M. Balharova Cooperative Compliance Models in the Netherlands and Australia: Truly Based on the Principles of Legal Certainty and Equality? PDF

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Cooperative Compliance models in the Netherlands and Australia: truly based on the principles of legal certainty and equality? LL.B THESIS Mirka Balharová 12002577 Commercial Law Specialization International and European Law LL.B The Hague University of Applied Sciences Mentor: Dr. Irma J. Mosquera ...

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Cooperative Compliance models in the Netherlands and Australia: truly based on the principles of legal certainty and equality?

LL.B THESIS

Mirka Balharová 12002577 Commercial Law Specialization International and European Law LL.B The Hague University of Applied Sciences

Mentor: Date:

Dr. Irma J. Mosquera Valderrama June 13, 2016

Declaration I solemnly declare that this thesis contains no material that has been submitted and/or accepted for the award of any other degree in any University or institution of higher education. To the best of my knowledge and belief, this thesis contains no material previously published or written by any other person, except where due reference is made in the text. I hereby certify that I am fully aware of the consequences for the academic offence of plagiarism, in accordance with the applicable Program and Exam Regulations of The Hague University of Applied Sciences.

Signed:

Date:

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Abstract Origins of traditional relationship between tax administration and taxpayers, which is based on public law, can be traced back to 19th century German doctrine. The concept of traditional relationship implies its hierarchical and coercive nature, whereby public authorities impose an obligation on the taxpayers to pay taxes. Recent years and an overall trend show a shift from this traditional relationship to a modern enhanced relationship, which implies horizontal rather than vertical nature and is based on cooperation, mutual trust and transparency. This thesis discusses cooperative compliance in Australia and horizontal monitoring in the Netherlands, as the examples of this trust based relationship. These models are tested towards the principles of legal certainty and equality in various phases of the cooperative compliance. The testing has taken into account the criteria for eligibility, the manner in which the models are implemented and whether or not the models apply to all taxpayers consistently in various stages of the cooperative compliance process. In this comparison, from the two models of compliance, the one that meets these requirements is the one of Australia because all the concerns in regards to legal certainty and equality seem to be unjustified. The Dutch model also offers certain degree of certainty and equality for the taxpayers however some issues in this model need to be further addressed. Australian model provides ultimately greater assurance of legal certainty and equality in all stages of the cooperative compliance. What changes could the Netherlands implement, so the horizontal monitoring will provide greater legal certainty and ensure equality?

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Table of Contents Abstract ..................................................................................................................................... ii Abbreviations ........................................................................................................................... iv 1. Introduction and Background ......................................................................................... 1 1.1

2.

2.1 2.2 2.3

3.

Cooperative Compliance and Legal Certainty ....................................................................... 12 Cooperative Compliance and Equality ................................................................................... 13

The Netherlands .............................................................................................................. 16 4.1

4.2 4.3

5.

History of Cooperative Compliance ......................................................................................... 5 The 2008 OECD ER Study....................................................................................................... 6 From Enhanced Relationship to Cooperative Compliance ...................................................... 6 2.3.1 The 2013 CC Report .................................................................................................. 7 2.3.2 Concept of cooperative compliance defined ............................................................. 7 2.3.2.1 Benefits and obligations of the taxpayers............................................................. 9 2.3.2.2 Benefits and obligations of the tax administrations ........................................... 10 2.3.2.3 Possible negative aspects of cooperative compliance ........................................ 10

Legal Certainty and Equality......................................................................................... 12 3.1 3.2

4.

Aim and Methodology .............................................................................................................. 3

Cooperative Compliance .................................................................................................. 5

Cooperative Compliance Model ............................................................................................. 16 4.1.1 Eligibility ................................................................................................................. 17 4.1.2 Getting involved – concluding an agreement with the tax administration .............. 18 Principles of Legal Certainty and Equality in the Netherlands .............................................. 19 Assessment ............................................................................................................................. 20 4.3.1 Benefits .................................................................................................................... 20 4.3.2 Problems .................................................................................................................. 20 4.3.3 How do these problems affect equality and legal certainty? ................................... 22

Australia ........................................................................................................................... 25 5.1

5.2 5.3

Cooperative Compliance Model ............................................................................................. 25 5.1.1 Eligibility ................................................................................................................. 25 5.1.2 Getting involved - concluding an agreement with the tax administration ............... 26 Principle of Legal Certainty and Equality in Australia .......................................................... 27 Assessment ............................................................................................................................. 28 5.3.3 Benefits .................................................................................................................... 28 5.3.4 Problems .................................................................................................................. 29 5.3.5 How do these problems affect equality and legal certainty? ................................... 30

6. Comparison and Assessment of Cooperative Compliance in the Netherlands and Australia .................................................................................................................................. 32 6.1 6.2 6.3 6.4

7.

