Corporate Governance: A New Life or the Kiss of Death for International Tax Lawyers?

01 January 2008

Executives must make solemn statements that all is under control and that the accounts reflect everything that is relevant. Everything also means the tax issues of the company. Management must make sure that there are no unquantified uncertainties in its tax accounts. Had someone suggested some years ago such tax certainty statement to be part of the accounts and thus responsibility of management, many would have smiled or even laughed. How can management know such things in detail and be certain about these? From what source can such tax assurance be derived? In a world full of complex tax codes and case law, tax treaties and resolutions and decrees, disputes and differing interpretations on all of these, it is a massive task for highly skilled tax lawyers to form an opinion about one issue, let alone be in full agreement on complex multinational matters. And yet management has to makestatements.

Is there a solution for these executives whose job also demands that they are to keep costs as low as legitimately possible? This objective for an often substantial cost, namely tax, can only be achieved safely through a conservative approach. A more aggressive system would put executives in conflict with the statement that they have to make in the accounts. This statement can often only be made once the competent tax authorities have expressed their views on the tax issues of the group in advance. In most countries, however, the opportunity to discuss undecided issues in advance with the tax authorities is remote, if it exists at all. This highlights an area in which the theory of policies and legal requirements appears at odds with practice and business. What causes this often disturbing difference and are there remedies? The Dutch treatment may offer practical solutions for dealing with the policies and regulations whereby practice and business are greatly helped, without there being a multitude of undesirable side effects.

As stated before, tax compliance and tax assurance is a phenomenon in an increasing number of countries and companies. New practices are created by professional firms offering to assist businesses in this process, albeit at a fee, thus adding to the costs of many businesses. It seems true to say that the less accessible tax authorities are for consultation, the more difficult and costly it will be for businesses and their management to comply with tax-related corporate governance requirements. The question is who, other than professional advisers, benefits from such a state of affairs? Although the history and culture of other countries are very different from the Netherlands, it would certainly be helpful if other countries considered taking some of the often misunderstood Dutch practices and policies on board. Other countries and institutions have frequently considered them undesirable, even if in virtually all cases the methods merely provided taxpayers and tax authorities with clarity about potential tax issues at an early stage. It is possibly true to state that a few ‘advance tax rulings’ may have been considered, from an overall tax perspective, to be on the generous side. But these rulings obtained in the 70s and 80s were only a small (if not unimportant) part of the overall “open relationship” between the Dutch tax authorities and businesses. These rulings resulted from efforts on both the part of taxpayers and the Dutch tax authorities to agree what was considered an arm’s length price, or to agree an interpretation of Dutch law that, until the 90s, was broadly worded.

Unfortunately there is also an unfortunate trend in Dutch tax legislation to move away from this “framework” legislation model. As in most countries, ever more detailed tax laws are enacted that are next to impossible to understand for businesses and management. As soon as a tax reform has taken place, tax laws are amended, thus adding to the uncertainty and effectively preventing management from giving unreserved assurances that it is in control of the company’s tax position.

Throughout the world, tax laws have moved and continue to move towards a very detailed and complex system including many overkill provisions. These have made tax laws very difficult to understand. Nice as this may be for tax lawyers, it does prevent management from being fully in control of its tax position. An accessible revenue service willing to express its view on issues facing business would be a great help.
Could these problems not be solved if others applied the Dutch practices and policies, allowing for a level of openness and discussion between taxpayers and the tax authorities on the interpretation of tax legislation? Why are many revenue services so difficult to approach for practical questions from individual taxpayers? Tax authorities appear to think that all taxpayers are doing everything possible to evade “their” taxes through whatever means. We believe that in practice most businesses wish to comply properly with all the taxes with which they are confronted, while ensuring they do not pay twice or more in cross-border situations. As a matter of course businesses will try reducing costs, including tax costs, but simultaneously they do have their standards, morals and integrity, which certainly extend, in our experience, to taxes. Could the resistance to taking these suggestions on board elsewhere be because of a lack of understanding? From that perspective it may be useful to explain what the Dutch practice is all about.

