Like it or not, a tax system is vital to any modern nation. It is a fundamental cornerstone of the nation's economic engine. It is the ability to raise tax revenue which underwrites the nation's credit, its ability to borrow and its currency. A well functioning and efficient tax system promotes economic stability and prosperity, while a poorly functioning tax system can lead to bankruptcy and economic ruin. The European experience of recent years graphically illustrates how the fortunes of countries wax and wane with economic conditions. Losing control of the tax system in such situations is a shortcut to disaster.
Thus we are concerned, particularly in these economic times, with the health and well being of the world's tax systems.
Most fundamentally, this work is devoted to laying out what a good tax system should contain. It must have the support of its taxpayers and the tax advisors who assist them. Without this support, widespread voluntary compliance is hard to achieve. And to get this support, a balance is needed between Taxpayer Rights and Taxpayer Responsibilities, as our work demonstrates.
In today's economic climate, many countries are introducing so-called austerity measures. These measures focus fundamentally on two things, cutting expenditures and raising taxes. This is generally expressed as an effort to right the economic wrongs of the past, generally blamed on external factors or previous governments, and put a country back on a sound economic footing.
The austerity measures have proven very unpopular, as one would predict, and as shown recently in Greece and Spain. Such policies have placed an increasing strain on the relationship between taxpayers and the tax administration, with taxpayers being reluctant to pay more tax, particularly when earning less. For a tax administration, the task of enforcing unpopular tax increases in a recessionary economic environment makes what is a difficult job in the best of times a far more challenging and sometimes close to impossible undertaking. At the same time, tax administrations are typically requesting increased cooperation from taxpayers, sometimes putting forward a theory that a "partnership" exists between the tax administration and the taxpayer, where the taxpayer, tasked with being a good partner in the system, should be expected to willingly comply and readily shoulder the appropriate portion of the tax burden.
Within this partnership, tax professionals (referred to in this report as tax advisors) play a critical role in the influence they wield to encourage taxpayer compliance.
There are many philosophical issues raised by this "good partner" theory, but of fundamental importance to such an approach, and tax compliance more generally, is whether taxpayers and tax advisors believe that the tax system is, broadly speaking, fair and recognises fundamental human rights. Without the backstop of a fair tax system, as perceived, this approach will, and in all too many jurisdictions is, falling on cynical ears. Necessarily, what lies at the heart of this work is the integrity and fairness of the tax system.
Our work does not comment on the political aspects of taxation, such as what the appropriate tax rate should be, how the tax burden should be distributed across society, or how money entrusted to governments should be spent. Taxpayers will of course have views on these issues, but the forum for expressing these views is the political arena, voting in and voting out political parties where such avenues are available.
The underlying integrity and fairness of a tax system manifests in many ways, which go far beyond the political philosophies underlying any particular tax system. They apply in any tax system and thus in all tax systems, just as human rights are universal. Fairness considerations manifest in the day-to-day operations of the tax system, the design and implementation of tax legislation, the rights of appeal, and many other aspects. It is to these points that our study is devoted.
We acknowledge that taxpayers have responsibilities under the tax system, and rightly so. A tax system which has no effective enforcement is a tax system in danger of collapse. History is full of examples of countries which have lost control of their tax systems, dating back to Roman times and even prior, and the consequences which result. But of equal importance is that Taxpayer Rights are recognised and protected by law.
Our experience, supported by our survey results, is that penalties alone are not sufficient to achieve a high level of taxpayer compliance. Faced with a tax system which is believed to be fundamentally unfair, taxpayers feel empowered to cheat the system and justified in doing so, and the more unfair the system, the more they will do so.
Even in an ideal tax system, there will always be taxpayers who will not comply fully with their responsibilities. But that is not the issue. Instead, the challenge is to achieve greater compliance, accepting that 100% compliance is not attainable in practical terms. Again this is where the concept of fairness arises.
Over the past several decades, the responsibilities placed on taxpayers have increased continuously, through ever more complex tax systems, anti-avoidance rules of even greater scope, increased disclosures, and an environment of tax legislation where constant change seems to be the norm. More is expected of taxpayers today than ever before. Taxpayer Responsibilities have increased while recognition of Taxpayer Rights has at best stood still. It can be argued that there are many instances where Taxpayer Rights have been eroded or ignored. Those responsible for drafting tax legislation have not often seen a benefit to recognising additional rights of taxpayers. Quite the reverse seems to be true. This undermines the "good partner" approach to tax administration, and it has caused taxpayers and tax advisors alike to be cynical of this philosophy.