Eligibility Requirements ......................................................................................................... 32 Compliance Agreements ........................................................................................................ 32 Entering into Cooperative Compliance .................................................................................. 33 Participation in the Cooperative Compliance Model ............................................................. 33

Conclusions and Recommendations .............................................................................. 34 7.1 7.2 7.3

Eligibility Requirements ......................................................................................................... 35 Lack of Guidance ................................................................................................................... 35 Discretion of Tax Inspectors .................................................................................................. 35

Table of Authorities ............................................................................................................... 36 Bibliography ........................................................................................................................... 37

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Abbreviations ACO

Annual Compliance Agreement (Australia)

ATO

Australian Tax Office

BIAC

Business and Industry Advisory Committee

CC

Cooperative compliance

CC Report

Cooperative Compliance Report

CFA

Committee on Fiscal Affairs of the OECD

DTCA

Dutch Tax and Customs Administration

ER

Enhanced relationship

ER Study

OECD Study into the Role of Task Intermediaries

FTA

Forum on Tax Administration (OECD)

IFA

International Fiscal Association

MNE(s)

Multinational Enterprise(s)

OECD

Organization for Economic Co-operation and Development

SME(s)

Small Medium Enterprise(s)

TCF

Tax Control Framework

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1.

Introduction and Background The main research question dealt with in this thesis is: “Are cooperative compliance

models in Australia and the Netherlands truly based on the principles of legal certainty and equality?” Origins of traditional relationship between tax administration and taxpayers, which is based on public law, can be traced back to 19th century German doctrine.1 The concept of traditional relationship implies its hierarchical and coercive nature, whereby public authorities impose an obligation on the taxpayers to pay taxes.2 The right of tax administration to impose taxes goes hand in hand with the obligation to collect them. Likewise, taxpayer’s obligation encompasses not only the payment of taxes but also the obligation to comply with the formalities that are connected to it.3 These rights and duties leave little room (if any) for negotiations and that only further denotes the superior position of the tax administration in this traditional relationship.4 Countries all over the world constantly work on developing and improving their tax systems. Recent years and an overall trend show a shift from this traditional relationship to a modern enhanced relationship which implies horizontal rather than vertical nature and is based on cooperation, mutual trust and transparency.5 The above mentioned shift or change to a modern enhanced relationship can be attributed to several causes. One of them is the realization by the tax administrations that not all taxpayers are attempting to avoid taxes, actually on the contrary, many are willing to fulfil their obligations and should hence be treated as team players rather than enemies. 6 Furthermore, due to the increased pressure put on tax administrations7, they are compelled to make better use of resources by concentrating on taxpayers who pose a higher risk of noncompliance. By creating a relationship based on mutual trust, where the tax administration and taxpayer are on equal footing, the burden is also equally spread and the risk of

1

M. T. Soler Roch, Forum: Tax Administration versus Taxpayer – A New Deal?, World Tax Journal October 2012 (282-295) p. 282. 2 Ibid. 3 Ibid. 4 O. Bühler, la influencia del Derecho Tributario en los conceptos del Derecho Público, hacienda Pública Española n ͦ 64, 1980. 5 Cf. Van der Hel-van Dijk, L& Pheijffer, M. (2012), A Tailor-Made Approach To Fiscal Supervision: An Evaluation of Horizontal Monitoring, Bulletin for International Taxation, Vol. 66, No.10. 6 R. Petruzzi and K. Spies, Tax Policy Challenges in 21st century, Series on International Tax Law, The Changing Relationship between Tax Administrations and Taxpayers: Coutnries’ Experience with Horizontal Monitoring A. Nunes dos Santos ; (p. 631-653) Wien Linde 2014, Vol 86, p. 633. 7 J.Owens, The Role of tax Administrations in the Current Political Climate, bulletin for International Taxation March 2013 (156-160), IBFD, p 157.

