Recent years have seen an increasing focus on tax compliance across the globe, with a number of international and domestic initiatives changing the tax planning and tax compliance landscape.
The tax compliance landscape is changing, and the products and services provided to clients are impacted by these changes. To maintain good governance, every business must consider its position - and that of their facilitators - in relation to tax matters and how to remain compliant, now and in the future.
Recent global developments and initiatives on taxation and tax compliance have increased the focus and attention of governments and the wider public on both the evasion (illegal) and avoidance (legal) of taxes by legal persons and legal bodies. This puts a greater burden in regulated trust and company service providers, who offer a range of trust and company administration services - including the provision of services to international clients where the structure or vehicle established may have or has been established partly or wholly for tax purposes. The aim is to have businesses consider reviewing and enhancing both their:
- Tax Risk Policy; and
- Tax Risk Management Procedures (to put this policy into practice) (the “Documents”)
The Documents take account of a business’s Business Risk Assessment (or similar document), which in the past was focused on the offence of tax evasion and more recently in some jurisdictions’ aggressive tax planning schemes. These documents should take the assessment of tax risk further introducing the need for ongoing tax compliance. Together these documents should set the “tone at the top” as to how to implement, communicate and train the staff on proportionate risk-based prevention procedures, and subsequently monitor and review their effectiveness.
While accountability and responsibility for the Tax Risk Policy and Tax Risk Management Procedures rests ultimately with the Board, there is a need to consider identifying a relevant responsible person within the business to guarantee ongoing tax compliance.
Will this be a strict compliance role or more generally an assurance role within the Client Service area of the business? Will the person be a tax specialist, or someone with appropriate experience to be able to identify and understand tax risks and changes within the business - arising from both the services and products provided to clients as well as from changes in relevant fiscal legislation across the globe.
On the providers side, those who offer trust and company administration services are required to automatically provide certain information about their clients (e.g. the OECD Common Reporting Standard “CRS” or through Intergovernmental Agreements between relevant jurisdictions and the USA designed to implement FATCA style reporting), or to have in place reasonable procedures to help the institutions cannot be used to criminally facilitate tax evasion (i.e. the UK “Corporate Offence for Failure to Prevent the Criminal Facilitation of Tax Evasion”).
Taking the UK as an example Her Majesty's Revenue and Customs (HMRC) broadly distinguishes between tax evasion, tax avoidance and tax planning as follows.
- “Tax evasion” is defined as the illegal and wilful underpayment of tax.
- “Tax avoidance” is the lawful under payment of tax through means that are within the letter of the law but against the spirit of the law and/or intention of Parliament.
- “Tax planning” utilises tax reliefs as per the letter of the law and as intended by the policymakers.
The UK Government has also introduced a new Corporate Offence of a failure to prevent criminal facilitation of tax evasion. The aim is to attribute criminal liability to relevant bodies for the criminal acts of employees, agents or those that provide services on their behalf. Under the UK Corporate Offence Guidelines a business should consider whether it would be classified as an “Associated Person” or not, and therefore whether it should recognize a greater burden of preventing behaviours that would facilitate tax evasion in structures and clients under administration.
New penalties are being introduced for those persons who have enabled another person or business to use a tax avoidance scheme that is later defeated by HMRC (targeting “enablers”).
These recently introduced changes in the UK apply extra-territorially and potentially has a significant impact for Groups as the location of a relevant body or criminal conduct may not matter. Businesses should also be aware that other jurisdictions will likely seek to adopt similar practices to the UK with their own corporate criminal offences.
Where a business is a member of a Group, the Group itself may have issued a Code of Conduct policy, although not a specific Tax Risk Policy. The local Board will have an overriding obligation to comply with local legislation and regulatory requirements. Where the Group issues its own equivalent of the Tax Compliance Risk Policy and Tax Risk Management Procedures documents, the local Board should review such documents and implement them to the extent that they do not contradict local requirements - in particular that they do not impose requirements that represent lower reporting and control standards than applicable in the local jurisdiction. In essence, the Group should set the overarching tax compliance code of conduct which sets the framework and core principles that all relevant businesses should adhere to.
Businesses face two key tax risks, which are a combination of sector, product & transaction & jurisdiction risks:
- Tax Compliance Risk – Risk arising from non-compliance with tax reporting requirements in respect of a client / and or structure.
- Tax Structuring Risk - legal, tax and reputational risk arising from providing a structure for a client without understanding the tax implications of the structure, and whether it falls within the business’s tax risk appetiteⁱ.
The Tax Risk Management Procedures should set out how a business will implement and meet the objectives set by the Policy and introduce controls applicable in day-to-day activities and management.
The procedures adopted or identified to be adopted to mitigate tax risk and exposure (risk-based prevention procedures) by a business will include but are not limited to:
- Having comprehensive and up to date client profiles in place;
- Having a robust review process, in particular in respect of clients profiles and structures in administration;
- Appropriate transaction management and client administration procedures for each stage of the client lifecycle, which take account of tax compliance matters;
- Maintaining CPD and training on developments in tax and ensuring staff are suitably qualified and experienced.
Tax compliance is becoming more and more complicated, from both a group and local jurisdiction perspective. The changes in the fiscal landscape internationally, combined with the international reach of some of those changes have placed greater emphasis on the need for businesses to take appropriate measures to meet these challenges. The key first steps include the establishment of the Tax Risk Policy and Tax Risk Management Procedures and the identification of a suitable Fiscal Risk officer with responsibility to help the business remain compliant.