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The principle that taxpayers have the right to arrange their affairs to minimize tax within the limits of the law is a longstanding feature of most Western tax systems, including ours. But this principle is being eclipsed. Tax authorities around the world now promote the idea that paying tax is a social responsibility and planning to reduce tax unduly is at odds with good citizenship.
Unified by the Organization for Economic Co-operation and Development's Forum of Tax Administrators, the Canada Revenue Agency, the Internal Revenue Service , and their counterparts are linking a company's approach to tax and its relations with tax collectors with the quality of its corporate governance. The tax authorities are also influencing governments to enact stricter laws against companies that are seen as shirking their civic duty through inappropriate tax plans.
Quebec is Canada's first jurisdiction to take up the call to arms against aggressive tax planning. On introducing new rules in October, 2009, Quebec claimed to act “out of concern for social justice and with the objective of protecting the integrity of our tax system.”
Quebec defines “aggressive tax planning” as a tax avoidance transaction that complies with the letter of the law while abusing its spirit. Quebec believes that tax planning involving confidentiality and conditional remuneration between the taxpayer and tax adviser are likely to be considered aggressive.
Among other things, Quebec's new rules:
- Require businesses to disclose confidential or contingent-fee transactions to Revenue Quebec or face stiff penalties.
- Give Revenue Quebec an extra three years beyond the usual reassessment period to challenge tax planning under the province's general anti-avoidance rule (GAAR).
- Impose additional penalties on any tax assessed under Quebec GAAR.
- Allow businesses to avoid the above consequences by making a preventive voluntary disclosure.
That Quebec acted on its own on such a major tax policy shift is unusual. Given global trends, the province is more likely a frontrunner among Canadian governments than an outlier.
Other countries are tackling aggressive tax planning as a corporate governance issue. In the United Kingdom, senior accounting officers of large companies must annually certify that their tax systems and controls are adequate. The United States requires companies to report “uncertain tax positions” – which are not certain to be upheld on audit – on their balance sheets and, in the future, on their tax returns. Australia recently laid out a detailed tax risk management framework that socially responsible companies should adopt.
These countries are following the OECD Forum's general principles for good corporate governance and tax risk management. The Forum says that tax risk should be managed like any other enterprise risk. Businesses should have a CEO- and board-approved strategy for managing tax risk and the standardized processes and controls in place to support it. Based on a recent KPMG survey of tax directors, however, only 53 per cent of Canadian respondents have global standards related to tax policies and only 30 per cent have a board-approved policy for tax risk management.
With governments in Canada and around the world seeking to increase tax revenues, shore up their tax bases and link social responsibility with tax risk management, it seems inevitable that Canada will get on board with new laws in this area – if not in Budget 2010, then sometime soon. Businesses can protect themselves by having a solid tax management foundation in place – a governance framework that helps the company reduce its effective tax rate responsibly while managing its tax risk.
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