Harmonious Relationship between Tax Advisers and Tax Administrators in the Interest of Taxation Law

By Ayush Gupta

Final Year, BBA. LL.B., Symbiosis Law School, Pune

“People who complain about taxes can be divided into two classes: men and women”.[1]

Introduction

Our country is among those having the least compliance of taxation law, a very small percentage of persons pay the actual and true amount of their tax liability. It is of common knowledge that, tax planning is legal while tax evasion is illegal, but unfortunately most persons choose to follow the latter. The responsibility for this lays not only on the taxpayers, but also on the tax advisers and tax administrators. These two communities have seldom worked in harmony and now it is most essential that they team up and work together in the interest of effective and efficient implementation of taxation law.

Meaning of Tax

“The hardest thing in the world to understand is the income tax”.[2]

A tax is a financial charge or other levy imposed on an individual or a legal entity by the State. A tax may also be defined as a pecuniary burden lay upon individuals or property to support the government. A tax is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority and includes any contribution imposed by government whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply, or other name. When taxes are not fully paid, civil penalties (such as fines or forfeiture) or criminal penalties (such as imprisonment) may be imposed on the non-paying entity or individual.

Taxation is a system used by governments to obtain money from people and organizations. The revenue collected by the government is used to support itself and to provide public services. Aside from being relatively permanent, taxation is compulsory and does not guarantee a direct relationship between the amount contributed by a citizen and the extent of governmental services provided to him.

Tax Advisers

“Income tax returns are the most imaginative fiction being written today”.[3]

A tax adviser is a financial expert especially trained in tax law. Companies and Individuals usually require tax advisers to minimize taxation, to avoid learning the details of tax law in complicated financial situations themselves or to learn the details of tax law from a professional adviser. Tax advisers have an important role in the tax system, as professional assistance with tax matters is required except in the most straightforward situations because of the complexity of the tax system. As tax advisers generally assist taxpayers in preparing tax returns and represent and advise taxpayers in their communications with the Taxation Department, they are, in effect, intermediaries between the taxpayers and the department. The quality of their advice, their professionalism and ethics play a central role in the tax system.

Tax Administrators

“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin”.[4]

Tax Administration primarily refers to the Department of Taxes of the Government. The main functions of tax administration are:

To detect and penalise non compliance; and
To facilitate voluntary compliance through the provision of quality taxpayers service.

These functions involve several component activities like taxpayer’s education and service, collection of information, collation and dissemination of information, storage and retrieval of information, verification (appraisal/assessment of information), collection of taxes, and taxpayer’s grievances redressal system.

Relationship: Tax Advisers and Tax Administrators

“There is no such thing as a good tax”.[5]

Enforcement of tax laws has become more difficult as trade and capital liberalisation and advances in communications technologies have opened the global marketplace to a wider spectrum of taxpayers. While this more open economic environment is good for business and global growth, it can lead to structures which challenge tax rules, and schemes and arrangements by both domestic and foreign taxpayers to facilitate non-compliance with our national tax laws. This raises continued concerns about corporate governance and the role of tax advisers and financial and other institutions in relation to non-compliance and the promotion of unacceptable tax minimization arrangements. Every person has the duty of interpreting the law, to try to find the true meaning of the statutory provision and not to adopt a strained construction in the belief that he or she is protecting the revenue. The revenue is properly protected only when the true meaning of the statute is ascertained and applied.

The assistance provided by professional tax advisers ought to result in better quality of the tax return and tax compliance generally. However, empirical studies have found that while professional tax advisers have increased compliance with unambiguous law, they have decreased compliance with ambiguous law. In other words, if the law can be interpreted in various ways, professional tax advisers will encourage their clients to adopt tax positions which they would not otherwise take to minimise their declared tax liabilities. Tax advisers are duty bound to advise their clients on how to pay no more than the law requires. But their behaviour causes concern if they advise their clients to engage in transactions that purport to be effective to avoid tax, but in fact are not. It is also a matter of concern if they advise their clients to engage in tax evasion, or otherwise not to comply with their obligations, or if they hinder, delay or obstruct tax investigations. It is here that the relationship between the Tax Advisers and Tax Administrators becomes very important.

A responsible tax administration must be effective and efficient in its task. Effective tax administration requires establishing an environment, in which citizens are induced to comply with tax laws voluntarily. People would comply with the tax laws so long as they feel that non-compliance may cost more, i.e., that the penalties likely to be suffered in case evasion is detected exceed the tax to be paid. Compliance is unlikely to be high if the belief prevails that evasion can be practiced with impunity and for this reason an element of coercion seems inherent. How effectively the tax administration can foster compliance would depend ultimately upon their perceived ability to detect and bring tax offenders to book, namely, unregistered taxpayers, stop filers, tax evaders and delinquent taxpayers. The tax administration must deal with all these categories of taxpayers simultaneously; otherwise non-compliance will shift to the gap where the administration exercises weaker control.

