Half a century ago, in most countries tax was largely the province of lawyers. Compliance was a matter of fact and agreement of taxes and determination of liability fell clearly into the lap of the tax inspector. Accountants handled the intricacies of compliance and this was seen not as a high level interpretive function but as a relatively low level administrative and clerical function.
In 2015 there is a very different picture. Costs of maintaining tax authority staff levels have proved too much of a burden to sustain an inspection based system. Staff numbers are plummeting and tax compliance is moving to systems characterised by taxpayer self-declaration with the tax authority relying on risk based audit coupled with penalties as the preferred means of enforcement. Some countries are more advanced in this than others but the shift is noticeable, inexorable and irreversible.
The move has been given impetus by major changes in economic practice, the rise of digital communications and the substantial input by tax professionals and advisors who have found it necessary to question the interpretation of tax law promulgated by tax authorities, in many cases successfully and for the benefit of the taxpayer.
Part of the shift in practice has been a realisation that tax is not capable of simple mathematical accuracy. At one end of the scale, a tax of 20% on the sale of a garden spade is, arguably, a simple calculation. At the other, once questions are asked to determine who is buying from whom, where each party is located, how the spade is to be delivered and when does possession or ownership pass, it can be seen that simplicity only exists at the end of a lengthy iterative process. And this only relates to the sale and purchase of a spade!
Tax itself has become complex and this is not only because legislators have made it ever more so by use of targeted reliefs or changes in rates and limits. It is more complex as a direct consequence of changes in economic practice, particularly cross border, and attempts to mirror those developments in prescriptive fiscal laws.
Taxpayers and their advisors, in dealing with the geometric growth in tax legislation, have been forced to question the application of tax law and, in the process, have realised the benefits that can accrue as a result of judicious tax structuring. This should not be a surprise. Unfortunately that very activity has excited legislators to increased levels of activity, targeted to negate where possible those structuring devices which deplete tax revenue and frustrate the spending aims of government.
We have a view that growth in tax legislation and tax avoidance are inextricably linked. You cannot have one without the other and the more complex tax law becomes, the more taxpayers and their advisors will devote resource to maximise returns at the expense of revenue yield to state coffers. Growth in tax legislation is a clear variation of the generalised Peter Principle and we think destined for ultimate failure.
Tax Advisors and BEPS
How long this position will endure is open to question. The G20 driven BEPS programme of OECD is due to report, with its recommendations, in the last quarter of 2015. We expect this to address many of the component irritants for tax administrations like treaty shopping, abuse of permanent establishment status, and tax arbitrage, as well as giving a lead on how global digitisation can best be addressed and tightening the provisions relating to transfer pricing.
A matter for aspiration and, given the huge backing not just from the G20 and G7/8 but also from the many countries that have endorsed and signed up for the emerging programmes, in particular the Global Tax Forum and the automatic exchange of information, one seen as likely to have at least some positive outcomes.
It is difficult not to be sceptical because, at present, it looks as if one of the results will be an enhanced global tax system which plays to the strengths of global trade and introduces more opportunity and need for cross border structuring not less.
Country by country reporting coupled with tighter and more defined transfer pricing disclosures with no overall cap on the maximum tax applicable on cradle to grave transactions must be addressed by any global business. Such a business is not only seeking to minimise its taxes but also seeking to ensure that, in aggregate, those taxes do not exceed the total profit and result in an acceptable level of return.
This tax planning will be a direct consequence of the BEPS process and will be undertaken by tax advisors. In so doing they will be acting in the interests of their clients and in our view will be defending their client's taxpayer rights and ensuring their client's compliance.
Increasing complexity in tax systems make it more, not less likely that tax advisors will remain an essential and permanent component of the fiscal environment. Their areas of activity will change to meet whatever new needs arise, but, given the desire of taxpayers to comply with laws they have little hope of understanding, the needs of software suppliers to have tax databases which are "real time correct" and the shift of fiscal responsibility to self-compliance by the taxpayer, the tax advisor's position is assured.
Rights and Responsibilities of Tax Advisors
The rights, roles and responsibilities of modern private sector tax professionals – external tax advisors, accountants, in-house tax advisors, economists and legal practitioners practising in the taxation arena - flow logically from the roles, rights and responsibilities of the taxpayers who hire them, and from the roles, rights and responsibilities of the tax authority.
