Looking for a balance between the uncomfortable and the absurd

In the tax scope, the word “certainty ” has a special value, although not a single internationally accepted definition. Therefore, it may be asked what we mean by “tax certainty”.

An excerpt from a phrase by François-Marie Arouet (better known as Voltaire) on issues unrelated to taxation says ” … uncertainty is an uncomfortable position. But certainty is an absurd position…”, it is useful to start from the basis that “tax certainty ” must be understood as a relative concept. For example, nobody imagined in 2017 that the world would go through a pandemic of such dimensions that it would significantly affect the economy, the way of doing business and social relations in general, which has inevitably generated uncertainty and changes in tax systems.

“Tax certainty ” is achieved when the tax system and procedures are clear and predictable, allowing for sound decisions to be made. Certainty by itself does not ensure that the tax system or procedures are well designed and efficient; it only provides the knowledge necessary to comply with the tax obligations and know the consequence of the various actions that a taxpayer may take. Nor is there a linear relationship between certainty and compliance, for example, a tax administration can make findings of its risk system transparent to generate certainty and motivate compliance. But doing so in an un-strategic way could cause the opposite effect, by providing taxpayers with useful information to determine which operations are outside the control of the tax administration.

Certainty is also achieved as a product of shared responsibility, through joint work between tax policy makers, tax administrations, and taxpayers.

According to a survey on the perception of multinational companies regarding tax systems in Latin America and the Caribbean, prepared by the OECD with information from 2020, a group of companies surveyed stated the need for more predictable and consistent tax treatment, greater clarity in information requests, less unjustified bureaucracy, more trust and cooperation, more consistency among tax authorities regarding the interpretation of international standards, among other aspects. Clearly, many of these needs imply to improve the “tax certainty”. The above is also consistent with what emerges from the report published in 2017 by OECD-FMI[1].

In this regard, it is advisable to consider the concept of “certainty” within the framework of a compliance strategy.  This is a fundamental aspect, but it is only an element within the strategy; it must contain at least four fundamental aspects:

  • Risk assessment: it is the starting point, allowing us to know the behavior of taxpayers. This is a complex process that requires sufficient information resources, adequate planning, and infrastructure. Taxpayer transparency in providing information is a key element.
  • Facilitation and control: this process is based on risk assessment and has to do with the definition and application of treatment actions, which can be preventive, real-time, or reactive; or service or control.
  • Risk perception: the perception of risk is the result of the proper implementation of points 1 and 2, which generates respect for the work of the tax administration and some certainty before the consequences of compliance or non-compliance.
  • Tax culture: it is the maximum objective that a tax administration can achieve. I am not referring to the conviction on the part of taxpayers about the importance of taxes and their benefits-an issue that is linked to aspects that go beyond the tax system itself-but to the fact that taxpayers understand that they must comply with their tax obligations and know how to do so.

Many of the actions that could generate “tax certainty” lie between points 1 and 2 and influence points 3 and 4. For example, some cooperative compliance initiatives include actions in both the field of risk identification and risk management, the field of facilitation and the field of control.

From now on, some good practices and documents are proposed that I recommend observing in order to strengthen the “certainty ” component within the strategy to achieve a tax culture:

 

Tax procedure: the CIAT Tax Procedure Code Model

it is a very complete document, which has been updated several times and presents good practices in almost all tax procedures, providing in turn, key concepts. The level of certainty is directly related to how the procedures are designed. Just to mention a few, it is worth highlighting aspects related to the concept of domicile, the determination of the tax obligation, the rights of taxpayers; the evidence, the presumption and factual substantiation of actions; the ex officio determination and the requirements of the administrative act, the information and assistance to the taxpayer, the obligations of collaboration and information, among others. The Tax Code raises many issues that are necessary but can generate uncertainty. For instance, the general anti-avoidance rule (GAAR), requires significant efforts and an appropriate strategy. The United Kingdom is a good example of GAAR application, since they have a Panel composed of experts nominated by their Tax Administration -with the participation of recognized experts from the private sector-, whose function, in general terms, is to provide an opinion on the cases that could be subject to this GAAR, with the aim of providing objectivity and consequently certainty to the procedure. Similarly, Canada has a Panel integrated by the Tax Administration, the Finance Ministry, and the Department of Justice to implement these standards. Some countries, Chile, the United Kingdom and Australia publish, through their tax administrations, cases of tax planning considered aggressive, some of their objectives being to generate a preventive impact among taxpayers and, where appropriate, apply general anti-abuse rules with greater certainty.

Tax non-compliance risk management: this is a much broader issue than the mere generation of certainty. However, it has a great impact on the latter. I recommend reading the CIAT’s (Manual sobre Gestión de Riesgos de Incumplimiento para Administraciones Tributarias del CIAT),

which provides ideas on how to approach the issue in a centralized manner and what aspects should be considered to address each of the critical stages: identify risks, analyze and assess risks, prioritize risks, treat risks and evaluate results. It is clear that, if it is not possible to know the behavior of taxpayers, it will be difficult to plan. In my opinion, planning is precisely the backbone of the initiatives to generate certainty.