Efficient tax administration requires that its task be performed at minimum cost to the community. Administration should be both reasonable and vigorous and it should be conducted with as little delay as possible and with great courtesy and considerateness. It should never try to overreach, and should be reasonable within the bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it should be relentless in its attack on unreal tax devices and fraud.

All these activities of the tax advisers and tax administrators are interrelated and hence a harmonious relationship between the two communities becomes essential.

Suggestions: Harmonious Relationship

“The difference between tax avoidance and tax evasion is the thickness of a prison wall”.[6]

The foremost requirements for harmonious relationship between the two communities are proper coordination, systematic practices, unambiguous laws, and an environment of mutual trust, respect, honesty and efficiency. It is essential for both communities to be able to separate personal from factual and legal issues and the focus should be on interests rather than taking positions. All persons should be independent as far as judgment and actions are concerned and the aim should be to have an open and unbiased dialogue wherein everybody can voice his/her opinion. The general rules of psychology and good behaviour such as treating your counterparts respectfully as being fair and trustworthy are equally important.

Tax advisers should provide their clients with the highest quality representation concerning tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the taxation authorities. The best practices include the following:

i. Communicating clearly with the client regarding the terms of the engagement. For example, the adviser should determine the client's expected purpose for and use of the advice and should have a clear understanding with the client regarding the form and scope of the advice or assistance to be rendered.

ii. Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts.

iii. Advising the client regarding the import of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy related penalties under the tax laws if a taxpayer acts in reliance on the advice.

iv. Acting fairly and with integrity in practice before the taxation authorities.

The following suggestions are aimed at making the environment more friendly and conducive for the tax advisers and tax administrators to work harmoniously:

i. Maintaining a climate of trust between both the communities, thus avoiding arrogant or antagonistic behaviour on either side.

The tax administration should not refer taxpayers or their advisers to judicial proceedings as long an efficient and timely solution can still be reached.

iii. Tax advisers should not threaten to unduly delay the assessment procedure by taking legal action.

The tax adviser must be able to say “no” to his client in any case, in which he might be instrumental to dubious/questionable practices of the client.
Protect the client against himself, i.e., avoid unreasonable requests and frivolous practices that will end up by harming the client, the tax adviser, or both of them.
Legality and equal treatment, i.e., equals should be treated equally, and unequals should be treated unequally; taxpayer’s cases will be treated differently only if the distinctive factual or legal features can be proven.
Ensure full transparency of administrative practices.
Timely announcements and systematic publication of administrative practices and changes affecting them, while avoiding announcements on matters that in the end will not change.
Non-published court decisions must also be taken into consideration.
Disclosure of interests and any potential conflicts of interest.
Developing a directory of tax planning schemes so as to identify trends and measures.
Expanding Corporate Governance Guidelines to give greater attention to the linkage between tax and good governance.
Improving the training of tax officials on international tax issues, including the secondment of officials from one administration to another.

The Future

The Taxation systems all over the world are moving towards regimes in which taxpayers themselves determine and report, in other words, self-assess their tax liability and pay the amount due without any special prodding from tax authorities. But self-assessment will result in high compliance only if accompanied by the actions of the tax administration that lend credibility to the sanctions prescribed in the law against non-compliance, and quality service to taxpayers.

Traditionally, the role of the tax administration has been to enforce the tax laws and provide at least minimal taxpayer service. This was understandable in the context of a small potential taxpayer base and the then prevalent practice of administrative assessment. Over time, as the taxpayer base expanded and the scheme of self-assessment introduced, it became necessary for the tax administration to also facilitate compliance through the provision of quality taxpayer service. In most developing countries this shift in role focus is suspiciously viewed as abandonment of its traditional role of enforcement and softening of the tax administration and many administrators unable to reconcile to their new role continue to resist this shift in the role perception from an enforcement officer to a facilitator. But this change is sure to be the norm in the future.

Conclusion

“The purpose of a tax cut is to leave more money where it belongs: in the hands of the workingmen and workingwomen who earned it in the first place”.[7]

The taxation system is inevitable, its objectives are very clear and the roles of the tax advisers and the tax administrators as a part of this system are well defined. However, it is ironical that both communities being aware of the importance of the other have not been able to work harmoniously. The differences between the two communities have reduced with time and the antagonistic approach seems to be ending, but the process has been very slow and the results have not been satisfying. A lot more needs to be done, and the task can be accomplished only if both the communities join forces, which is very practical and logical as the ultimate objective of both communities is the same, i.e., the effective and efficient implementation of taxation law.