but perhaps difficult to answer her question..
So, is the worst over for the banks?
Well let's start by saying that I sincerely hope so and that the prognosis looks good. I believe that right now Revenue and the financial institutions are working well together to clear up the legacy of tax non-compliance that existed in certain areas.
I can also say, and with some certainty, that on a broader front the general relationship between Revenue and the financial services industry continues to improve and deepen. This better climate provides us both with opportunities to ensure that the mistakes of the past are not repeated.
This relationship, and the benefits that it brings to both Revenue and the industry, will be the central focus of my remarks this afternoon. I also want to also touch briefly on one other issue, which is, I believe of particular importance to this audience - that is the changeover to International Accounting Standards.
At the outset then let me emphasise the importance to Revenue of a professional
working relationship with the financial services industry. I, and my colleagues
in Revenue, are very aware of the vital importance of this sector to the
economy as a whole. We also recognise the very dynamic nature of the industry,
evidenced by the continuing expansion in the range of financial products
and instruments and we acknowledge the need for clarity with regard to
the taxation implications of such developments and for Revenue to be responsive
in providing such clarity. We are proceeding on the basis that the businesses
that you work in want long term certainty in relation to tax exposure
and that you want no surprises emerging from Revenue investigations or
other enquiries.
Large Cases Division (LCD)
Revenue's Large Cases Division - a relatively new part of our restructured
Office - with its specialist business units dealing with banking, insurance
and pensions, is a central component of our relationship with the industry.
The relationship between LCD and its client group is a leading edge model of Revenue's desired relationship with all our customers. The LCD approach (or programme) is a balance of a highly professional, carefully targeted audit regime to tackle non-compliance, balanced with a positive co-operative relationship geared towards building the highest standards of compliance.
I would like to touch briefly on some aspects of this programme.
- Officers from the Division have had introductory meetings with executive management of large enterprises, encouraging them to review their tax compliance on a rolling basis;
- The largest cases have already been assigned a senior level case manager,
who acts as a contact point for the case and has responsibility for
monitoring the enterprise's compliance with its tax obligations;
- Audit programmes are focusing on specific themes and are being prioritised
to address risks which have been identified in our research and our
profiling of the industry;
- A strong commitment to self-regulation will be reflected in risk ratings
and the level of audit intervention will be scaled to match the perceived
risk - there will be no exemption from audit but audits will take as
little time as possible with consequential reductions in compliance
costs.
- On the other hand an uncooperative, confrontational attitude, a pattern
of aggressive tax planning; or little evidence of commitment to self
regulation will attract a commensurately greater degree of Revenue scrutiny.
- The Division is working to develop a Co-operative Compliance Framework between Revenue and our largest customers that will set out what our customers can expect from Revenue and what Revenue expects from them.
The Co-operative Compliance Framework
Let me expand just a little on that Co-operative Compliance Framework.
I don't have to tell this audience that internationally, there is an enhanced
recognition of the importance of effective governance in maintaining the
confidence of investors, shareholders and customers.
In addition to this international focus, the spate of revelations of non-compliance in Ireland has, I believe, begun the development of a much stronger sense of the social responsibility of every citizen, whether individual or corporate to comply with their tax obligations.
In practical terms, the Companies (Auditing and Accounting) Act, 2003 places compliance firmly on the corporate agenda.
Revenue's Cooperative Compliance Framework is designed to help directors to meet their obligations under the Act and to encourage acceptance of responsibility at top level for tax compliance matters. The Framework approach envisages that senior management at Board level will take overall responsibility for tax policy and for its proper management at operational level.
The Co-operative Compliance Framework therefore provides a timely opportunity for institutions to effectively stitch good tax compliance practices into their governance framework and thereby demonstrate their commitment to this responsibility.
I want to make it very clear that when financial institutions (or any
other business) adopt this Compliance Framework and behave "responsibly"
on tax, we will do everything possible to ensure that this does not of
itself create a competitive disadvantage. If Revenue has learned anything
from episodes such as DIRT, Insurance Wrappers and the like, it is that
a variation of Gresham's Law tends to apply to tax practices in the financial
sector; bad (or aggressive) tax practices drive out the good. I give you
reassurance here today that as far as Revenue is concerned, bad tax practices
will not be allowed to give any financial institution a competitive advantage
over those institutions that act responsibly from a taxation standpoint.
Legacy Investigations
It would be impossible to address the question of whether the worst is
over for the banks without reference to what are now called Revenue's
legacy investigations.
These investigations - into the legacy of non-compliance, largely involving
fiduciary taxes - have dominated our recent day-to-day interactions with
the financial institutions in this country. The scale of the non-compliance
exposed reflected poorly on some banking practices and also affected public
confidence in the administration of the tax regime. For Revenue, there
was never an option but to comprehensively address these issues. We have
a fundamental duty to the overwhelming majority of compliant taxpayers
to demonstrate that non-compliance cannot and will not be tolerated.
