Monday, August 18, 2008

Law Street in The Economic Times (August 2008)

Dear Readers,
Another column, after a brief gap. Hope you enjoy reading this one.
Unfortunately I could not find it on the web edition today (Aug 29), I will upload the link later, when the article is uploaded. On rare occassions there is a slip in uploading.
PS: ETonline suddenly decided to upload it under the "guest writer" and not "columnist section". Just found the url, click here
A helping hand during taxing times

- Tax authorities must adopt risk management techniques
- Understanding the tax payer’s commercial scenario is crucial
- Transparency must be improved

“Life is mostly froth and bubble; two things stand like stone, kindness in another’s trouble, courage in your own”. This columnist recalls scrawling these lines in year-books of school-mates aeons ago, when Facebook was non-existent.

Year-books, may have become extinct, but Zenobia Aunty claims that this quote still holds true. She has recently experienced and understood first hand the ethos of this quote and has learnt to accept and appreciate help.

Talking of help, in tax-land, it is invariably the tax intermediaries (your friendly tax advisors) who offer help, and at times offer what is perceived by tax authorities to be aggressive tax planning advice. After all, they cater to your actual needs!

In this backdrop, a team set up by The Organisation of Economic Co-operation and Development (Oecd) has recently published a report on “Study into the role of tax intermediaries”. Recognising that tax advisors merely supply what client’s require and are perhaps not the real decision makers, this Study Team examined the tripartite relationship between tax payers (in particular the biggies), tax authorities and tax advisors. The participating countries also included non-Oecd members such as India.

The name of the game here is risk management, not by the tax payers, mind you, but by the tax authorities. To quote from this report: “A key point to keep in mind is that risk management is not only about what tax bodies do but also about which tax returns not to audit, which tax issues not to ask about and which enquiries not to pursue. Judging what they will not do assists tax bodies to prioritise the things that they will do.”

And all this should be conducted keeping in view, the five attributes that large corporate tax payers want tax authorities to demonstrate, viz: understanding based on commercial needs; impartiality; proportionality; openness and responsiveness. If this is done, it would encourage tax payers to provide early disclosure of potential tax issues and usher in greater transparency.

Proportionality is all about balance, knowing what issues to pursue and what not to pursue. And the first tiny steps to achieve this seem to have been taken in India. After all just because a company is popular on the stock exchanges does not mean it is a high risk company from a tax perspective!

Recent news reports indicate that: “The tax authorities have decided not to scrutinise the tax returns of over 1000 top companies, provided no major disputes are pending against them. Last year, the CBDT had taken a decision to scrutinise tax returns of about 200 ‘A’ group companies listed on the Bombay Stock Exchange BSE, 500 National Stock Exchange companies and a large proportion of non-banking finance companies”.

But Zenobia Aunty feels much more can be done. Take for instance, understanding based on commercial needs, which should also include understanding the basic characteristics of that particular industry, say – industry trends, commercial risks, use of intellectual property et al. Without an understanding of this, the broader context of an activity or transaction would be misunderstood resulting in costly litigation. We have seen this happen, such as the withholding tax litigation in relation to software imports.

Coming to impartiality, there must be consistency and objectivity in the issue resolution; perhaps it is high time that alternative dispute resolution techniques were introduced in India, such as fast track settlement using a mediation process. If tax authorities are forced to chase tax collection targets, impartiality may be impacted.

Openness and responsiveness are aspects that Zenobia Aunty prefers to club together. For instance, changes in tax policy should be introduced after sufficient dialogue. The need of the hour is to develop enhanced relationships, on the lines of projects undertaken in Ireland, the Netherlands or even the USA.

In the Netherlands, a pilot project commenced way back in 2005, with twenty large companies to conclude “supervision agreements”. In essence, CFO’s have to commit to full transparency on current tax issues, in return the tax authorities give a binding opinion on that issue expediently. The advantages for the company are: certainty, being in control of their tax position, and lesser administrative burdens. This project is now going strong.

With India having contributed its inputs to this study, one can hope for better times ahead. In other words, collaboration and not confrontation holds the key to a brighter future and tax authorities world over are awakening to this realisation.

Amen to that.

PS: This also featured in Kay Bell's Tax Carnival. Check out the other interesting articles as well, which featured here.

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