An OECD study into the role that tax advisors play in the use of tax minimisation techniques by large companies has recommended that governments should attempt to reduce the demand for aggressive tax planning by encouraging a wider tripartite relationship between revenue bodies, taxpayers and their advisors.

An OECD study into the role that tax advisors play in the use of tax minimisation techniques by large companies has recommended that governments should attempt to reduce the demand for aggressive tax planning by encouraging a wider tripartite relationship between revenue bodies, taxpayers and their advisors.

The study, commissioned by the OECD’s Forum on Tax Administration in September 2006, examined the role tax advisors play in the increasingly complex tax environment and the work they undertake in helping their clients comply with the requirements of existing tax codes and legislation.

It concluded that: “…the vast majority of tax advisors help their clients to avoid errors and deter them from engaging in unlawful or overly-aggressive activities.” But some intermediaries, it said, also act as designers and promoters of aggressive tax planning.

Although the FTA remains concerned over the role of tax intermediaries in this form of tax planning, it recognised that companies determine their own appetite for risk. Its preferred approach was to reduce the demand among corporate taxpayers for complex tax minimisation arrangements.

It proposes that tax authorities do this by developing risk management techniques to differentiate between high and low risk taxpayers so that they can focus time and resources on dealing with the higher risks.

This will require more voluntary disclosure of information by taxpayers which, the FTA suggests, can be encouraged by developing “enhanced relationships” with taxpayers and their tax advisors.

The study’s description of an enhanced relationship sees companies volunteering information on their operations, where they believe there may be a different interpretation of tax law between them and the revenue body that may lead to a significantly different tax liability.

Companies should also provide broad ranging responses so that the revenue body can understand the significance of issues, deploy appropriate resources and reach the right tax conclusions.

In return, revenue bodies should offer, “understanding based on commercial awareness, impartiality, proportionality, openness through disclosure and transparency, and responsiveness".

In particular, tax authorities should apply a professional, fair and efficient approach to resolving issues. This should be used at all levels of the authority to provide greater certainty for taxpayers.

"We do not believe that the demand for aggressive tax planning will disappear nor that all tax intermediaries will stop offering aggressive tax planning products. Further, some large corporate taxpayers may choose not to enter into the enhanced relationship," said the study.

"It is by continuing to refine our risk management processes to identify these taxpayers and to allocate the necessary level of resources that we can ensure they meet their obligations under the law. Large corporate taxpayers, and their advisers, who are unwilling to embrace transparency must learn they cannot expect to prosper at the expense of others."

The FTA said more work is necessary to turn the report’s recommendations into a roadmap for change. The study recognises that each country is starting from a different place based on the current stage in development of their tax system and local culture and practice, and so each country will need to develop its own routemap.

The investigation into the role of tax advisors in tax planning was commissioned by the FTA after its last meeting in Seoul. The conclusions of that meeting were summarised in the Seoul Declaration, which recognised that ensuring compliance with the respective tax laws of each country had become more difficult as trade and capital liberalisation and advances in communications technologies had opened the global marketplace to a wider spectrum of taxpayers.

It also highlighted some of the challenges revenue bodies face in this more open environment to ensure taxpayers meet their obligations under the laws of each country and that aggressive tax planning was curbed. It was against this background that the OECD study, led by officials from HM Revenue & Customs in the UK and the OECD Secretariat, into the role of tax intermediaries was initiated.

The study's authors also noted that some banks, especially investment banks, play a significant role in developing and implementing aggressive tax planning both for clients and also for banks’ inter-bank and proprietary trading. It said it had not been able to develop fully its understanding of how this sector operates, which made it more difficult to explore the benefits of an enhanced relationship for these taxpayers.

High net worth individuals, it said, may also participate in aggressive tax planning but time constraints had precluded the study team from fully considering the most appropriate response strategies in this context.

Follow-up studies in both these areas are to be undertaken, building on the activities of the working groups of the OECD’s Committee on Fiscal Affairs.

The study was published at the FTA's meeting in Cape Town on 11 January to discuss global trends in business and the implications for revenue bodies. It was attended by the heads and deputy heads of revenue bodies from 45 economies.