Some years ago, legislation in various countries set a process in motion that is progressively transforming the paradigm of the tax authority-corporate taxpayer relationship. The event that marked the first big step in this direction in Italy was the program Collaborative Compliance (commonly called Cooperative Compliance), introduced with the enactment of Legislative Decree 5 August 2015, n. 128 (aka “The Certainty Decree”).
This program, inspired by experiences beyond Italy’s borders, in particular in the Netherlands and Australia, basically turns the conventional tax compliance paradigm on its head. In fact, the traditional tax-taxpayer relationship involves a confrontation (but we may more aptly call it a clash) that would happen ex post (after the taxpayer conducts any fiscally relevant accounting procedures and files a tax return, and subsequent to an audit initiated by the tax authorities). In contrast, the Cooperative Compliance mechanism provides for continuous ex ante cooperation (before launching into any sizeable transactions or major business dealings) between the taxpayer and the tax collector.
The rationale justifying Cooperative Compliance is the guarantee of legal certainty that this constant preliminary interaction provides to taxpayers. Indeed, they are unlikely to face audits or tax assessments in the years to come, or any administrative sanctions, possible criminal charges, or reputational damage that would potentially stem from such procedures. Moreover, the tax authorities save their administrative resources, who can then focus their auditing and assessment activities directed toward taxpayers who have no intention or possibility of cooperating.
This conversion process for the tax compliance paradigm, which is still evolving, implies a cultural and organizational change, both for corporate taxpayers and for the tax authorities.
Our research activity into this evolution focused first on exploring Cooperative Compliance models implemented in other countries, to weigh their potential benefits, critical issues and adaptability to the Italian context. Second, we asked ourselves how companies can better manage their tax risk, and we identified the most effective and sustainable practices to confront and overcome this challenge. Finally, the last issue we addressed concerns fostering greater transparency, responsibility and collaboration between tax authorities and taxpayers, with the aim of ensuring more effective and sustainable tax risk management in the long run.
Starting from a contextual analysis, our research attempts to answer some crucial questions.
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:
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:
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:
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