In our view, what is required is to bring Taxpayer Rights and Taxpayer Responsibilities to the forefront and into balance through a bold initiative to create a Model Taxpayer Charter. This Taxpayer Charter which we have drafted is reproduced in Chapter 2. It is, in our view, a balanced document in that it covers both Taxpayer Rights and Taxpayer Responsibilities. It is comprehensive in nature, dealing with all of the issues we believe to be relevant in a typical modern tax system. It is, in our view, capable of being adopted into domestic law, although the exact process of this will vary from country to country.
The provisions in the Model Taxpayer Charter were derived from a survey of Taxpayer Rights and Responsibilities in 41 countries, representing over 80% of world GDP. While the survey was not exhaustive, it was very comprehensive and the survey results, reproduced in Appendix II, are indicative of the general state of Taxpayer Rights and Taxpayer Responsibilities around the world.
The Model Taxpayer Charter seeks to lay out Taxpayer Rights and Taxpayer Responsibilities in, broadly speaking, 20 different areas. Many of the provisions are already laid down in the laws of the countries which were surveyed, such as the right to appeal a tax assessment. However, certain of the provisions are more novel, and some are far reaching, and intentionally so.
Before designing the Model Taxpayer Charter, we considered whether existing Taxpayer Charters, or the rights of taxpayers recognised under existing legislation, would be sufficient. If so, then why bother to create a Model Taxpayer Charter? We found that Taxpayer Rights, whether included in a Taxpayer Charter in place in a particular country, or recognised by legislation (tax, constitutional or other), had one or more of the following shortcomings:
- the Taxpayer Rights outlined in a Taxpayer Charter are not legally binding and, as a result, are largely ignored by taxpayers, tax advisors, and the tax administration alike
- the Taxpayer Rights are not comprehensive in scope
- where Taxpayer Rights are recognised, they do not go far enough, are listed in very general terms, and are not generally capable of enforcement
- the Taxpayer Charter is largely a policy statement issued by the tax administration which is focused mainly on enforcement, is self-serving, and not useful
- there is no attempt to hold the tax administration accountable to taxpayers
- there are no provisions dealing with drafting standards for tax legislation, a consultative process on amendments to tax laws, or generally the fairness of tax laws themselves.
We are concerned that the initial reaction of tax administrations and governments to a comprehensive Taxpayer Charter will be negative. There may be concerns that the problems it will create for the further development and administration of the tax system will be considerable, and will outweigh any benefits to be derived. And governments do not like to bind themselves to commitments, even to their own citizens, without clear benefits and careful weighing of all options. To this we would say that these concerns are overstated. For countries prepared to take a bold step, and invest in the goodwill of their taxpaying population, the benefits over the longer term will be considerable in terms of improvement in compliance and acceptance of a balanced and equitable tax system.
We tested the specific provisions in the Model Taxpayer Charter against our survey results, to determine, broadly speaking, whether there were examples of countries that would support each substantive provision. Based on this analysis, modifications were made and provisions were deleted in some cases and others were added. Not all provisions in the Model Taxpayer Charter were suitable for this analysis, so only certain provisions were selected. The results are contained in the chart reproduced at the end of our work. Looking horizontally across the chart shows the support or lack of support within the 41 countries surveyed for a particular provision in the Charter. Looking vertically down the chart gives a general overall impression of the situation of Taxpayer Rights and Taxpayer Responsibilities in a particular country.
It is important to note that every substantive provision in the Model Taxpayer Charter has support in one or more countries surveyed. Therefore we conclude that none of the provisions in the Model Taxpayer Charter are radical and beyond the realm of reasonableness.
With our initial work published in May 2013 we asked for input on the Model Taxpayer Charter, through an extensive worldwide consultation process. We have now refined the Model Taxpayer Charter to produce a final product which reflects a global consensus among professional organizations of tax advisors.
