Cooperative compliance in developing countries – can it work? Fredrik Aksnes Norwegian Tax administration

Necessary preconditions for cooperation Information game with two-sided uncertainty – Possibility of verification of taxpayer (TP) information – Tax administration’s (TA) audit capabilities as seen by TP Both parties must have something to gain from the cooperation – Tax predictability – Cost saving – Better prioritazion of resources

Taxpayers are tax evaders and enforcement is needed Taxpayers are different and must be treated differently Taxpayers are partners for good adminstrative systems Taxpayer’s single attitude: to pay as little tax as possible (even through illegal methods) Taxpayers attitudes vary, must be understood and dealt with accordingly by TA TA need to understand the TP experience and build together with TP better systems TA’s Compliance Programme History

The Norwegian Experience with Cooperative Compliance Tax administration (TA) going from a basically conflictual to a more cooperative approach Gradually built over time by showing predictability and professionalism in decisions Reduces case handling time and increases confidence in decisions Avoids many unnecessary («stupid»), time- consuming conflicts

What does it take to make cooperative compliance a viable strategy for the MNE segment in developing countries?

Specific conditions in African countries MNEs are mostly subsidiaries of a mother company outside of Africa – Hard for the African TA to get hold of necessary information from mother company – Very few double taxation treaties and TIEAs – not many options for requesting another TA for assistance – MNE Tax function often placed outside the subsidiary makes communication slow – Dearth of data such as comparative prices make transfer pricing issues difficult to solve – Not any strong feeling of being part of the society of the African country can endanger compliance

But Africa is not one country any more than Europe

OECD 2013 report on cooperative compliance and Africa Commercial awareness – Unsatisfactory in many emerging TA Impartiality – Corruption issues can jeopardize impartial processes Proportionality – Lack of resources might make this hard to satisfy Openness – Not a strong tradition for public transparency Responsiveness – Few case-handlers with a legal background can slow down the decision process

How do taxpayers perceive the Tax Agency?

Building strong, trustworthy relationships TA must gain respect by showing that it is professional by entering constructive, fact-based dialogues with the taxpayer, not trying to achieve short-term, non-sustainable adjustments – professionalism and consistency TA must build trust through issuing public and private rulings and APAs and not let its law interpretation be influenced by the political cycle’s need for short-term revenue – predictability and credibility

How to gain respect – the experience from the Oil taxation office Strategy to improve and ensure compliance through professionalism: Highly educated and skilled staff Team work (economists, lawyers, auditors) on complex issues Knowledge of the oil industry, technology, products and markets Integrate competence in legal and economics issues Comprehensive examination of the tax return and accounts annually Information to the companies on regulations and decisions Small organization – focus on specialized tasks Work with the same taxpayer over several years Strong capacity in reading and analysing contracts written in English

How to build trust Be reliable – Do what you say – Honor your promises – Be consistent Be honest Be open Show integrity

Comparison of professionalism between advanced and less advanced TA Factors relevant for success of cooperative compliance initiatives Advanced TALess advanced TA Highly educated, skilled and experienced staff YesNo, or to a lesser extent Intra-professional team work (economists, lawyers, accountants, tax auditors) YesNo Sound understanding of business and markets YesNo Specialization in specific businesses, tax matters YesIn some yes, in others no Stable, enduring (2-3 years) relation between TA team and taxpayer YesTo a lesser extent (due to corruption issues?) English contract language skillsMore or lessIn anglophone TA yes, in others no

Trust in different tax jurisdictions (according to taxpayers) Advanced TA Less advanced TA ReliabileMostly, but not alwaysRarely, but sometimes HonestOften, but not alwaysLess than in an advanced TA OpenMostly, but not alwaysLess than in an advanced TA IntegrityHigh, but not alwaysVaries from high to low

Establishing administrative cooperative compliance systems Cooperation and agreements at a high-level – Is the top management of the subsidiary at the right level for agreements? Time consuming processess – the MNE tax director/function often not present in country Role of tax intermediaires – Few and not necessarily well qualified

Cooperative compliance can work! Cooperative compliance can be a powerfull tool also in African countries but must be judged on a case-by-case basis – A weak TA must build strength and trustworthiness through enforcement work before introducing cooperative compliance programs – A stronger TA should gradually implement this compliance tool for the large business segment and find a good balance between enforcement and cooperative compliance

The international tax community’s role Strengthen the enforcement work through bilateral assistance and initiatives such as Tax Inspectors Without Borders (TIWB) Provide expertise on tax treaty and TIEAs negotiations as well as sharing and developing best practice on cooperative compliance Support collection of more relevant data for Africa to be used as input to transfer pricing cases and in cross- country benchmarking

Time for reflections and questions Thank you!