Tax & Revenue in COVID 19 crisis
Tom Maguire | Business Post Column
We’re all dealing with the Jurassic economy. A recent publication of the OECD, the organisation that brought you the Base Erosion and Profit Shifting (BEPS) initiative, recently issued a report outlining the plight of the Revenue authorities in these times Although you mightn’t think it, some may be unsympathetic but you have to remember that what affects Revenue will also affect taxpayers in one way or another.
Before getting into that report, the OECD previously called out the Irish Revenue’s approach as an example in dealing with international tax issues in its report analysing “Tax Treaties and the Impact of the COVID-19 Crisis”. Here’s the science bit, a tax treaty effectively decides what a country’s taxing rights are in certain situations.
For example, a foreign company can be taxable in Ireland if it carries on business here through a “permanent establishment (PE)”; that’s tax nerd speak for certain branches and agencies. A PE can comprise humans acting as certain agents of the foreign company. The OECD “encouraged” tax authorities to provide guidance on the application of domestic law requirements to minimise or eliminate unduly burdensome taxpayer compliance requirements in the context of the virus.
It continued: “For example, Ireland’s Revenue has issued guidance to disregard the presence of an individual in Ireland – and where relevant, in another jurisdiction – for corporate income tax purposes for a company in relation to which the individual is an employee, director, service provider or agent, if such presence is shown to result from travel restrictions related to COVID–19”.
Similarly on “corporate residence”, more tax nerd speak for determining where a company will ultimately pay tax. There, the OECD explained: “Ireland’s Revenue has issued guidance to disregard the presence of an individual in Ireland – and where relevant, in another jurisdiction – for a company in relation to which the individual is a director, if such presence is shown to result from travel restrictions related to COVID–19”. So not too shabby an approach according to the OECD and the effect on Revenue will also affect the taxpayer one way or another.
The OECD’s report “Tax Administration Responses to COVID-19: Recovery Period Planning” is written from the perspective of Revenue authorities all over the planet rather than on a country-by-country basis. It outlines various elements of a Revenue’s authority recovery period planning including such issues as scenario planning, opening of offices, working methods etc. Two areas that caught my eye were “business restoration planning” and “reputation management and communication”.
The report explains the starting point for a tax administration’s business restoration planning is likely to be a reassessment of the critical functions, which should be prioritised during the recovery period. You can see their point. It continues that the tax administration’s objectives, during the crisis were to support taxpayers facing cash-flow constraints and hardship, reduce immediate burdens and support other government actions while continuing to bring in revenue to fund government.
Our box was appropriately ticked there with the operation of the Temporary Wage Subsidy Scheme (TWSS) where Revenue rightly dispensed cash to taxpayers where various Ts & Cs were met rather than being tax takers. Readers will recall my previous column, which outlined discussions with business leaders explaining the need to get cash into businesses fast, and the TWSS was one way of doing that. However, the OECD explains that while these remain important objectives in the recovery period “there may be a shift in balance towards revenue collection, including increasing compliance activities, albeit not necessarily an immediate return to previous business as usual operations”.
Revenue going back to its roots will require planning to take into account, as the report outlines, the wider government objectives on fiscal support. We can see that coming with TWSS monies being taxed in the employee’s hands at the end of this year, and when currently deferred taxes ultimately fall due.
The report outlines some considerations on the obstacles surrounding Revenue achieving its objectives because as it notes:
- in some cases, remote working will have been highly effective, whereas, in others there may have been a lack of equipment, system constraints, etc., which may be capable of being addressed relatively quickly;
- different ways of working may be considered, for example where audits remain difficult because of health considerations, then more use of risk targeting, desk audits, remote inspection of accounts and remote interviews may be useful mitigating actions;
- until a vaccine is found, frontline staff and taxpayers will still be concerned by health risks. This might be addressed through the development of policy (and related communication) regarding the safety of frontline staff and taxpayers, including the consideration of screening policies (e.g. questionnaires, temperature checks, testing).
Readers will recall that Revenue has suspended certain audit activities but that won’t go on forever and what will that look like when such activity resumes. Audits are intrusions into a taxpayer’s business which are provided for by law. There may or may not be tax issues within that business but that does not get around the fact that questions will be asked and taxpayer’s time will be taken up answering them. There will be time for the taxpayer to make certain disclosures of tax missteps at audit meetings and this should continue in a socially distant or virtual world. The effect on the Revenue will affect the taxpayer one way or another.
And like everyone else tax administrations’ reputation is key: Substantial periods to build and seconds to eliminate. The OECD is aware of this issue and explains that positive changes in reputation acquired during the crisis period can, however, be double-edged during the recovery period when there is likely to be a shift in balance towards the collection of revenue. It explains that this “will benefit from careful management given the significant impacts that might result”.
Why? According to the OECD, such reputation has an effect on taxpayer compliance. The report explains that in considering how to manage the risks and opportunities arising from changing perceptions of the tax administration, authorities may wish to develop communication strategies to build positive compliance attitudes.
That’s all grand but you have to remember that the level of compliance in Ireland is already significant. There will be times when we will disagree with Revenue and that’s the way it should be. However, there’s no getting away from the fact that the effect of the crisis on Revenue operations will affect the taxpayer. Therefore and according to the OECD, it is in both parties’ interest to continue to make interactions as seamless as possible.
Please note this article first featured in the Business Post on 7 June 2020 and was re-published kindly with their permission on our website.