The OECD recently published a paper entitled “Together for Better Outcomes” dealing with the issue of how to involve and engage small and medium enterprise (SME) taxpayers and other stakeholders in the tax compliance process. This study was commissioned by the OECD’s Forum on Tax Administration (FTA) and presented by a task group from the SME compliance sub-group.
Small and medium enterprises comprise the vast majority of businesses and it is important for the tax administration to deal with their affairs in an efficient way. The traditional method of examination and audit of the tax return consumes the resources of the tax administration and often raises problems that might have been avoided had they been encountered at an earlier stage. The OECD report looks at the benefits for the tax administration of increased engagement with SMEs that can lead to reduced compliance costs, fairer treatment of taxpayers and a level playing field. Services may be more tailored to the needs of SMEs and lower risk taxpayers may be given faster service. Closer cooperation with the tax administration may be viewed favourably by tax intermediaries who can see this closer involvement as a way of developing their own business. This method of focusing on outcomes rather than inputs may have wider benefits although they are difficult to measure.
Engagement with SMEs may take place through formal mechanisms. One way of engaging with SME and other stakeholders is through consultation on new legislation. Generally revenue bodies set up platforms for dialogue and consultation that may involve professional bodies and representatives of taxpayers. These may evolve into close working relationships where there is a high level of cooperation. Although SMEs are a large, diverse and geographically widespread group there can be on-line collaboration, for example in Australia where the ATO has set up a registration-based on-line community.
Another way of engaging with taxpayers is through education and guidance. This can ensure that taxpayers are aware of their tax obligations and know where to find the guidance they need. This helps to lower unnecessary compliance costs that could arise through inadequate information.
Compliance risk management activities may include engagement with taxpayers and other stakeholders to identify compliance risks, gain an understanding of taxpayer behaviour and design efficient and cost-effective interventions. This provides a broad range of options for engagement with taxpayers, and even where there is a necessity for a tax audit there are still opportunities for enhanced engagement with the taxpayer that may lead to increased cooperation in the future.
Revenue bodies are encouraged in the OECD report to assess their current practice and experience and look at ways of implementing more systematic approaches to taxpayer involvement. The revenue bodies should also look at their current resources and how to better equip themselves for a higher level of engagement with taxpayers, not just in terms of skill sets within their administration but also in terms of their organizational culture and values. They could fit the strategy into their performance evaluation framework by focusing on broader outcomes rather than a smaller output focus. Enhanced cooperation and involvement with taxpayers is not only suitable for low risk taxpayers but may also bring benefits when used with high risk taxpayers and industries. Intermediaries may be involved in the cooperative approach as in the Netherlands where compliance agreements are signed by the tax administration with tax intermediary organizations.
Systemic solutions involve lasting changes to the compliance process such as early involvement with taxpayers that can lead to a reduced need for activity at a later stage of the compliance process. Compliance activity at an earlier point in the process may lead to a situation where resources may be more focused on the small number of cases that still need attention at a later point in the compliance process. Some of these systemic solutions are however only possible if there is cooperation from taxpayers and their representatives. Feedback and complaints from taxpayers may be used to identify friction points.
A feature of systemic solutions in practice has been that they use technology to implement a process that takes the taxpayer through the compliance process from beginning to end and where compliance by the taxpayer is the “default” position that is assumed by the system. This enables the tax administration to concentrate resources on the exceptional cases where the process requires further input. The technology enables better recording of transactions, improved accounting records, simplified tax filing procedures and smoother procedures for tax withholding. Technology raises the possibility of a real-time view of business results that can be shared with the tax administration.
Implementing the change needed to move to a system based on taxpayer engagement and involvement requires capacity building and a mechanism to manage the change. Risk aversion within the revenue body may be overcome by committed management and enabling tools and technologies. SMEs and intermediaries must be approached and encouraged to work more closely with the revenue body. New Zealand has put together a “shareholder engagement tool-kit” that involves defining the purpose of the engagement; identifying and analysing stakeholders; designing tactical engagement; undertaking engagement and evaluating the effectiveness of the process.
Another challenge is to demonstrate the value of this approach in terms of outcomes. It is difficult to measure the costs and benefits of greater engagement with taxpayers and this is a barrier to implementation of the system. The outcomes need to be measured and related to the activities of the revenue body. The FTA has issued a guidance note to help revenue bodies assess the effectiveness of their approach. This involves a process of understanding the risk; expressing the desired outcomes; devising the right mix of strategies to take into account the causes rather than symptoms; identify indicators for each compliance strategy; and evaluate the success of the strategy over various time periods. Some practical measures and indicators may be set at the outset of the procedure and can be used to gauge progress and assess the benefits of the risk assessment process.