Copies of the preliminary report were sent to Ministers and Deputy Ministers of Finance and Revenue (or their equivalent) of the countries who participated in the survey. Copies were also sent to the Parliament of the European Union, the OECD, the United Nations Fiscal Affairs Committee, the World Bank, the IMF, and certain other interested stake holders.
Subsequent to publication of our preliminary report, the Finance Ministers (and subsequently the leaders) of the leading 20 global economies endorsed the OECD's Base Erosion and Profit Shifting Action Plans. Recognition of Taxpayer Rights in the context of these proposals (particularly where they involve information exchange between jurisdictions whose tax system, privacy and confidentiality and data protection laws are robust and jurisdictions where they are not) is of particular importance and has yet to be addressed. For example, the recent hacking of the IRS database of U.S. individuals illustrates our concerns.
Collectively the participating organizations, being AOTCA, CFE and STEP, have directly or indirectly around 500,000 members who are tax advisors located in over 80 countries around the world. While there was not universal agreement among all of the survey participants on all matters, there was an overwhelming consensus that a Model Taxpayer Charter with the force of law would be hugely beneficial to all stakeholders, being taxpayers, tax advisors, and the tax administrations alike. Recognising and enshrining comprehensive Taxpayer Rights in legislation will contribute substantially to both the perception and reality of fairness and integrity in the tax system. Placing statements of Taxpayer Responsibilities in an over arching document reinforces the proposition that while holding rights, taxpayers must also shoulder responsibilities and do so in good faith.
The adoption of such a document may actually bring about the partnership philosophy of the taxpayer, the tax advisor, and the tax administration cooperating together. Consider that Taxpayer Rights are responsibilities for the tax administration and Taxpayer Responsibilities are rights of the tax administration. This mirror image of rights and responsibilities, laid out and acted upon in a balanced and constructive way, should enhance the relationships between all stakeholders.
We are grateful for the feedback we received, and particularly to those who gave their valuable time to write comments and/or meet with our authors and their professional bodies. In particular, we wish to acknowledge Pascal Saint-Amans of the OECD who commented that our Taxpayer Charter should be "principles based". We agree and comment further on this below.
Initially our thought was that the principles in our Model Charter were self-evident. But that may be because we, as authors, understood the purposes behind what we wrote. This oversight is easy to make, and, on reflection, it is the same issue we as tax advisors raise when we review tax legislation to discern its purpose. The intersection of tax policy, purpose and tax avoidance is a difficult one to map when purpose is unclear.
Thus we have spelled out what we believe to be the guiding principles of our Taxpayer Charter in 10 Taxpayer Rights and 10 Taxpayer Responsibilities from which the more specific provisions which follow can largely be derived. There are various ways that these principles could have been listed, and our wording and organization is merely one choice among many. But with clarity being the main beacon in guiding us, we believe that our listing is appropriate.
As a taxpayer you have the right to:
- Integrity and equality
- Efficiency and effectiveness
- Appeal and the right to dispute resolution
- Appropriate assistance
- Confidentiality and privacy
- Pay correct amount of tax
And the responsibility to:
- Be truthful
- Provide information
- Be cooperative
- Make payment
- Comply with the law
- Maintain records
- Take due care
- Retain responsibility for advisors
- Show courtesy
- Comply cross border
These headings are explained in more detail in Chapter 2 and in the Taxpayer Charter where they appear.
Some may say that these principles as they stand are enough without more. To that we say resoundingly no. While useful for guidance, they are largely not actionable. Indeed it is for exactly this reason that Taxpayer Responsibilities are laid out in precise terms in tax legislation. Without specific criteria for application to each major subject area, particularly under the heading of Taxpayer Rights, as generally there is no lack of provision for Taxpayer Responsibilities, we are back to where we started. And that is not where we want to be.
Another comment we received is that our approach reflects an old fashioned and confrontational approach to tax administration from which the world is moving away. The modern approach is to enter into dialogue with the tax administration and disclose areas of uncertainty. Then collectively the issues can be resolved, perhaps by rulings, and all will be well.
This may be suitable for large corporate taxpayers and ultra-high net worth persons, but beyond that, at the grass roots practice of assisting the everyday taxpayer, the entrepreneur, the small estate, it is not practical. It drives up the cost of tax compliance and contributes to, rather than resolves, uncertainty. If tax laws are clearly written, comprehensive, and administered accordingly, the need for dialogue and rulings should diminish. We see this, quite frankly, to be a failing of the tax system, being glossed over by a stop-gap approach of resolving issues "at the margin" where the tax rules are uncharted.
