During the last decade, there has been a remarkable development of cooperative relationships in various tax systems worldwide. The management model known as “Cooperative Compliance” has gained relevance by offering an alternative to the traditional confrontation between the Tax Administration and taxpayers.
“Collaboration Agreements” or “Co-Operative Agreements” What are they?
The “Collaboration Agreements” have emerged as a response to reduce tax litigation. They propose a relationship between the Tax Administration and companies, initially multinationals, focused more on the level of cooperation and mutual trust than on confrontation; anticipating the generation of conflicts through collaboration.
Cooperative relations are constituted as a managerial philosophy based on transparency, understanding and trust, which must permeate all tax verification, verification and inspection activities.
An essential premise of the cooperative model consists in assuming that the relationship is governed by subjection, solely, to the Law. Or, in other words, that neither the interest of the Administration in maximizing collection nor that of the taxpayer in reducing it to its minimum should prevail, but rather the common interest of reaching a point of agreement on what is reasonably acceptable.
One manifestation of this organizational model is what has been graphically explained as the onion layer system. Instead of trying to control absolutely all the information, exhaustively, of each and every one of the taxpayers, from their accounting statements, it is about monitoring the internal control systems that each one of them has articulated to ensure that they pay their taxes, in due time and form. This will be done through the internal tax risk control system, “Tax Control Framework”, which should have been agreed by the two parties.
Therefore, the Tax Control Framework is a fundamental tool for obtaining Collaboration Agreements with Public Administrations and for obtaining benefits through the construction of a relationship of trust and transparency.
Advantages of the Cooperative Compliance Model
a) Greater voluntary compliance: by establishing a constructive and transparent dialogue between the Tax Administration and taxpayers, the perception that tax compliance is an onerous burden is reduced and mutual trust is fostered.
b) Reduction of the “Tax Gap”: the cooperative approach has as main objective to reduce the gap between the taxes that must be paid and those that are actually paid. This is achieved by improving the efficiency of the Tax Administration and the accuracy of filing returns, which decreases opportunities for tax evasion and avoidance.
c) Efficiency and less litigation: working together allows the Tax Administration and taxpayers to resolve possible discrepancies and controversies more quickly and effectively, reducing the need for costly and lengthy litigation, to the benefit of both parties and the system in general.
d) Saving of resources: Cooperation allows a better use of the resources of the Tax Administration by focusing them on areas of greater risk and priority. Additionally, taxpayers avoid expenses associated with potential penalties and fines.
e) Promotion of a tax culture: By promoting a closer relationship between the Administration and taxpayers, a responsible tax culture is fostered. Taxpayers can better understand their tax obligations and feel like an active part of the tax system.
f) Identification and continuous monitoring of tax risks related to administrative and business processes with a preventive vision to safeguard the value created.
g) Reputational benefits linked to tax transparency and tax fraud prevention measures.
Challenges
However, there are obstacles that must be overcome for the Cooperative Compliance model to be effective, among them are:
The inequality of resources, especially for small and medium-sized enterprises, can limit their participation due to the lack of specialized personnel and resources.
Regulatory complexity in the tax field, where laws and regulations can be complicated and change frequently, making it difficult to establish long-term agreements.
Overcoming Challenges with Luptax
At Luptax, we are committed to helping you overcome these challenges. Our company specializes in structuring and building “Tax Control Frameworks,” offering methods and control systems for tax process management. Our eDIMI methodology, based on OECD recommendations, is adaptable, accessible, and beneficial for all taxpayers, regardless of size. With our unique software in the market, we assist in creating an effective Tax Control Framework, optimizing internal processes, and providing the necessary information to meet tax obligations.
Our goal is to provide governance and reliability in tax management, demonstrating to your board of directors and stakeholders that your tax function is transparent, managing risks, and providing security in your tax activities.
The Future of Cooperative Compliance
The Cooperative Compliance model represents a promising alternative for achieving more effective and equitable tax compliance, fostering a responsible tax culture, and benefiting society as a whole. The practical application of cooperative relationships in tax management varies depending on each country and its context.
In the coming weeks, we will discuss its application in both Spain and Italy. At Luptax, we are dedicated to leading this change towards cooperative and effective tax management.