A smart approach providing multiple benefits

Human beings, in negative situations and in certain circumstances, do not accept collaboration from colleagues, friends, family or others. Among the reasons we could quote the pride of not owing anything to anyone, the mistrust at the time of revealing intimate information to obtain such assistance, or mere shyness when needing to ask for something. In these situations, and within this logic, sometimes it make sense say to others “help me to help you”.

In this sense, in the area of tax administration, we could ensure that the lack of transparency or openness on part of the taxpayer or the tax administration could lead in certain cases to a “lose – lose” consequence. In this way, to encourage “voluntary compliance”, it is necessary to create a climate of mutual trust, thus breaking down fears and prejudices.

Given the characteristics of the tax relationship, to arrive at this “balance point” constitute a challenge, in which the tax administration intends to help and the taxpayer should allow to be helped (and vice versa).

From a rational point of view, it is expected that each party will provide the collaboration, transparency and trust allowed by their own bargaining power, the bargaining power of the parties being primarily determined by the level and quality of the information that they handle, as well as their capacity for processing it.

It is essential that the strategic level of the tax administration deal with these matters and promotes studies, with the aim to assess how and when to develop and implement actions of “cooperative compliance” or “cooperative relationship” that lead to improve the relationship with various segments of taxpayers. In turn, this promotes a higher degree of corporate compliance and social responsibility, regarding tax matters.

While numerous actions have been conducted on this topic at international level (e.g.: forums, technical documents, etc.), I consider that there is no consensus on the definition of the related concepts. They are not legal concepts, so it is not necessary that the definition be very accurate. However, is important to be able to distinguish between a “cooperative compliance” or “cooperative relationship” initiative and a traditional service, as well as also internally define in tax administration the areas that would be in charge of developing, implementing and following up such initiatives.

These initiatives, by their characteristics, require a level of minimal development in different fields specific to the tax administration and their context. Among them, the level of tax culture, the control capacity of the tax administrations, the human resources development level, knowledge of the business by the tax administration, the compliance level and administration costs, the technological development, the tax system complexity, the availability and quality of information, the risk management, the ability to work in real time, the quality of the processes, how internal controls are performed, management aspects related to corporate governance and the capacity of the tax administration to carry out multilateral initiatives with other governments, among others.

The definitions of “cooperative relationship” and “cooperative compliance” have generated many discussions in the OECD context. The term “cooperative relationship” could lead to connotations of inequality in the tax treatment. It is why the OECD considered the term “cooperative compliance” as the most appropriate, to be more accurate, because it not only denotes the process of cooperation, but it also demonstrates its purpose as an integral component of the overall strategy of risk management by tax administrations.

The CIAT has recently published a working paper called Cooperative Tax Compliance Relationship: current reality in CIAT member countries of Latin America, the Caribbean, Africa and Asia (Spanish Only), presenting initiatives of developed countries and of developing countries that have marked trends. The referred work, relying on the identified findings, proposes the following definition, which in my view allows us to understand more clearly this scope of action:

“A cooperative compliance initiative is one that arises from the relationship between the tax administration and the taxpayer, and which seeks to achieve significant improvements in the level of mutual transparency and consequently on the level of voluntary compliance, aiming at reducing the costs of compliance and management, and where possible, prevent disputes regarding the legal-tax relationship.”

While this is a wide definition, it is not expected that, for the existence of the “cooperative compliance initiative” all the described situations should take place simultaneously. For example, a reduction of compliance costs is not necessarily taking place at the same time as a reduction of management costs.

A few years ago, CIAT organized an activity on cooperative compliance in Latin America and the Caribbean, where I presented a regional overview on the topic. Within the framework of the discussions, a renowned European tax expert requested the floor to express his perception that “cooperative compliance” is a utopia in the developing countries and that many of the initiatives in these countries were not generating results.

To the surprise of this gentleman, benefit of taxpayers and pride of the tax administrations in developing countries referred to in the working paper, we can say that there are 37 implemented initiatives, which have mostly provided tangible results aimed to obtain some or all of the benefits set out in the proposed definition in 16 developing countries.

I invite you to review the chart below, presenting the existing types of cooperative compliance initiative, to consult the working paper and to comment the present post.

Percentage and number of initiatives by category (1)

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