BEPS Action Plan: in the field of international taxation, BEPS has presented recommendations and initiatives that contribute to generating certainty, either directly or indirectly. Some examples would be the specific anti-abuse measures posed by Actions 3 and 4 allow taxpayers to have a clear idea of the consequences of their actions. Action 5 allows tax administrations to access rulings that used to not be disseminated in the past, to assess risks. Action 8 provides further details on the treatment of intangibles. Action 12, if properly used and the tax administration has sufficient resources, is a key tool to avoid disputes and provide certainty about tax positions. Action 13 improves transfer pricing risk analysis. Action 14 provides certainty on the procedure to be followed in international disputes. At the level of international taxation, the “Cocktail of measures for the control of harmful transfer pricing manipulations” (Cocktail) it is a fundamental tool to provide certainty, in the face of the” subjective ” transfer pricing regime applied by most countries, whose application requires almost perfect scenarios. In this sense, the Cocktail proposes initiatives to improve the application of the best method rule in a scenario where unilateral methods are applied indiscriminately; initiatives to improve voluntary compliance through benchmark profit margins; and measures to control abuses in import/export transactions of raw materials, a fundamental issue for most developing countries. It also deals with other issues related to efficient mechanisms for risk management, resolution, -mutual agreement procedures – and dispute prevention-conclusive agreements-, among others.

Tax management: in this area I recommend consulting the CIAT’s Manual on Tax Collection and Recovery, which raises issues related to the management of the registration of taxpayers, the current account-the fundamental process to keep the taxpayer informed on his situation-, the pre-completed tax returns -a development that provides certainty and also shows the proper use of the data by the tax administrations-, processes related to the refund of taxes – issue that historically and in the absence of adequate risk management, implied a high level of uncertainty-, the electronic notification -which increases the certainty in communications, among others. As a result of this manual, two working papers were generated, one entitled Pre-completed Tax Returns (Declaraciones Tributarias Pre-elaboradas)  and another called Parameterization and Current Account Services (Parametrización y Servicios de Cuenta Corriente) which deal with these aspects in greater detail than the Manual.

Cooperative Compliance: these initiatives are the most sophisticated and have a high level of effectiveness to generate certainty and therefore, compliance; since they ensure adequate risk management, improve the relationship with the taxpayer and allow to react preventively and in real time. The OECD initiative, called International Compliance Assurance Programme it is an international initiative aimed at multinational companies. There are other cooperative compliance initiatives based on forums led by tax administrations, where companies-directly or through groups – and/or tax intermediaries participate, which have yielded good results. I recommend reviewing the experiences of the United Kingdom, Chile, Australia, Spain, and the United States in this area, which I detail in the respective chapter of the Book “New Paradigms of Post-COVID-19 Tax Law”, Directed by Humberto J. Bertazza and recently published by the publisher Editorial La Ley

Technology: technology is the best ally to achieve success in almost all of the initiatives mentioned above. The book entitled ICT as a Strategic Tool to Leapfrog the Efficiency of Tax Administrations (ICT) provides ideas on technology applied to tax administration (For instance: risk management, tax refund, transfer and sale of tax credits, control technique with technological support, digital services, electronic invoice, computer security, etc.). Clearly, the technology allows better access to data by taxpayers and tax administrations, better information processing, greater traceability and inalterability of transactions, the possibility of confirming the identification of officials in the processes, reduction of times, etc., which inevitably contributes to the level of certainty. With regard to the digital economy, certainty involves defining clear and simple procedures for individuals operating in this area to comply with their tax obligations. As far as indirect taxes are concerned, I recommend assessing the VAT Digital Toolkit for Latin America and the Caribbean developed by the OECD with the support of the IDB, the World Bank, and CIAT; and the DEC- Tool on Digital Economy Compliance[2] developed by CIAT and NORAD so that countries effectively implement the recommendations of the aforementioned Toolkit.

Ethics and corruption: all the above become useless if there is corruption and lack of ethics. Perhaps the latter are the elements that most affect the level of certainty since corruption generates unpredictable behavior for taxpayers and the tax administration, and lack of ethics leads to an inadequate and inconsistent application of tax procedures. In this area, I recommend reading the Ethics, transparency, and fight against corruption Manual. (Manual de ética, transparencia y lucha contra la corrupción).

In the area of administrative litigation, there are experiences where the use of artificial intelligence provides greater efficiency in the resolution of cases, which can contribute to greater tax certainty in this area of action. I highlight here the Brazilian experience.

This issue gives for a broader work than what can be addressed in a blog. Tax certainty requires dealing with many challenges, including a shift in institutional culture towards a risk-based approach and considerable human and material resources. However, the starting point for smaller tax administrations is to create or improve their channels of communication with taxpayers. Advances in communications, which were enhanced in the wake of the pandemic may be a low-cost option to achieve this purpose. Working at the level of relationships has a positive impact on the behavior of taxpayers and on the work of the tax administration.

It may not be possible to achieve all the certainty we want, but the experiences discussed show that it is always possible to reduce the level of tax uncertainty.

[1] https://www.oecd.org/tax/tax-policy/tax-certainty-report-oecd-imf-report-g20-finance-ministers-march-2017.pdf
[2] https://www.ciat.org/ciatblog-the-digital-economy-the-norwegian-cooperation-and-ciat-an-essential-tool/?lang=en

 

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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