And we have been very successful in doing so. We demonstrated our commitment
by following through on holders of bogus non-resident accounts who did
not come forward voluntarily. This has paid off, not only in terms of
the €1.6 billion collected to date from special investigations, but,
and arguably more importantly, in its demonstration effect - we have proved
that we mean business. This was clearly reflected in the numbers coming
forward voluntarily with regard to the overseas assets investigation.
New phase of co-operation
The BNR investigation is now in the final phase. The Overseas Assets investigation
is moving to its second phase with Revenue preparing to go to the High
Court seeking access to the lists of offshore account holders so that
we can identify, and tackle, those who did not come forward under voluntary
disclosure.
A key positive aspect of the Overseas Assets investigation is the sea
change in attitude and commitment shown by the financial industry. This
investigation indeed may be seen as marking a new phase in the relationship
between Revenue and the financial, sector, a phase characterised by increased
contact at all levels, improved mutual understanding and enhanced co-operation.
As you are undoubtedly aware late last year I had a series of meetings
with the chief executives of a number of financial institutions. Without
exception they signalled clearly that full co-operation would be extended
to Revenue in relation to this initiative. To date the initiative has
secured €700m for the Exchequer but more importantly it has demonstrated
a willingness and an ability to deal with the legacy of tax evasion. I
am pleased to acknowledge the help and assistance of the industry in this
achievement and I look forward to continuing cooperation during the next
phase of our offshore investigations.
Suspicious Transaction Reports
Another area in which Revenue has worked well with institutions to establish
a mutually suitable framework, is the Suspicious Transaction Reports.
Again here I want to acknowledge the co-operation of the industry in working
with Revenue to address potential areas of non-compliance.
I believe that both the Overseas Assets and the Suspicious Transactions
initiatives provide compelling evidence that a co-operative engagement
between Revenue and the industry represents the best way forward for both
of us.
International Accounting Standards
I would like to focus briefly on an issue that will be very much on your
agenda in the coming months. The International Financial Reporting Standards,
or International Accounting Standards [IAS] go "live" from January
next - for accounting periods beginning on or after the 1st of January
- so the countdown has begun.
This change will involve considerable adjustment for business, particularly
so for the financial sector. The adjustment was not made any easier by
the uncertainties, at EU level, that surrounded the adoption of IAS 39.
In extending the requirement to report gains and losses on financial instruments
on a "fair value" basis at the balance sheet date, this new
standard presents a particular challenge to the financial sector in pursuing
steady profit growth
Business needs to know how the calculation of taxable income will be impacted
by the move to the new standards. Revenue, in consultation with our colleagues
in the Dept. of Finance, is examining the implications of the new standards.
As a general rule, we would like to see as close a correspondence as possible
between profits reported in company accounts and profits for tax purposes.
We recognize that complex adjustments to accounting profits serve to increase
the burden of tax compliance. Where possible, subject, of course, to protecting
Exchequer yield, we want to avoid adding to that burden.
To look briefly at a few relevant examples of the issues arising from
the changes:-
- the treatment of financial instruments and the profit volatility that may result from more extensive booking of these instruments at balance sheet date market values;
- the tax deductibility of new methods of providing for doubtful debts;
- the requirement to deduct, in computing profits, a measure of the the cost of share-based payments, for example share options provided to employees;
- the timing of recognition of fee income and payments - for example loan fees previously credited and debited immediately may now be recognized over the life of the loan concerned.
I can assure you that this is now a priority issue on Revenue's agenda and, in consultation with the Department of Finance, we will be working towards clarification of the tax implications of the move to the new standards as soon as possible.
Conclusion
In conclusion I might return to Marie's question - is the worst over for
the banks?'
I believe that the cathartic period we've been through has cleared the
way for a greatly improved professional working relationship. The legacy
issues are being dealt with and co-operation, communications, mutual understanding
and respect are now very much a part of our relationship. I hope we both
recognise our interdependence. Revenue needs tax compliance from the financial
sector and a healthy, competitive, internationally respected financial
sector needs a good working relationship with Revenue - and I hope it
doesn't sound too pretentious if I say that the country needs both! Looking
forward I see the development of the new compliance framework as developing
and deepening that relationship. The challenges will come in the form
of maintaining a focus on tax compliance as a key corporate priority and
ensuring there's no slippage, no rowing back, no re-thinking on co-operation.
To that extent the answer to Marie's question is ultimately in your hands.
For my part I think it's not so much a question of the worst being over,
more, perhaps, of the best being yet to come.
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