CIAT TECHNICAL CONFERENCE 2008 - SOUTH AFRICA Topics Emerging from the Agenda of the Tax Administrations
PROFILE OF THE TECHNICAL PROGRAM FOR THE 2008 CIAT TECHNICAL CONFERENCE IN SOUTH AFRICA The Conference technical program stems from a process that started when the Executive Secretariat addressed all the member and associate-member countries and asked them to point out which would be the priority topics of interest to exchange experiences and undertake a joint analysis. Upon receiving the answers, the Executive Secretariat drafted a preliminary agenda, which seeks to combine the topics set forth that deserve greater attention, in terms of the number of countries suggesting them, in order to put together a consistent and integrated technical program. The preliminary agenda drafted by the Executive Secretariat is submitted to a Thematic Committee under the framework of the General Assembly. Such committee is made up by representatives of member-countries designated by the CIAT Executive Council, which examines, modifies or approves the preliminary initiatives of the Executive Secretariat and submits them as initiatives to the General Assembly, made up by all the member-countries, which in turn approves or modifies the preliminary agenda that shall make up the technical program of the Technical Conference for the following year. The agenda that will make up the technical program for the Technical Conference in South Africa is a decision of the CIAT-member countries adopted in the General Assembly of Bridgetown, Barbados in 2007. MAIN THEME: TOPICS EMERGING FROM THE AGENDA OF THE TAX ADMINISTRATIONS The key task of the TAs is to oversee the effective compliance and enforcement of the regulations that constitute the tax system as well as those that govern the relations between such Administration and taxpayers in assessing and paying taxes. Likewise, and as a result of the fast transformations of the environment in which they operate, they shall permanently identify and analyze the changes in such environment, which shall facilitate not only adapting to them as an organization but also designing appropriate strategies to promote and control compliance, knowing that the trend in the new challenges is that they are increasingly more complex and difficult to overcome. On the other hand, currently, certain topics emerge on the TAs agenda that although not totally new, feature a new dynamism and relevance based on the present contexts in our countries, which warrant our focus on them. Such emerging topics refer to: the
use of taxes for non-fiscal purposes, that is to say, exceeding revenue raising to finance public expenditure and, specifically, their impact on the functions of the TAs; the importance and complexity of the TAs compliance control functions, in the light of the proliferation of tax evasion schemes that hurdle the exercise of such functions; finally, we shall address risk management as a tool that favors a proactive TA approach, enabling them to channel their actions and resources to obtain results more efficiently. Consequently, in this CIAT Technical Conference we would like to invite you to reflect and exchange experiences on those three broad topics and, within each one of them, disseminate and analyze certain specific experiences on particular aspects. Topic 1:
The non-fiscal functions of taxation and their impact on the Tax Administration.
Although in certain arguable cases, the use of taxes as an instrument to achieve nonfiscal purposes is a quite common and traditional practice. The first non-fiscal objective we have in mind is the contribution to a better social distribution of income applying the vertical equity principle. Additionally, it is frequent to find provisions in the tax legislation that set forth incentives to savings, investment in certain economic sectors or geographic regions, the development of certain activities and in other cases, disincentives such as, for example, the so-called “green taxes” geared at protecting and preserving the environment, all of which generally result in a greater complexity of the tax system, and consequently, its administration, which poses additional challenges for the TAs. The non-fiscal functions assigned to taxes especially impact the TAs’ auditing area, since they frequently times imply the need to establish and exert additional controls, particularly to avoid the inappropriate use of incentives that operate under the guise of tax benefits. Likewise, it is important that TAs as organizations in charge of administrating and controlling the tax system, provide feedback to the government and society on the outcomes and the impact of such type of measures, and on such basis, suggest modifications to perfect or suppress them. On said topic, we understand it shall be important to look into the convenience and limitations in the use of taxation for multiple non-fiscal functions. Particularly, the impact on its essential function of providing sufficient financial resources to meet government expenditure and on the performance of the TAs. ASPECTS TO BE CONSIDERED: The speaker shall address, at least, the following aspects: 1.
Brief description and features of the main non-fiscal functions normally assigned to taxation.
