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Bear Hug Between Tax Payers & Administration
When the Tax committee of International Bar Association (IBA) invited me to join the panel titled 'The Bear hug, or will tax payers and tax administration soon be sharing the same bed ', I was kind of foxed with the choice of topic. On enquiry, I was informed that due to an overwhelming response to the same topic in the spring meeting of IBA/IFA/OECD in Paris, IBA was repeating the show at its annual meeting in Dubai last fortnight which hosts the largest gathering of lawyers from varied fields.
I found myself surrounded by an interesting Panel comprising of senior German & British tax administrator, and tax lawyers each from Sweden, Spain & Netherlands not to forget interventions by the Americans. Views on India assumed significance as it was the only non-OECD member country on the panel. Our objective was to share how approaches by tax administration towards tax assessments/investigations (popularly called audit) are evolving in an era of slowdown. On one hand most economies are clamoring to enhance tax collections, penalties for non-compliance are getting stiffer & risks of personal liability of tax directors/ advisers & governance risk for boards seems to be rising. In addition, demand for information under the treaty exchange clause continues to increase. This is giving rise to a new debate on rights of tax payers on secrecy of information and exercising tremendous burden on governments to deal with requests of information, not to forget the challenge of dealing with information secured from stolen bank data. In many parts of the world, the traditional model for relationship between the tax businesses and administration is eroding in favour of enhanced relationship models, yet a distant reality in the Indian context. The panel also provided a glimpse into the future of tax audits & investigations & evolution of multi-jurisdiction joint audit; an idea whose time will arrive in India.
Sophistication in audit approaches
The present Indian tax system will move away from red tape, delays, archaic procedures, draconian penalty procedures to a modern system with organic outlook of risk management process to choose select cases for investigations. The age old practice of doing assessments/audits will necessarily have to be driven by strategic approach of the administration on field work, dialogue with the tax payer, encouraging disclosure of uncertain positions or an error of judgment. Disparate measures for domestic exchange of information between the Tax & customs wing is expected to make material progress - this will not just improve the overall intelligence of the administration, but, will result the cost of compliance for tax payers. Though, tax payers expected a lot from the much talked about LTU (larger tax payer unit) initiative launched by Minister Chidambaram, the reactions have been mixed and some tax payers are considering opting out of the scheme due to high handedness of few ambitious officials. Spain's program has met with success and there are lessons from UK that India can learn from. India's active participation in various working groups of OECD will compel law makers to embrace changes not just on policy formulation, but, also improving its quality of administration. Desire to make investments in the IT architecture, seconding officials for international programs is high on India's agenda and I see rapid changes in medium term. India's desire to host the UN tax committee on transfer pricing early this year is a case in point. India received praise for it Advance Ruling program and in anticipation of legislating Advance Pricing Agreement (APA), there is hope that the law makers would walk the path of bilateral agreements ( and not unilateral as some are speculating ) as the world is moving in that direction.
Governance to drive the agenda - will India go Dutch
India has a lot of ground to cover on disclosure & governance on tax matters. Indian GAAP is restrictive on upfront disclosure of uncertain tax positions and far from the level of sophistication of FIN 48 (a US mandatory) reporting requirement wherein the CFO has to express an opinion on the likelihood of success of dispute or potential dispute. Disclosure of information to authorities upfront is culture & convention driven and though, there is no discernible trend, it will go a long way in improving governance & prevention of white collar crimes. Spain has requirements for transparency of positions not just for listed companies, but, even private individuals. It clearly shifts the risk if you lay all your cards; a potential downside is risk of secrecy & confidentiality being maintained as it can cause enormous harm to reputation of all stake holders. That is where the Dutch horizontal monitoring scheme (as opposed to vertical where the tax payers & administration could witness a face-off) has become popular where there is an open dialogue guided by principles of trust & transparency with spin-off benefit for both sides. Common forms of horizontal monitoring entails voluntary disclosure under which the tax payer notifies issues that have significant risk (cases of fraud is not covered) with full disclosure of all facts & tax authorities within an agreed time frame accept the position. Our settlement commission procedure will need to be overhauled to get anywhere closer to the Dutch horizontal monitoring system, which has gained popularity in many jurisdictions. South Korea, UK are others have also implemented, though; Germany finds it difficult to go that far due to cultural reasons and its federal state system. The UK system of enhanced cooperation which gives tax payer an opportunity to put all cards on table before the transaction has been carried out is popular and avoids protracted litigation.
The bogey of information exchange
India is not isolated on the debate if tax secrecy is affected by disclosures. Governments are grappling with host of treaty convention hurdles to deal with the menace and India is in the midst of it. Cases of stolen Swiss bank information, rights of tax payers getting jeopardised are high on the agenda of UK, Germany, France, USA & Switzerland. A recent decision of Germany's constitutional court has allowed usage of information procured from stolen CD's, whereas, the French court has taken a contrary view. US follow the protocol of 'proper treaty request'. UK has to think carefully before sharing information with foreign jurisdictions, particularly where there are death sentences for financial crimes & draconian penalties. UK is advanced in its directive on release of information for money laundering and has different provisions on sharing for criminal activities. The Swiss are dealing with concept of change in law and sharing of information on prospective basis - a deal it signed with India to share information prospectively from January 2012. I anticipate coherence of policies at G20 level on such matters & its transparency & exchange of information forum with over 100 members playing a pivotal role. India will be in the forefront in the forum.
Amidst panel colleagues, there was consensus that the hug between the tax payer & government was indeed a bear hug - we couldn't conclude who was bear between the two!
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First published in the India Business Standard 21 February 2011