The modern tax advisor can fulfil any one or more of the following roles:
- Intermediary agent acting independently
- Advisor on business tax structure and planning
- Tax accountant and compliance tax filer
- Advisor to high net worth individuals and families - capital and income
- Independent advisory relationship with revenue authority
- Dispute resolution procedure and negotiator
- Tax investigator, with the taxpayer's consent
- Outsourced independent tax audit and assurance
In so doing he/she will act with a high level of professional ethics and will do so with due regard to his/her client's rights and responsibilities as a taxpayer. Depending on where the tax advisor is located he/she may be legally regulated, may be professionally regulated or may be acting with no regulation.
In all cases the contract with the client may have an implied or presumed duty of care which, whilst leaving the taxpayer as wholly responsible for his/her tax compliance, gives a duty not only to defend assiduously the client's rights but also to point out the concomitant responsibilities. In providing these services the professional is in a position of trust and confidentiality. If he or she fails to discharge properly this duty there are legal remedies available to the client, including the right to sue for damages arising from negligence.
The duty of a tax professional to carry out the instructions of their client can only be carried out if the instructions are consistent with the professional's other legal responsibilities and, in particular in due awareness of both civil and criminal law and the professional's ethical codes to which they subscribe.
An example would be a contract with the tax authority which specifies required terms to enable participation in electronic filing. The contract will require professionals to accept certain conditions in order to enjoy the business benefits flowing from use of the service. It does not, nor properly could it, prejudice the role of tax professionals as agents of their clients, indeed without it they would not be able to act.
There is no legal obligation upon tax professionals to act at a standard above the minimum required by law. Their professional or their employed status may include adherence to a non-legal code of conduct but there is no necessity to act in accordance with community interests. The current debates around abusive tax avoidance, howsoever defined, has produced much public pressure to develop a code of conduct but, at the time of writing, no such enforceable code exists. If and when one arises whether it carries the force of law or not will be of great interest.
Tax professionals must obey the law. This obligation provides the rock upon which is founded ethical standards and codes of professional practice. It provides boundary lines beyond which professionals cannot go, whatever the wishes of their clients, and in this respect, any advisor who deals with specific and general anti avoidance laws must be sure both of their knowledge and the limits of their advice. Those who are legal practitioners are officers of courts and so have, in addition to the obligations noted above, duties to the court.
Independence of Tax Advisors
The key characteristic of the tax advisor is his/her independence and this is inextricably bound with a duty of reasonable care and the level at which that operates. The issue of what constitutes reasonable care lies at the heart of concerns which can arise regarding the relative rights and responsibilities of taxpayers and tax advisors.
A good example of this can be seen where a penalty is levied on a taxpayer who has a tax shortfall and that shortfall was caused in whole or part by the failure of the taxpayer or his tax advisor to take reasonable care to comply with the legislation. Thus are introduced two important and contentious concepts: that of vicarious liability, where the taxpayer becomes liable for the failings of the tax advisor as his agent and of reasonable care.
The same standards apply whether or not a taxpayer uses a tax advisor. Difference only arises where failure occurs because the tax advisor has not fulfilled his duty of reasonable care to his client - the tax consequences including any penalties which may become chargeable in some jurisdictions, fall on the taxpayer whilst the tax advisor has a civil liability where the damage will normally be measured by the extent of the client's loss.
This vicarious fiscal liability will fall on the taxpayer if it is proven that he has failed to exercise reasonable care in the handling of his tax affairs. This requirement exists whether or not a tax advisor is contracted. The fault he, the client, has suffered lies in the fact that he has chosen to rely on his tax advisor for the exercise of reasonable care and this trust was misplaced, either because the tax advisor failed to gather all necessary information from the client or because he did so but failed to use it as required.
Where taxpayers have complied with prescribed requirements regarding record-keeping, made a full and honest disclosure to the tax advisor of information requested, and complied with the tax advisor's advice, they will have exercised reasonable care in relation to all but the filing requirements. Only if he has failed to bring to the attention of the tax advisor information he/she could be reasonably expected to know was relevant to the preparation of their return can he/she have a failure in respect of information disclosure.