Challenges posed by such functions to the TAs and their potential impact on collection, particularly as regards the application of tax exemptions in part or in full. 3. Forms of facing such challenges in terms of regulations, procedures and administrative capability. Case study 1.1. Environmental protection tax measures. Presently, we frequently refer to and show concern for issues such as global warming and its effects on climatic changes, unchecked deforestation, gas emissions and polluting industrial waste, and overpopulation in large cities. All of them constitute issues tied to the causes of environmental damage, which as regards taxation, grant new momentum to the proposals of taxes aimed at improving the quality and preserving the environment. Nowadays, we hear about proposals of enforcing the so-called “environmental taxes” or “eco-taxes”. They frequently differ as regards their scope, features, forms and enforcement. It is also worth highlighting that among the established or advisable tax measures, some are focused on promoting environmental care and protection, by extending advantages for taxpayers who do so, while others punish with higher costs the goods or activities that, for example, entail a greater risk of pollution or depletion of non-renewable resources. Another common feature is that collection arising from this class of taxes has a specific purpose, such as funding the actions that contribute to improve and preserve the environment. On the other hand, just like any tax measure, its administration entails controlling its effective enforcement, which is not always easy, especially when its design is complex and entails verifying facts that are difficult to control by the TAs. ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1. 2. 3.
Brief description and features of the tax measures to protect the environment that have been implemented or are to be implemented in your country. Results obtained in terms of environmental protection. Have they been measured and if so, how? Description of the control mechanisms designed and implemented by Tax Administration; have special control programs been defined and developed and what were the results achieved?
Case study 1.2:
Tax incentives and investment.
It is normal for taxes that make up the tax systems to enjoy relatively more favorable treatments than the general system, that they serve as incentives to guide the allocation of resources towards certain activities or geographic regions or, simply, capital formation. It is normally stated that in general terms, the enforcement of this type of incentives hinders vertical and horizontal equity. As pointed out by Stanley Surrey a few decades ago, tax incentives in particular and tax exemptions in general (in the form of tax credits or deductions), constitute a form of executing government expenditure without it being explicitly stated on the budget. Such departure from the essential purpose of taxes of producing revenue for the State erode the tax bases and produce a reduction in revenue, which lead Surrey to call them “tax expenditure”. This situation determined that in the last few years increasingly more countries started to draft the so-called “tax expenditure budget”, in order to better control their public finances. Experience indicates that it is difficult to accurately determine the effective impact of tax incentives on investment, whether in general on this variable or on specific benefits for a given region or area of business. On the other hand, the tax incentives that we have been mentioning pose an additional challenge to the TAs that may be more complex to control if the taxable events have been filed correctly and the taxes arising therefrom duly paid, which is verifying the truthfulness of the events or conditions that justify the tax drawdown or exemption applied by taxpayers on assessing the tax amounts. ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1. 2. 3.
Brief explanation on how investment incentives operate in his/her country, the outcomes quantified in terms of an increase arising from their enforcement. The cost in terms of revenue losses, if measured. What are the control and oversight mechanisms established by the Tax Administration to avoid the abuse or sidetracking of the objectives pursued thereby.
Critical Tax Control Issues.
The TAs’ compliance control function has always stood out as the most complex one for such administrations. In the present, and for a number of decades, challenges have increased by virtue of the growing internationalization of the economies and the technological advances, upon determining a noticeable growth of cross-border transactions and an increasing sophistication of the means and mechanisms employed to undertake such transactions. An example of the latter is the use of the
Internet to implement the maneuvers inherent in harmful tax planning and, in general, the lack of transparency evident in all types of transactions that broadly fall under the notion of electronic commerce. Also, internally, maneuvers and sectors requiring complex control systems appear, among which we may mention harmful tax planning among economically related businesses, the underground economy and self-employed professionals and service providers in general. Likewise, it is difficult to control foreign income and equity when the criterion of worldwide income has been adopted. A significant portion of the human, financial and technological resources of the TAs are allocated to the exercise and support of audits, and at the same time, to develop new and better control mechanisms that enable them to identify and manage new risks, as well as accompany the ongoing evolution of actors and circumstances to be considered in the existing ones, thus quickly adjusting to changes in the context. On the other hand, it is also worth considering that according to the nature or type of taxes to be controlled, the tax evasion schemes may vary, as well as the sectors of business and the profile of taxpayers deemed critical. The special relevance of the TAs control function is based on the fact that such function is essential in ensuring the tax system enforcement equity, aimed at taxpayers’ correct compliance with tax obligations. ASPECTS TO BE CONSIDERED: The speaker shall, at least, address the following aspects: 1. 2. 3.
Identification and brief description of the critical most relevant topics for tax control, regarding the main taxes. Control mechanisms set forth to face such challenges. Features, taxpayers’ sectors, type of taxes and transactions set forth. Results obtained after the implementation of such mechanisms.
Case study 2.1.:
Emerging Risks in Aggressive Tax Planning.