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noncompliance is lowered.8 Modern enhanced relationship supports this new emphasis on risk management of tax administrations and forms an internal part of it. 9 Cooperative compliance and horizontal monitoring are demonstrations of this trust based relationship and have been adopted by number of countries.10 Cooperative compliance represents a trust based model which requires the tax administration to provide legal certainty in advance and the taxpayer is in return voluntary transparent. This transparency is supported and based on a Tax Control Framework (TCF). TCF is a tax control instrument, which is in place to provide an overview of internal functions and processes related to tax and to ensure that the taxpayer will provide complete tax information required for a tax return in a timely and transparent manner. Horizontal monitoring, a term which will be used throughout this thesis is the term used for cooperative compliance model in the Netherlands11 and some other countries.12 Although cooperative compliance models provide more legal certainty to taxpayers in return for greater and timely disclosure, it is important to examine whether provide sufficient legal certainty throughout the whole process and whether they treat all taxpayers equally. Concerns which will be discussed in this thesis look among other at the requirements on basis of which taxpayers are eligible to be covered by such regimes. By concluding agreements with taxpayers, the tax administration wants to provide legal certainty in advance and in principle it sets out criteria which allow taxpayers in similar situations to be treated equally. The participation in cooperative compliance implies the enhanced relationship of a taxpayer with the tax administration through an assigned tax inspector. The agreements are then concluded by the tax inspector who also takes into account past tax behaviour of the taxpayer. Tax inspector's discretion to overlook or point out some past tax positions which can be favourable or unfavourable can be one of the examples of an ultimate unequal treatment of the taxpayers.13 This example and other situations which will be discussed in this thesis raise the

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External Compliance Assurance Process (ATO, 12 October 2015): Accessed June 12, 2016. 9 E. van der Enden and J. de Groot, Two Missing Links: A Move towards an Auditing Standard Specifically for the Tax Control Framework, Bulletin for International Taxation, IBFD, September 2015 page 506. 10 E.g. the Netherlands, Australia, Austria, Denmark, France, Ireland, Italy, Japan, New Zealand, Norway and Slovenia. 11 OECD, Tax Administration 2015: Comparative Information on OECD and Other Advanced and Emerging Economies, (OECD 2015), p. 268. 12 E.g. Austria and Slovenia. 13 H.Gribnau, Cooperative Compliance: Some procedural issues, in R. Russo (ed.), Tax Assurance, Deventer: Kluwer 2015, p. 211.

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question whether these models aren’t in fact violating the principles of legal certainty and equality Cooperative compliance should represent the step forward, which tax administrations envisaged at first. It should create a cooperative environment, in which the taxpayers are motivated to comply with their tax obligations due to the increased communication and interaction with the tax administration. However, cooperative compliance should not allow creation of any “sweetheart deals”14 awarded to some taxpayers only, thereby violating the principle of legal certainty and equality.

1.1 Aim and Methodology This thesis aims to compare the cooperative compliance model in Australia and the horizontal monitoring model in the Netherlands and to assess these models in light of the principles of legal certainty and equality. The question addressed in this thesis is: "Are cooperative compliance models in Australia and the Netherlands truly based on the principles of legal certainty and equality?” To answer this question, this thesis will first describe the history and development of the concept of cooperative compliance and the role of various actors in this process, including the OECD. Following, cooperative compliance models in Australia and the Netherlands will be analysed in light of their development, their underlying rules and most importantly the requirements for participation. The assessment of these cooperative compliance models will take into account the extent to which the cooperative compliance models are available in the countries in question and the manner in which they are implemented. The analysis of the models will address the potential violations of principles of legal certainty and equality in various stages of the cooperative compliance process. The author will consider possible direct as well as indirect violations of these principles.15 Next section (section 2) will provide an overview of the history and development of the concept of cooperative compliance and it will define the state of the art definition of cooperative compliance. Section 3 will define principles of equality and legal certainty. 14

Meeting Summary (Co-operative Compliance: how to deliver fairer tax outcomes while minimizing conflict and supporting economic growth, Vienna, September 2015) “Sweetheart deals” refer to situations in which the discretion of the tax inspector or the requirements for eligibility in the cooperative compliance program would lead to unequal treatment of taxpayer in similar situations. 15 The author will consider not only direct violation (prima facie), but also indirect violation of principles of legal certainty and equality, especially when assessing the eligibility requirements,. By indirect violations the author refers to e.g. instances in which the eligibility criteria are formulated in a way that it is impossible for some of the taxpayers to meet them, despite the fact they are in principle falling within the scope of the cooperative compliance regime.

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Sections 4 and 5 will describe and analyse the cooperative compliance models in the Netherlands and Australia. Section 6 will compare and assess these models in light of legal certainty and equality and discuss their advantages and disadvantages. The comparison will be restricted to the following elements: (1) eligibility criteria, (2) tax base benefits, (3) problems and (4) justification and proportionality of benefits granted. Section 7 will provide author's recommendations and conclude this thesis.

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2.

Cooperative Compliance

2.1 History of Cooperative Compliance Cooperative compliance is a quite recently developed concept and hence has a rather short history. It is crucial to understand the background and the situation under which the concept emerged into public consciousness and how it developed throughout the time. Beginnings can be traced back to time before any discussions on cooperative compliance arose on the international level. ...