The statement that tax systems around the world are becoming increasingly complex needs no empirical evidence for its justification. It is rare that tax systems become simpler, and the level of complexity can become daunting. No doubt this is responsible, in part, for the growth of the tax profession worldwide.
In recognition of this, professional bodies of tax advisors have increasingly introduced certification programmes, and in many jurisdictions around the world, the tax profession is regarded as separate and distinct from the accounting and legal professions. Tax advisors may have their professional training rooted in the accountancy or legal professions, but the complexity of tax laws and their administration requires that a separate certification process be adopted.
Taxpayers and tax administrations are increasingly feeling the brunt of this complexity. A by-product of this is the increase in the compliance burden faced by taxpayers. As a result, it has become recognized that tax administrations must provide an increased level of service to taxpayers and tax advisors to deal with this complexity.
In light of this, it is reasonable to expect that tax administrations will provide assistance to taxpayers and tax advisors so that this complexity can be handled on a practical level. This may take the form of practice aids such as tax forms, instructions, interpretation guides, and rulings.
The implications of this complexity are very pervasive, and are recognized in many provisions of the Model Taxpayer Charter.
Complexity leads to uncertainty because of the risk of error or difference of opinion in interpretation of tax legislation.
Issues of tax complexity are compounded, to some extent unnecessarily, by at least three additional problems which are emerging, namely the frequency of change in tax laws, lengthy delays in the drafting and enacting of tax legislation, and interpretations of tax law which change over time.
We have been and are witnesses to substantial evolutionary change in tax practice. Administrations want cost effective simplicity, transparency and broad brush tax legislation which gives them the greatest flexibility of action and choice. Their wish for greater resource is hindered by financial throttles which in many countries stifle recruitment and retention of quality staff and prevent investment in technological development which would, and indeed in due course will, revolutionise tax systems for the benefit of all.
Taxpayers on the other hand are becoming more astute and more professionally and technologically informed. Arguably there is an imbalance which administrations seek to correct by ever more complex and far reaching legislation designed to control taxpayer behaviour rather than to guide and encourage it. Most taxpayers accept the need for and want a tax system which is aspirationally fair without the need for heavy handed and punitive measures, except in the case of criminal or grossly negligent activity.
Both sides have certainty as an objective. Administrations want the reassurance that what has been returned to them and what taxes have been paid are complete and accurate. This can be achieved for them by taxpayer transparency, full and complete disclosures and, where professional assistance is used, confidence that such professionals are subject to a regime which includes discipline, adherence to a strict professional code and maintenance of current and applicable tax knowledge.
Taxpayers, on the other hand, view certainty in a practical context. They desire that what has been declared and paid has been accepted and will not be subjected later to redetermination. We are not here referencing the taxpayer who relies on non-disclosure or questionable interpretation of an event to allow him/her to achieve a lower tax liability than would be appropriate. Rather we are referring to the honest taxpayer whose major concern is the cost of dealing with a detailed review coupled with the nagging fear that despite thorough and adequate procedures, human error has crept in and he/she might have missed something or an alternate and unexpectedly harsh interpretation might be adopted by the tax authority.
A classic system where returns are made and subject to audit and checking certainly gives both the taxpayer and tax authority a hands on feel as to certainty. But, unfortunately it is not a runner in today's world where labour costs of revenue staff have to be pared to the bone. Most tax authorities now favour a system of self assessment which puts the onus of compliance and interpretation firmly on the taxpayer's shoulders. For both sides there are tools to help.
A statute of limitations applicable to errors on both sides, but not criminal activity, acts as a long stop which enables both sides to put away their records and move on. A formal system for clearances of difficult or disputed matters both in advance and, where returns have been made, by referral is a major aid to the achievement of certainty, provided there is full and complete disclosure and both sides enter into the process with open minds and in good faith.
Broadly worded anti-avoidance rules should be used sparingly, because of the uncertainty they cause, in favour of clearer and more specific legislation.
We see the expectation of a taxpayer to have certainty, as far as possible, in tax matters to be a core right. The issues are complex and multi-faceted. We discuss this theme in several other areas, such as Limitation Periods and Drafting Tax Legislation.