In addition to the concerns and challenges of “domestic” aggressive tax planning, in which the events and actors belong to a given national territory, as mentioned in the CIAT Manual on International Tax Planning Control, the latter poses a more difficult issue for the TAs, which shall be addressed on the basis of the analysis of the current world economic context. The growing number and multiple modalities adopted by international transactions, that is to say those that go beyond the borders of a given country, shall be controlled
as regards their nature, magnitude and actors to determine their tax effects by the TA whose jurisdiction to perform such control on the goods and individuals is limited to the respective territory. Undoubtedly, such circumstances pose great challenges for the TAs when it comes to the enforcement, collection and audit of the taxes under their jurisdiction, in the case of taxable events that involve goods or individuals from another jurisdiction. The new scenario challenges the TAs to become more dynamic in the articulation of tax planning schemes and actors and to adapt to the new conditions proposing legislative changes that address vacuums or gaps that foster violations and at the same time, expanding its operative capacity to control new strategies for an everevolving tax planning. At the same time, it is necessary to develop new preventive or proactive actions such as the promotion of corporate tax responsibility by creating awareness in business people as regards the risks entailed by aggressive tax planning for their companies and, likewise, deterring the agents that promote such schemes by the control and punishment thereof. ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1.
Comment on the international tax planning practices detected in his/her country, briefly describing the context in which it originates and the circumstances facilitating their origin.
Identify the administrative and regulatory actions enforced in the country to counter the schemes applied for the purpose of abusive tax planning.
Comment on the initiatives underway and those planned in order to curb aggressive tax planning based on corporate tax responsibility and deterrence of the agents that promote such planning.
Case study 2.2.:
Regulation of holding companies and trusts.
It is no news that controlling corporations or holdings and trusts constitutes a mechanism that may be used by certain taxpayers to reduce their tax burden, and this is an increasingly frequent practice, visibly eroding tax collection. Moreover, in many cases, the application of such entities has spurred competition among countries that offer significant tax advantages and promote themselves as a destination for such corporations and trusts to attract large capitals to their jurisdictions.
Among the advantages they offer, in addition to tax exemptions or the application of very low tax rates is the full confidentiality guaranteed regarding the name of the partners and beneficiaries in a corporation and, also, the administrative proceedings required to set up holding companies and trusts. Likewise, such countries are marked by lack of international administrative cooperation since they have not subscribed tax information exchange agreements with other countries. All such factors difficult the administrationâ€™s control efforts, which is the reason why many countries have enforced specific regulations to certain extent to offset such difficulties, as well as administrative procedures that improve the possibilities of exercising appropriate control of such corporations. Some of these regulations are geared at recognizing, and consequently allowing, the creation of holdings and trusts depending on the features of the corporations; for example, and provided they are limited liability companies and not corporations, that they are based in countries that are not considered tax havens or low-taxation countries, etc. ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1. 2. 3.
Brief description of the regulations and administrative rules in place for holding companies and trusts. The results obtained with the introduction of such regulations; hurdles in their implementation. Control programs introduced in auditing and tracking compliance with regulations and the results obtained.
Case study 2.3.:
Mechanisms for e-commerce transparency.
The significant benefits of electronic commerce to society overall are widely known, which determined its significant growth since the Internet became available in the â€˜90s. Nevertheless, not all are advantages, and for the Tax Administration in particular it has posed a greater complexity to exercise control not only as regards individuals but also the transactions performed. Knowing the transactions and taxpayers by accurately identifying them, their status, features, date, amount, location, fiscal year, etc., are completely relevant aspects for any Tax Administration. It is precisely in this sense that the difficulty posed by the Internet appears, by hindering access to accurate information.
Numerous mechanisms set forth as means to make such transactions transparent arise from technology proper. That is to say, electronic invoicing, the possibility of querying vendors and accounting records expeditiously and reliably, and the fast exchange of information are, among others, tools that would contribute to make such electronic transactions more transparent. It is also necessary to rely on administrative rules and procedures that enable the implementation of such mechanisms and, very specially, that regulate electronic commerce while avoiding unnecessary complications for taxpayers. ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1. 2. 4.
Description of the mechanisms implemented or to be implemented to make ecommerce transactions transparent. Difficulties and hurdles encountered as well as solutions applied in overcoming them. Results obtained from the mechanisms implemented and future steps.
Building, developing and applying risk management.