The scope of this article does not allow for a description of how the practice of open discussions at an early stage between taxpayers and their competent tax inspectors came into being. Once started, it became quite natural for companies and their representatives to have open discussions with the inspector handling their tax matters, whereby a taxpayer would disclose all relevant information to the tax inspector. Any agreement reached was based on these facts and fell within the terms of the relevant legal provisions. In general a mutually satisfactory outcome could be reached in a matter of weeks and sometimes days. It was a practice in which taxpayers and the tax inspectors tried to avoid problems in arrears, which explains also why there were relatively few tax matters for companies that went to court.
The settled points were considered to govern the company’s tax position until parties agreed otherwise or when the relevant tax laws or their general interpretation changed. Few court cases dealt with the validity of such agreements. It was decided that both parties were indeed bound by such agreement. This trend coincided with the growth of the number of multinationals establishing a Dutch holding company. These groups also wished to put a secure, tax-efficient structure in place for their flows of funds or their intellectual property, and so for these activities an advance ruling practice developed. Both taxpayers and inspectors were trying to establish an arm’s length consideration for these activities through discussion. It must be remembered that this advance tax ruling practice was a relatively small part of the open discussion and consultation environment, as it existed between taxpayers and “their” tax inspectors.

Nonetheless this particular advance tax ruling practice engendered strong reactions from a variety of sources. As a result, for some time a more formal and inflexible approach was followed in the Netherlands. Tax inspectors could only operate within narrowly defined limitations imposed upon them by politicians and the the Ministry of Finance. A burdensome aspect was the introduction of “knowledge groups” comprising many inspectors and representatives of the Ministry of Finance. These units concentrated on different specific areas and if a taxpayer wanted to discuss unclear issues, the first question was whether it should be referred to the appropriate broad knowledge group. This meant that it took much longer before the tax position of taxpayers became clear. Although virtually all parties involved saw the disadvantages, the political climate did not allow for a return to the proven and trusted system until a few years ago. The government acknowledged the importance for taxpayers to be able to have, in many cases, certainty in advance. It issued policy statements to support such requests provided the taxpayers were upright and their proposed transactions not too aggressive, while the advance certainty should not be in conflict with the good faith principle towards a tax treaty partner.

Moreover, advance rulings in regard to transfer pricing issues should be according to these policy statements and be based on the internationally accepted principles such as the OECD Guidelines in this area. For advance certainty on particular internationally relevant structural questions such as the role and position of a holding or the absence of a taxable branch in the Netherlands, a specialised unit, the advance tax ruling team, was created to deal professionally and quickly with requests, often in a matter of weeks. Another specialised unit, the APA team, was created to deal with advance pricing agreement and is also functioning well.

Thus in several areas a business can in practice be in control of its tax situation. Possibly of at least equal relevance is the change that allows taxpayers the old-fashioned contact with inspectors who have been clearly nominated as exclusively competent to deal with the tax matters of individual taxpayers. All this has made the Dutch tax administration more accessible, enabling management to be much more easily aware of potential tax costs. Often such awareness can be obtained within a limited period unless the question is genuinely complex and needs a deep technical legal evaluation. In practice, few matters are so unclear that they have to be decided in court.

Recently a new instrument that most businesses consider a great help, the “covenant”, has been introduced. Companies of a certain size can reach a formal agreement with the tax inspector under which they will be transparent about their tax risks. In exchange the inspector will quickly give an opinion about, in essence, all tax issues. Companies entering into such a covenant must undertake ongoing solid reviews of their tax position. When an unclear aspect surfaces, it should be discussed openly with the inspector. The normal contact between taxpayers and the tax administration is also ongoing.

All this helps companies to be largely certain about their tax position. Today’s practice is based on several policy statements by the Ministry of Finance, which has learned together with business the lessons from the past. Dutch tax payers and tax collectors realise that through open communication a lot is gained and little is lost. With this in mind, we wonder why tax authorities in other countries find it so difficult to have a good platform for discussions with their taxpayers. The parties concerned have many interests in common and in the absence of good open discussion possibilities, not only is business life more difficult, but it seems also true to say that the tax administration is loosing as well. Disputes may drag on forever and the tax climate may then deteriorate faster than our own climate owing to global warming.

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