"Managing Tax Risk - DOC"
GENERAL OECD SPEECH 1 – 2 JUNE 2005 SEGMENT AUDIENCE FORMAT DATE STRIKING THE BALANCE BETWEEN SERVICE AND ENFORCEMENT The strategies we use to determine our approach Jennie Granger Second Commissioner Australian Taxation Office OECD, Dublin, Ireland 1 – 2 June 2005 Lessons from the past, directions for the Future Lessons from the past, directions for the future Our statement of business intent establishes how we in the Australian Taxation Office carry out our role of managing the country’s revenue system. OUR BUSINESS INTENT Our business intent is: ‘To optimise collections and make payments under the law in a way that instils community confidence that the system is operating effectively.’ This statement emphasises the point that the Tax Office is not, and will never be resourced, to chase every last dollar payable under the law. We are required to make intelligent choices about what compliance risks will be treated and how and, consistent with that, where to best apply the resources available to us. Our statement of business intent also provides the core guiding rule for making those choices – will they promote confidence in the community that the system is operating effectively? Notwithstanding our institutional authority, we will not be free to operate if the community does not have confidence in the way we are managing the system. This is a lesson from history for all institutions. Recognition of this impacts on decisions about allocation of resources and the strategies we employ. It means, for example, that our most intensive audit and review activities are at the large end of the market – large corporates and high wealth individuals. Our audit results in this market continue to be substantial, and we continue to identify significant risks. It means that we need to differentiate our treatment of taxpayers according to their approach to meeting their tax responsibilities and the circumstances they face in doing it. It also means we have to find the right balance between service and enforcement. This is both in the overall balance we achieve in managing the revenue system and in addressing the individual needs of taxpayers and how we treat them. At the next level our business model shows how we turn that intent into action. 1 Lessons from the past, directions for the Future OUR BUSINESS MODEL Context The Australian system relies on taxpayers self-assessing their tax obligations. This self-assessment system sets the context in which we operate. It flows from the recognition, reflected in our business intent, that tax administrators are not going to be resourced to review all transactions or events that may have a tax consequence. Such an approach would also be rejected by the community as too burdensome and intrusive. Self-assessment is, in essence, a risk management approach to revenue administration, an approach that is commonly employed around the world. It is based on the reasoning that revenue administration is best achieved by employing the available resources to: support people in doing the right thing, and concentrate reviews on cases where there is a greater risk of people not doing the right thing, whether intentionally or not. APPROACH This reasoning leads to the key components of the approach identified in our business model. That is, our approach is framed around the twin objectives of: making it as easy as possible to comply; and verifying compliance using a risk management approach. Recognising that there are many different participants in the revenue system and that different taxpayers take different postures in meeting their obligations, these key approaches are overlaid with the need to ‘manage relationships and differentiate accordingly’. The combination of these components of our business model mean that we are required to operate variously as: a trusted authority on the law a professional advisor and educator, ensuring people have the information and support they need to meet their obligations under the law a firm enforcer of the law, and a fair administrator who recognises people’s circumstances in meeting their obligations. 2 Lessons from the past, directions for the Future CAPABILITIES The final component of the business model recognises that delivery ultimately relies on the capabilities of human beings and that building that capability is a key element of effective revenue administration. This is true of staff of the Tax Office where proper skilling, and systems support, are imperatives. It is also true of others who play a significant role in managing our revenue system. As such, the business model acknowledges our role in supporting people and businesses that contribute to the effective operation of the tax system, including tax agents, accountants, advisers and software developers. This component of our business model therefore extends our service obligations beyond the traditional concept of service to taxpayers (and their representatives). The booklet I have provided expands on these elements of our business model and points to current and future directions in delivering on it. Some of the trends detailed there are: a shift towards greater certainty for taxpayers within a self-assessment system an emphasis on promoting and supporting a culture of tax risk management in the community a greater emphasis on lodgment compliance and debt management expanding online and real time information and transactions to ‘open up’ personal account and transaction details to taxpayers, and providing tax officers with the tools necessary to ensure a taxpayer feels they are dealing with a person who understands their dealings with us. If our business intent and business model provide the conceptual framework for the role of service and enforcement, how then are choices about balance made in practice? I am going to approach the answer to that at three levels: non-discretionary service proactive compliance management, and management of particular compliance risks 3 Lessons from the past, directions for the Future NON-DISCRETIONARY SERVICES The first level recognises that we do not have an unlimited budget and that there is what might be categorised as non-discretionary demands on that budget. This both limits the resources available for service and enforcement activities and dictates the nature of certain services. Thus there are essential services that must be provided to ensure that ‘machinery of revenue collection’ operates smoothly. People need a basic understanding of what they need to do to meet their obligations. They need to know when to pay and what to pay. They need to be able to be able to transact business with us – lodge returns and make payments. In our case these service standards