With regard to the filing requirements, unless the tax advisor also happens to be an officially regulated filer, commonly referred to as an intermediary, the client passing information to his/her tax advisor or allowing that tax advisor to collect the information does not conclude or remove the requirement for reasonable care for correct information exchange which the tax authorities placed on the taxpayer.
Where the tax advisor is an intermediary he/she will compile the information for filing from what the taxpayer has supplied and, in most instances will require the taxpayer to sign a statement as to the completeness of the data supplied. This may meet the requirement for the taxpayer to file, as it has been done for him by an authorised agent of the tax authority. It does not, though, remove the requirement for reasonable care.
As far as clients are concerned they cannot remove the reasonable care requirement placed upon them. They can go some way to mitigating the consequences of failure by using a tax advisor and ensuring that they make all necessary disclosures to him/her in a timely and sufficient manner. If they do so any failure will incur the same fiscal consequences for the taxpayer as would apply if no advisor was engaged– a vicarious liability.
The remedy available to the taxpayer is, depending on the civil contract between taxpayer and tax advisor, civil action for damages because the tax advisor has failed to exercise reasonable care in his/her handling of the client's affairs. In this it is clear that there is a fundamental requirement placed on all tax professionals to maintain a knowledge of tax law adequate to identify and resolve issues relating to the tax affairs of their clients and to ensure that the client meets the duty of reasonable care the law places on him/her.
Ethical Considerations for Tax Advisors
It is axiomatic that tax authority staff and tax professionals must act in accordance with the law. It also is the case that both have the option of adopting, by their own choice, codes of behaviour which are founded not in the formal requirements of law, but rather as a matter of ethics or professional standards. Such codes complement the law, and provide behavioural guidance to those electing to adopt them. They may be given the status of civil legal obligations, where embodied in formal undertakings by the party or parties in question.
Codes of ethics introduce the concept of duties and loyalties owed to society and its social and political institutions, and distinguish these from those owed to the law. This begs the question as to what these duties and loyalties are, but clearly they extend beyond a requirement to operate in strict accordance with the law.
It may happen that a client's lawful instructions are, or are perceived to be by the tax professional, incompatible with the wider adherence owed by the professional to the community. In such circumstances the professional, bound by an obligation to comply both with the client's lawful instructions and with a formal behavioural code, must make a choice.
If that choice is to comply with the code, the professional may be obliged to decline to act for the client; if the choice is to comply with the client's instructions the professional may have no choice consistent with his or her ethical obligations. In such a case the only options would be to resign or risk disciplinary consequences.
In some instances, provisions of ethically-founded behavioural codes re-state and/or expand upon existing legal requirements. Even so, their incorporation into the codes of professional bodies is helpful, for it adds an ethical dimension to the legal canvas.
The ethical obligations upon the tax authority, and upon its staff, should be no less onerous than are those upon tax professionals. These obligations may be set out in a formal Code of Ethics of the tax authority, or one applying to the Government Service as a whole. Such documents articulate requirements which in part are legal obligations and in part are based on considerations of ethics.
To the extent that social attitudes or perspectives of reputational risk motivate a client to adopt a more aggressive view of tax planning opportunities, the tax professional can and should limit involvement to advice because any decision can only be made by the client. In these cases the professional's role is to ensure that the client is fully advised of all matters for and against so that he can make an informed decision. In particular he/she must be especially careful not to act if the circumstances should fall within those they regard as incompatible with their ethical or legal position.
The approach to administration of tax systems has, over time, fluctuated between an adversarial and a co-operative one. Currently, consistent with a move to a responsive regulatory strategy, tax authorities have expressed the desire for a co-operative partnership style relationship with the tax advising profession. The profession is seen as a critical leverage point to promote voluntary compliance with the tax system by the bulk of taxpayers.
The advent of a partnership style relationship between tax authorities and the tax profession raises many issues, one of which is whether the desire to establish this relationship is mere rhetoric employed by both parties in the pursuit of their divergent interests. In fact, the very existence of these opposing interests raises the possibility of ethical conflicts that need to be carefully managed by both parties to the "partnership".
