The OECD issued a publication entitled “Cooperative Tax Compliance: Building Better Tax Control Frameworks” during the meeting of the Forum on Tax Administration (FTA) on 9 to 11 May 2016.
Enterprises must assess the accuracy and completeness of their tax returns and the other disclosures made to the tax authorities. They therefore need a tax control framework (TCF) to ensure a robust compliance process. The OECD publication provides guidance to help businesses design and operate appropriate frameworks.
Content of a tax control framework
Considerations of business integrity are now included in the corporate governance frameworks and strategies set up within enterprises. The G20/OECD Principles of Corporate Governance include recommendations on the role of the board of directors and executive management in overseeing the business integrity policies. The OECD in its Guidelines for Multinational Enterprises includes recommendations for treating tax governance and tax compliance as important parts of this oversight and of risk management.
The specific features of the internal control system must reflect the circumstances of the business and industry. However there must be six building blocks for any TCF:
- The tax strategy must be established. This will reflect the appetite for risk including the willingness to adopt tax positions that the tax authority may disagree with.
- The strategy should be applied comprehensively, covering all transactions that could affect the tax position of the enterprise.
- Responsibility should be assigned. The Board is responsible for the design and implementation of the strategy and the role of tax personnel within the enterprise should be clearly defined.
- The whole process should be documented. There needs to be a system of reporting of transactions and events so that potential risks of non-compliance are identified and managed. Sufficient resources must be made available to implement and review the TCF.
- There should be regular monitoring and testing of the framework.
- The framework should be sufficient to provide assurance to all stakeholders including the tax administration that the tax risks are subject to adequate internal control and that the tax returns and other disclosures are reliable.
The enterprise must establish its appetite for risk and ensure that the risk management framework can identify cases where the desired risk level is exceeded. Mechanisms must be in place to mitigate any additional risk that exceeds the “risk appetite” of the enterprise.
Assessment of the TCF
The tax authority must assess the soundness of the TCF and make sure it is being followed in practice. The OECD suggests some specific approaches that could be used by the tax authority in assessing the TCF:
- Asking the management of the business how the TCF works.
- Examining the changes made as a result of new legislation or business restructuring, to test how the framework operates and its ability to identify process errors.
- Other tests including reality checks, auditing tax returns and reviewing the reporting by the enterprise.
To test the application of the TCF in practice the tax administration could check the controls existing within and outside the business from external auditors and other authorities. The tax authority should look at how the business has tested its own controls and what audit trail and documentation has been created. Tax risks can also arise from implementing changes to the structure or sequencing a transaction and the TCF should identify the extent of any risk arising in practice. The TCF should reflect changes in the operating environment including tax legislation and business restructuring. Many revenue authorities also have a regime for mandatory disclosure of some tax risks.
Conclusions
In the context of cooperative compliance the tax administration must adjust their risk management strategy for each large business taking into account the voluntary cooperative compliance relationship.
The report concludes that when the TCF of a multinational enterprise is assessed as effective and the enterprise provides full disclosures including relevant information to assess tax risks, the extent of reviews and audits conducted by the tax authority can be reduced. The tax authority can rely on the information in the return and rely on the taxpayer to bring uncertain tax positions to its attention.
Tax authorities should evaluate how TCFs can best be assessed and use them to strengthen the cooperative compliance model by effectively managing compliance risks. Countries should formulate their own methods to evaluate business risk management systems. They should also consider issuing additional guidance to ensure the disclosure of tax risks.