are articulated in the taxpayers’ charter, which also sets behavioural expectations in our dealings with taxpayers. Ultimately the standard of these services – turnaround times and quality – are set by community expectations. These let themselves be heard through direct representations to the Tax Office, through representations to Members of Parliament, through parliamentary committees, through the media and through our own research into taxpayer needs and expectations. Indirectly, these expectations are set by people’s experiences in dealing with other organisations, both public and private. This may not sound like an exact science but experience tells us it can be a blunt science. For example, when tax agents were feeling the pressure of learning about new taxes and meeting expanded lodgment and payment requirements following major tax reform in 2000, they made it clear in no uncertain terms that we needed to lift our game! Of course, while these services might be non-discretionary, how they are delivered and the level of resources required to do that can be influenced. That is the reason we are, for example, expanding online and real time information and transaction services. This is part of what we have called our easier, cheaper, more personalised change program. It is an investment designed in part to make the delivery of these essential services more efficient and further reducing the annoyances and irritations that arise when you do not have well-oiled revenue collection machinery. Maximising the efficiency of this essential service delivery (and of other necessary components of operating a revenue collection agency such as systems and HR delivery) in turn maximises the resources available for proactive compliance activities, at the next level of proactive compliance management. 4 Lessons from the past, directions for the Future PROACTIVE COMPLIANCE MANAGEMENT Within our compliance budget we have to make choices about the resources and the mix of strategies – various forms of service and enforcement – we devote to managing compliance for our various revenue products (for example, income tax, goods and services tax, excise) across the various market segments (large business, micro, small and medium businesses and personal taxpayers). To determine this we undertake what we call Health of the system assessments in the lead up to producing our annual Compliance Program. The Health of the system assessment requires that we determine our view on how ‘healthy’ is the operation of the particular revenue product – is it achieving its outcomes, are the right players in the system, do people understand their obligations, are risks identified and acted on, do we have the capability (people, systems and processes), how effective is the administrative design and so on. We then look across those various products from a market perspective to give us a view of whether we have the right balance there. It is acknowledged these assessments continue to be works in progress as we improve our methodologies and identification of information to support the assessment. To varying degrees they are, and will continue to be, the product of judgements based on experience. Making this assessment requires that we analyse the status of the various compliance risks and the effectiveness of our current mix of strategies in dealing with them. This mix of strategies is illustrated in your booklet by reference to the micro business market. The results of that are reflected in the Compliance program we publish each year. It covers the various risks we have identified in each market segment and the activities we will be undertaking to address them. By publishing a detailed Compliance Program we are setting out to influence compliance decisions by putting people on notice of the risk of entering into certain courses of action and by similarly influencing the advice given by professional advisers. That is, publishing the Compliance Program is in itself a proactive compliance management strategy. The two steps I have outlined to date – meeting non-discretionary demands and determining our compliance program – resulted in the split of resources you see here on screen and detailed in your booklet. MANAGEMENT OF PARTICULAR COMPLIANCE RISKS When we get to this level, managing particular risk areas, our mix of strategies are guided by our compliance model. Again, you’ll find detailed information on the compliance model in your booklet. In essence, the compliance model directs us to best understand why people are not complying and develop the appropriate mix of strategies to address these in a way that maximises the compliance impact from available resources. Three case studies help illustrate this: our compliance approach to large business our approach to improving the record keeping of micro businesses, and our steps to improve certainty for individual taxpayers. 5 Lessons from the past, directions for the Future LARGE BUSINESS Compliance by large businesses is an area of great interest to the Australian community and often attracts media attention. In a general sense, the tax risks we see in this market are around complex planning arrangements that exploit the grey areas of tax law. Because of the scale of the revenue at risk, it is a segment where our scrutiny is relatively intense. It is also in this segment that we took our initial steps to promote tax risk management in the community which resulted in the publication of the Large business and tax compliance booklet. It is about two years ago now when the Commissioner first raised the importance of managing tax risk as part of good corporate governance for corporations and their Boards. This has engaged many large and even small to medium enterprise owners and their advisers. Since raising the issue, the Commissioner reinforced and supported more conscious tax risk management by writing directly to the Chairmen of Boards of Australian listed companies giving Boards the assurance that tax risk analysis papers prepared for them will remain confidential. More recently, cooperative and time sensitive arrangements have been developed for private rulings on issues of concern to Boards. Audit results, particularly for large corporates, have been healthy with total taxes and penalties raised across the large market segment in the last two years alone amounting to some $6.7 billion. Collections have exceeded $3.7 billion. It has been these audit outcomes that have been the leverage point in raising tax risk management as an issue warranting Board attention. In essence, tax risk management is about the level of comfort a corporation has that they will not face substantial liabilities following a review by the Tax Office, or