Some tax authorities, notably those of the Netherlands and the United Kingdom, have expressed an interest in a co-operative partnership style relationship with the taxpayer and his representative tax advisor. Key amongst the many issues this raises is the conflicting responsibility of the tax advisor to his client, the taxpayer and the tax authority. The possibility of ethical conflict needs careful management but provided the separate responsibilities of each party, including the tax advisor, are mutually accepted, the administration of taxation systems could be significantly improved.
On August 31, 2012 the International Fiscal Association issued a detailed report on this subject. It identified many of the issues which need to be addressed. Subsequently, the OECD has been exploring the concept of an Enhanced Relationship between taxpayers and tax administrations, which is now being referred to as "Co-operative compliance", since an eponymous OECD report of May 2013, and it is to be expected that other tax authorities will be encouraged to follow suit.
Rules of Observance for Tax Advisors
It has been said that when a profession is fully developed it may be described as a body of men and women:
- identifiable by reference to some register or record;
- recognised as having a special skill and a sufficient level of education in some field of activity in which the public needs protection against incompetence, the standards of skill and learning being prescribed by the profession itself;
- holding themselves out as being willing to serve the public;
- voluntarily submitting themselves to standards of ethical conduct beyond those required of the ordinary citizen by law;
- undertaking to accept personal responsibility to those whom they serve for their actions and to their profession for maintaining public confidence
In a number of countries, the activity of giving tax advice or the use of the title tax advisor are regulated and professional standards are thus mandatory. Regulation of tax advisors can be justified to the extent it serves to facilitate the administration of tax for the interests of taxpayers generally and provided it does not violate any Taxpayer Rights. This applies in particular to the following:
- Qualification requirements for tax advisors
- Rules on diligence, care and conscientiousness, and professionalism
- Regulation to safeguard the independence of advice given
- Regulation to ensure effective protection of the client's legal position (confidentiality of client information and advice given)
- Regulation to safeguard the client's financial interest (insurance, liability, handling of client's funds)
- Protection of the integrity of data
The duty of care imposes upon tax professionals a responsibility, consistent with the law, always to safeguard without fear or favour the interests of their clients. It follows from this that tax professionals ought not to undertake tasks or to accept additional responsibilities from other parties including from the tax authority which prejudice their ability to do so.
The relationship between the tax professional and client is one whereby the professional provides for a fee or other consideration for certain agreed services. The terms will normally be enshrined in a contract, often a detailed letter of engagement in combination with general terms and conditions, but will normally include reference to or presumptive inclusion of most or all of the following:
- A tax advisor has to observe the law and respect the professional ethics to which he/she subscribe.
- A tax advisor has to defend the interest of his/her client. The client's interest may coincide with the state's interest but may never be overridden by the latter. Any form of "Co-operative Compliance" will not change this. Even in an agreement in which a client commits himself to do/disclose more than is legally owed, the tax advisor will watch whether the collaboration remains fully in his client's interest.
- Cooperative behaviour will usually be in the client's interest. But a client may choose to be cooperative to the extent of required disclosure but not to volunteer more details than he has to. It cannot be assumed, neither by the state nor by the tax advisor, that a client is ready to share information he/she is not obliged to share.
- Any agreement in which the client commits himself to do more than he/she is legally required has to be clearly advised by his tax advisor as to the extent of his responsibilities and any attendant risk.
- The tax adviser will assure that the client incurs no disadvantage from cooperating only to the extent of his/her legal obligations.
- A tax advisor cannot enter into an agreement with a tax authority that unduly influences or seeks to limit his/her obligation to his client.
- Advice given by a tax advisor has to be independent also from the tax adviser's own interests or the interest of any third party. There should be effective and enforceable rules, either in the law or in ethical procedures or codes of conduct, on how to handle any threats to the tax adviser's independence that may arise. There is a margin of difference by countries/professional bodies as to the reaction to a conflict of interest: While some consider it sufficient to inform the client, others require express consent or even oblige tax advisers to terminate the assignment. Some countries do not allow professional firms to be owned or controlled by non-professionals to prevent conflicts of interest between the owner of and the client (e.g. where the owner is selling financial products or the owner is a competitor of the client).