Risk management has always been an important task for the TAs. The purpose of such action is to identify, control and eliminate the sources of risk before they prevent reaching the objective. Although we currently rely on more technological tools in support of such management, the essential tasks and basic questions have remained almost unchanged. It is essential for a Tax Administration to consider the greatest areas of irregularities, who may be perpetrating them and, on such basis, allocate its resources efficiently to effective actions. In order to answer such questions accurately, it is important to rely on risk management models, especially in line with its context and genuine capacity; that is to say, that they are effectively applicable, simple to manage and flexible in order to enable their fast adjustment as the elements of risk change. In order to build, develop and finally implement risk management in a Tax Administration, we must previously set forth a number of options relative to, among other aspects, its scope and objectives, integral nature or functional specialization, the articulation and performance assessment, actors and the adjustment procedure and time. In any case, a risk management model shall take into consideration risk estimation, which integrates into the risk identification processes to enumerate the potential risks; risk analysis examining risks in detail to measure their probability of occurring and
potential impact; and risk assessment by organizing such risks according to their likelihood and the magnitude of their impact. We should add risk control that requires risk management planning to address each significant risk and risk supervision to determine the progress on the control thereof and identifying the new risks that may appear or the transformation of existing ones. ASPECTS TO BE CONSIDERED: 1. Features, scope and objectives of a risk management system. 2. Components of a risk management model and an integral approach or specialization by functional areas. 3. Conditions to apply risk management, assessment, tracking, adjustments and modifications. How and when should it be implemented; stakeholders in the process; how and who should manage the system. Case study 3.1.:
Information relevant to risk management.
Information is a key aspect for the administration, as a starting point in the analysis and development of a risk management model or system. How to determine that information is relevant, how, when and who shall obtain it are priority issues. Nevertheless, although it is a key element in identifying and managing risk, it is also true that many TAs currently rely on excessive information. It is very frequent to see that they request and accumulate a lot of irrelevant information, showing concern for the quantity and not the quality and timeliness of such information. Also and many times, they fail to consider the processing and systematization capacity of such information, exceeding their actual possibilities. All this may result in having the effectively relevant information to develop a risk management system drowned in a sea of data that hinders its identification and use. In the case of risk management we face situations of uncertainty; the event that characterizes the risk may or may not occur, but additionally, should it occur, we should expect undesirable consequences. Therefore, it is relevant to rely on information regarding situations and subjects that match similar characteristics and circumstances to those regarding situations and subjects involved in undesirable situations or losses for the Tax Administration.
ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration.
1. Forms of identifying the relevant information with regards to risk management. 2. Tax Administration powers and means to gather information.
3. Characteristics and conditions required to gather information.
Case study 3.2.:
The use of technology: information systems and databases.
With regards to the foregoing item, not only is it important for the Tax Administration to succeed in determining the relevant information related to risk management but also to employ and manage the technology that enables the expeditious, timely and systematized processing of the flow of information received. Building and using information systems by way of the multiple alternatives and options available in the technology market, whether in-house developments or licensed solutions, are instrumental in the roll-out and application of a genuine risk management solution. To the extent that risk estimation integrates the risk identification, analysis and assessment processes in the sphere of risk management, and that these other processes entail relying on abundant information on past experiences and comparing it against the evolution of certain variables in the context, to establish probabilities of events being repeated and predict the potential magnitude of its impact, the availability of information systems and databases is an important source of support for effective risk management.
ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1. Criteria considered in building and using information systems and databases in support of risk management. 2. Description of the features of the information system and databases and strategies designed and applied for its use.
Case study 3.3.:
Organization and development of tax intelligence actions and alliances with other Government agencies.
The following step once the information systems have been developed and implemented and upon relying on the databases that enable to use it on an organized, timely and expeditious basis, is to feed new information into such databases and/or update the existing one. For such purpose, it is important to design and apply tax intelligence strategies and structures and create alliances with other government
agencies that work, rely on or enjoy access to tax information and may contribute in effective risk management efforts. To the extent conventional auditing procedures based on the analysis of the data submitted by taxpayers and sometimes provided by third-parties, in many cases have not sufficed to reveal tax crimes such as fraud and contraband of large magnitude perpetrated by increasingly complex and professional organizations, it would be convenient to furnish the TAs with highly specialized units for the investigation and detection of this type of tax crimes, generally connected with criminal behaviors. Such Tax Intelligence bodies tend to operate in close relation with other specialized anticrime bodies with the objective of developing new tools and knowledge that support the auditing function as a whole. Such units are mainly focused on the investigation of tax and customs fraud that involve large sums of money and are perpetrated by organized groups with the purpose of rendering, whenever possible, the necessary evidence in the administrative area in order to criminally charge violators. The information thus obtained is also relevant as risk management feedback, in this case, relevant to especially transcendental risks based on the nature and magnitude of their impact.
Internally, even in the initial taxpayer selection phase, in addition to the investigations in the external open sources that include the data denied â€“ obtained by employing specialized operating procedures- are subjected to the information analystâ€™s mental processing. The resulting interpretations and conclusions render the noblest product of the investigation activity: the so-called Intelligence knowledge.
ASPECTS TO BE CONSIDERED: The speaker presenting the case study shall address, at least, the following notions, considering the specific situation of his/her Tax Administration. 1. 2.
Conditions for the development of tax intelligence strategies and mechanisms. Strengths and weaknesses in their development. Features and conditions relative to the development of alliances and types of alliances to develop.