Tax authorities and corporate taxpayers: how to build a win-win relationship

A traditional tax compliance system, based on ex-post confrontations, tends to give rise to lose-lose scenarios. In fact, corporate taxpayers have to deal with uncertainty regarding how their business activities are taxed, which means risking cost being deemed non-deductible, as well as possible administrative sanctions, criminal charges or reputational damage. The tax authorities, on the other hand, have to contend with information gaps which lead to a loss of tax revenue and a sizeable waste of limited resources, as they are forced to activate audits and assessments on a broad pool of taxpayers rather than a precisely selected set. 

Instead, an ex ante cooperation scenario, typical of Cooperative Compliance programs, normally translates into a greater likelihood of tax compliance for taxpayers, which in turn leads to lower financial risk (and as a result, lower costs), reputational risk, and criminal risk. For the tax authorities, by encouraging collaboration with selected taxpayers, who are transparent and willing to dialogue ex ante, it should be possible to reduce the number of taxpayers in that gray area, in other words, companies that may want to be compliant but are unable to fully do so. This would leave authorities free to focus their more onerous and aggressive verification and assessment activities on a smaller set of ​​taxpayers who lack the desire or the ability to collaborate ex ante. 

This brings us to the concept of tax risk management. For taxpayers, this means developing an internal control system, known as the Tax Control Framework (TCF). For the tax authorities, it involves classifying taxpayers according to their risk profile.  

Cooperative Compliance programs are found in over 25 countries. In our study, we focused particularly on the experiences in Australia, the Netherlands and South Africa (pioneers of Cooperative Compliance), as well as the United Kingdom and the United States. We examined in detail the characteristics and benefits of these programs, highlighting the best practices, and challenges that arise in tax risk management. 

Before rolling out these initiatives, countries usually set up pilot projects initially reserved for large corporate taxpayers and later extended to others, including individuals. As we’ve already pointed out, the typical feature of these programs is the constant dialogue that’s established between the taxpayer and the tax authorities, which is constructive in reaching an ex ante resolution of issues regarding qualification and tax treatment.  

Here are the main benefits of Cooperative Compliance Programs: faster response time in answering concrete questions; achieving tax certainty; reducing penalties in case of non-compliance by taxpayers; enhancing reputation by publishing a list of taxpayers enlisted in the program. 

Highlights of these programs include qualitative selection of participants, the implementation of a TCF, and the preemptive resolution of tax issues. Specifically, the TCF emerges as the result of collaborative effort between the taxpayer and the authorities. This framework rests on three pillars: 

1. Accountability: Tax compliance responsibilities are clearly attributed to appropriate functions in the company.
2. Risk assessment: Tax risk is detected and measured efficiently.
3. Internal communication & information circulation: Fiscally relevant information is disseminated efficiently.

Thanks to the concrete examples we discuss in our research, we can see how Cooperative Compliance Programs work in the real world. A pilot project conducted with 14 taxpayers paved the way for the Italian program, which now targets taxpayers who satisfy quantitative and qualitative criteria (respectively, turnover of at least 750 million euros, and the adoption of a TCF). In this country, the Cooperative Compliance Program is managed by an office at the Italian  Internal Revenue Service made up of a core group of selected officials. Currently, over 100 companies have been admitted to the program, which also guarantees that administrative sanctions in the event of non-compliance will be cut in half or eliminated altogether; participants are also granted immunity from tax recovery activities before the tax assessments are final. 

The legislature also recently extended the scope and benefits of Cooperative Compliance with the following provisions: 

• The minimum turnover required to access the program will be gradually lowered even further (to as little as €100,000 by 2028). 
• Administrative sanctions are eliminated for taxpayers who inform the authorities of tax risks before taxes fall due and returns are filed. 
• A two-year reduction on the statute of limitations on tax assessments for program participants who have adopted a system for detecting, measuring, managing and controlling tax risk that is certified by an independent qualified professional. 

These developments align for the most part with the experiences in the countries that pioneered Cooperative Compliance, and with OECD recommendations.  

Examining the challenges and opportunities that arise in the field of tax risk management, our research: 

• encourages authorities to explore the prospects for the evolution of Cooperative Compliance Programs, including lowering access thresholds, shoring up incentives, and introducing new practices and standards; 
• confirms the importance of continuing to promote greater transparency, responsibility and cooperation between the tax authorities and taxpayers to ensure effective and sustainable tax risk management;  
• highlights the crucial role of corporate governance and the involvement of top management in defining the corporate tax strategy.