Client tax integrity – What should you do? | Regulatory Risk | Deloitte Netherlands


Client tax integrity – What should you do?

How to address client tax integrity risks?

Client tax integrity management entails incorporating regulatory requirements, but it is necessary to consider broader views on undesirable tax behaviour from clients as well. Being aware of the importance of cultivating a more broad sense on shifting societal norms and ultimately regulations leads to enhanced and forward looking tax integrity management.

By Christiaan Visser, Diederik Verlinden & Stephan Ong | March 13, 2019


The interest in tax integrity has significantly increased recently. The Panama Papers, Paradise Papers and CumEx-files have cast a spotlight on the worldwide practices of tax avoidance. We can establish that, in general, there is an overall more hostile attitude within the public debate on tax integrity. This also involves less acceptance of businesses who facilitate such arrangements for their customers. For this reason, financial institutions are now expected to truly take their tax integrity efforts to the next level, and no longer hide behind a strict interpretation of regulatory requirements while allowing behaviour that is “lawful, but awful”.  

Regulatory shift

The trend of increased focus on tax integrity is also reflected in a number of new regulations, such as the Foreign Account Tax Compliance Act (FATCA), OECD Common Reporting Standard (CRS) and the recently implemented Sixth Directive for Administration Cooperation (DAC6) as well as various other regulatory proposals resulting from the OECD Base Erosion and Profit Shifting (BEPS) action plan. Especially DAC6 could have a high impact on financial institutions since it involves a mandatory disclosure of aggressive (cross-border) tax arrangements, and the scope of the hallmarks of reportable arrangements is quite extensive. More clarity on this is to be expected later this year, but is the interpretation of the hallmarks are likely to remain very broad due to the anti-abuse “catch-all-approach” of the EU.

At the same time the Dutch Central Bank (DNB) has been vocal on the topic for some time and for 2019 indicated that client tax integrity will be one of the main topics on its agenda. Moreover, DNB has recently released a consultation draft of good practices for financial institutions in regard to client tax integrity. Financial institutions are even more expected to properly understand client’s tax position, structure, behaviour and the impact of transactions on their tax position.

A best practice would be a thorough review of clients’ corporate structure and (expected) transactions (which would coincide with the requirements from AML/CFT and DAC6 and should therefore be synergetic with existing processes). Deviating transactions could then be tracked more easily, potentially resulting in a need to pose additional questions to the client. Also, the products and services offered to a client might (be used to) facilitate ‘reportable arrangements’ under DAC6.

Related article: Dutch Central Bank publishes good practices for banks

Imbedding tax integrity risks

To really tackle the issue of client tax integrity, it is key that institutions incorporate the topic within the entire organization’s integrity risk framework. This involves making tax integrity a fundamental part of the Systematic Integrity Risk Assessment (SIRA) and the institutions integrity risk appetite. Based on the SIRA and risk appetite the institution can determine the specific risks that need to be mitigated and subsequently lead to concrete controls.

Introducing the required tax integrity controls can entail upgrading current mitigating measures, such as existing transaction monitoring. Institutions however also need to consider broader controls. An example is continuously keeping track of their clients corporate structures and rationale behind this. This also involves already defining what structures and behaviour generally pose a higher tax integrity risk, for instance (transactions with) entities in jurisdictions on the EU list of non-cooperative tax jurisdictions, controlled foreign corporations or hybrid structures.

Ultimately, it is key to acknowledge that each mitigating measure at the client level should be seen as part of the larger integrity control framework. This allows effective assessment of the combined set of measures and procedures, to see if all identified tax integrity risks are truly mitigated. It also prevents redundancy and inconsistency between different procedures and controls, for example by directly incorporating reporting obligations under DAC6 in the design of tax integrity controls. Last but not least, it simplifies the implementation of a continuous improvement loop for all controls, which in turn ensures new regulatory developments and societal risks are continuously taken into account.

Time to act

Given the great public scrutiny, supervisory attention and ongoing regulatory developments, sitting back is not an option. This however also offers a great opportunity to fully commit to mitigating client integrity tax risk within the entire institution, but in an efficient way and integrated in existing processes and operations.

Now is the time to establish a truly structured and overarching approach, embedding client tax integrity risks in the entire risk control framework. Deloitte offers the required wide-ranging skills and strong experience to help you forward on this, combining the expertise of our Regulatory Risk, Tax, Legal and IT/Operations teams into an all-round team.

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