if they do, about the level of comfort they have that they will succeed on appeal to the courts. It is part of a broader issue around certainty that was highlighted in the recent review of income tax self-assessment by the Australian Department of the Treasury. The Commissioner has already signalled that he wants to go further than the legislative changes arising from that review. While continuing to improve our audits of large corporates, we have indicated a willingness to develop a different, more current model, for those of our largest corporations sharing the objective of greater certainty. Given that the top 20 company groups pay almost one half of the $24 billion in company income tax collections from the large market segment, this initiative is directed at them, at least initially. What that model might be is yet to crystallise, but elements open for discussion include the following. An agreed plan on clearing the past and moving to a more current basis for tax risk management across all tax types. This might include, for example, a plan for concluding any existing audit and rolling it forward to the current year. The level of any penalties and interest arising from this would reflect the cooperative approach being adopted by the company. A process to verify that existing systems accurately record tax obligations and that there are processes in place to maintain that accuracy. (This is particularly important for GST, being a transaction-based tax and for pay as you go withholding from employees’ salaries). A forward arrangement designed to encourage collaborative and cooperative tax risk management practices between the corporation and the Tax Office. This could include an agreement on areas raising the greatest potential risk for the corporation. Appropriate processes for resolving these could then be determined, for example priority rulings from the Tax Office or negotiation of an advance pricing agreement in the case of cross-border transactions. Agreement on disclosure and reporting requirements, together with processes that as far as possible align with the company’s processes and systems. 6 Lessons from the past, directions for the Future Regular senior level meetings to discuss recent developments, emerging risk concerns and to ensure the arrangements are operating satisfactorily for both parties. Reduced penalties and interest on any past or future adjustments reflecting the open and cooperative approach to tax risk management. We will continue to work with large corporations to determine if such a new model is achievable. A further benefit of the success of such a model, from my perspective at least, is that it would allow for more rigorous scrutiny of those adopting a more aggressive tax risk position. RECORD KEEPING AND MICRO BUSINESSES Our approach to how businesses keep records illustrates the importance of framing service and enforcement in an integrated way to improve compliance. Poor record keeping is a high risk to compliance for businesses, especially our smallest businesses – micro businesses in our terminology. Our mix of strategies for achieving compliance through good record keeping starts with a range of support and education products including: free record keeping workshops record keeping fact sheets tailored to industry sectors such as retail, wholesale, services and primary production free record keeping software, available for download from our website, and a record keeping evaluation tool on our website so that taxpayers can assess whether they are meeting their record keeping obligations. As an intermediate step we have a program of visits to review the record keeping practices of businesses. Where necessary we advise on areas that need improvement. Where substantial improvements are needed, but not made within a reasonable time our approach transitions to enforcement where we apply penalties. 7 Lessons from the past, directions for the Future IMPROVED CERTAINTY FOR INDIVIDUAL TAXPAYERS I’ll now talk about how we are moving to improve certainty for individual taxpayers. Clearly the best approach to ensure compliance is one that builds compliance into the time when people are actually sitting down and preparing their tax return. We need therefore to be alert to this opportunity. This last case study explains how we use income matching, not only in our enforcement work, but as a way of offering taxpayers a service to help them comply. Currently, like most revenue agencies we run large post assessment income matching programs. If we find discrepancies then we amend assessments and apply penalties as appropriate. We are working to develop greater online capacity. In future we hope to offer services to taxpayers such as the ability to download their income data directly into their electronic tax return. This will not only simplify return preparation for people, it will also give us and taxpayers greater confidence in the accuracy of returns. As a first step we will be offering the ability to download details of taxable government benefits for people using our electronic tax return product - etax - to lodge their annual income tax return. More generally on issues of certainty and differentiation, we have given ourselves a further challenge. Currently we use risk profiling to identify cases for audit or other reviews and we are investing in improving our capability in this area. By changing the paradigm, we are also looking to use risk profiling to identify those taxpayers we have no reason to review. Our two to three year objective is to be able to give many individual taxpayers almost immediate confirmation that their tax responsibilities have been finalised (from our perspective) with the lodgment of their annual income tax return. CONCLUSION As you can see from these examples, we differentiate our responses to the needs and risk profiles of different market segments. For some segments, there is a stronger emphasis on enforcement approaches, for others it is more about education and information and supporting those advisers who are dealing directly with taxpayers. The good results we achieve from this balance of approaches are evidenced by our revenue collections. We are also seeing rising satisfaction levels amongst taxpayers with our products and services. By identifying and managing risks with an appropriate mix of service and enforcement strategies, by being open with the community about what we are seeing and what we are doing about it so as to influence compliance behaviour and by addressing the individual needs of taxpayers and how we treat them, we are fulfilling our business intent to optimise collections in a way that instils community confidence that the system is operating effectively. 8