In fact, this approach runs contrary to so many of the principles we list under Taxpayer Rights that it should be opposed. Among them are:
- Integrity (different taxpayers in similar circumstances may get different results based on discretion exercised by different offices or officers of the tax administration)
- Certainty (the process contributes to uncertainty, resolved only though the process of dialogue when the law should be clear)
- Fairness (not cost effective)
- Appeal (hard to appeal the exercise of discretion)
- Corruption (any methodology that allows a tax officer to exercise discretion without an independent and objective set of rules to judge against, and without checks and balances, sets up a platform for possible corruption)
- Complaints (it is difficult to complain about the exercise of discretion because it is not objective in the first place)
We offer these thoughts, in particular, to developing countries who are formulating and evolving their modern self-assessment tax systems. To you especially we say do not go down this path.
The Model Taxpayer Charter aims to be a balanced document that is constructive for all parties. It focuses objectively on Taxpayer Rights and Responsibilities, without favouring one party over another, and certain provisions apply both to taxpayers and to tax administrations.
We have included on theis website extensive comments received from the persons who completed the survey. These make for interesting reading, although many of the comments are specific to the country concerned and need to be read as such.
The survey results show that tax administrations, generally speaking, perform their duties to a high standard, particularly in the areas of providing support to taxpayers and in having an independent appeal process. Criticism tends to lie more in the areas where taxpayers do not have clearly defined rights, such as input into the legislative process, and the drafting of tax laws, rather than day-to-day conduct of tax administrations. However, the trends towards placing an increasing compliance burden on taxpayers, increased complexity, and broadly worded anti-avoidance rules that undermine certainty, have all been noted in the majority of countries surveyed.
"Charter Explanation" reproduces the Taxpayer Charter with a commentary on most of the provisions to give a full explanation. It also notes the principles from which the more specific provisions derive. At the end, a table illustrates this in a snapshot.
"Selected Topics" considers a series of topics about Taxpayer Rights and Responsibilities and ties these back to the provisions of the Taxpayer Charter. The highlights are the following:
- Taxpayer Rights have a basis in human rights, and are an essential part of a tax system that cannot be removed.
- Taxpayer Responsibilities are fundamental to the functioning of the tax system, but must be balanced with Taxpayer Rights in an equitable and readily understandable way.
- Past studies into Taxpayer Rights and Responsibilities have been largely inconclusive, and have resulted in broad generalisations, which, as a practical matter, have done little to further the relationship between taxpayers, tax advisors, and the tax administration.
- Taxpayer Charters in the past have been largely non-binding statements of general principles issued by tax administrations, and have, for the most part, not been overly useful or well received. In many cases, these Taxpayer Charters are either ignored entirely, or are not well known. They are not effective in enhancing the perception of fairness of the tax administration.
- Taxpayers should be entitled to reasonable certainty in respect of their tax matters, both as to the interpretation of the tax implications of transactions and arrangements and to provide closure through a statute of limitations. This principle of certainty is being increasingly eroded in several ways, including general anti-avoidance rules that are difficult to interpret, and exceptions to statutes of limitations.
- There are no generally agreed standards for drafting tax legislation, and the complexity of modern day tax legislation is becoming an increasing burden for taxpayers, tax advisors, and tax administrations alike. If this trend continues, it may result in a situation where a tax system becomes incomprehensible to virtually all and as a result, collapses. This is particularly the case in the international tax area.
- A tax ombudsman (also called a taxpayer advocate) is not an effective mechanism to enforce and monitor Taxpayer Rights unless given the legal power to do so.
- While retroactive legislation is not commonly used by tax administrations across the world, most countries do not provide limitations on its usage, potentially resulting at worst in a denial of fundamental Taxpayer Rights, and at best, an uneasy feeling that a State may use it as a last resort - as India attempted to do to overturn its own Supreme Court.
- Specific Taxpayer Rights are granted through the fundamental freedoms of the European Union Constitution, but that said, this is a continuing source of tax litigation, and countries in the European Union have often been slow and resistant to reflect such provisions within their domestic tax systems. A change of attitude and a show of good faith is required of some nations.