By Enza Sonetti
Since its beginning, the debate about tax cooperative compliance has been characterized by OECD and EU efforts to improve voluntary compliance in multinational and large businesses, because of their internal organization and level of tax risk exposure. SMEs have always been excluded by tax compliance systems (an exception being the Dutch Horizontal Monitoring), as they often lack internal control systems able to engage with tax authorities and prevent tax risks: due to dimensional reason and managerial strategies they do not have an internal department responsible for guaranteeing that their decisions or plans comply with the law and, in particular, with the constantly changing tax law.
Several research outputs have underlined that SMEs’ tax governance goes hand in hand with the development of their tax behaviour and morale. An analisys commissioned by Her Majesty’s Revenue and Customs (HMRC) about the attitudes of SMEs towards tax evasion highlighted that, besides internal and organizational aspects, there are several external influences that affect their ability to be compliant. First and foremost, evasion in SMEs often depends on a lack of financial boundaries between personal and business assets that could also determine incidental evasion. Most important decisions in this kind of businesses are delegated to the manager-owner of the company, affecting evasion perception and its related risks: evasion is often felt like something necessary for the survival and growth of a business, encouraging it to take advantage of the opportunities to reduce its tax burdens. From another point of view, risks are not properly considered, as they are often deemed to be small or manageable. Therefore, this evasion is deemed to be insignificant in comparison with the evasion that could be carried out by multinationals or large companies. This approach to risk and evasion has consequences on the way SMEs conceive the tax system: on one hand, the tax system is perceived as complex and hard to deal with; on the other hand, a reciprocity in which paid taxes matches received services is the feature that would characterise their ideal relationship with tax authorities.
Due to these difficulties, it is clear why they have mostly been subject to simplification measures. According to the OECD’s 2015 document on tax compliance for SMEs, countries have often adopted measures to reduce SMEs’ tax burdens, including for example replacement taxes (simplified method of tax calculation often on a presumptive or cash flow basis; simplified reporting and filing requirements; exemption from all or several other taxes) or measures allowing preferential treatment of losses or depreciation of goods, fiscal credits for R&D or reducing the assessment notice terms.
As mentioned before, a fine example of involving SMEs in compliance programs is represented by the Dutch Horizontal Monitoring, which, through the support of Tax Service Providers (TSPs), allows SMEs to cooperate with tax administrations. This system aims to achieve horizontal cooperation based on mutual confidence and precise specification of responsibilities in order to increase compliance awareness and to reduce — and optimise — the number of tax assessments: the key for achieving these objectives is the compromise of the taxpayer for fulfilling a return that is acceptable and free of mistakes.
Dutch Horizontal Monitoring is not the only way to encourage SMEs tax compliance through the cooperation of TSPs: in the US and Australia, the monitoring of SMEs can be outsourced and entrusted to external auditors, or it can be ensured by certified tax service providers. With reference to TSPs certification, tax authorities and TSPs work on a stand-alone basis but in the same direction in order to guarantee that tax services are provided to the public in accordance with appropriate standards of professional and ethical conduct. Certified TSPs are an option offered to taxpayers by many countries like Australia, Turkey and the US — an option that switches provider compromise to work in favour of professional and ethical standards with the reduction of auditing by the tax authorities: the affiliation to the certification is itself a guarantee of a proper way of performing tax audits.
Managing tax risks and ensuring compliance is not easy, especially for SMEs: over the years, many solutions have been introduced to achieve it, including certifications or adherence to ethical or organizational standards. In this context, international standards are voluntarily accepted management guidelines: in some cases, they may be considered mandatory as a result of their use, or adoption by lawmakers or regulatory authorities and can exempt from liability for infractions or crimes.
In Italy, for example the adoption of a management model pursuant to art. 6 D.lgs. 231/2001 (although it has a legal basis and is not a mere standard) can exempt corporations from liability in respect of certain crimes (amongst which tax crimes are not explicitly included). Although this choice is open to critical debates in legal doctrine and jurisprudence, it will be probably overruled by the adaptation to Directive EU/2017/1371 on the fight against fraud against the Union’s financial interests.
Although especially successful among large companies, guidelines and benchmarking may also appeal to SMEs, who may show their willingness to comply with them in order to structure their internal organization and to ensure adequate risk management and control systems. Standards can indeed change the point of view of a business regarding risk management and reduction (and related reputational damages) through organizational schemes, working on separation of duties method and on principles of good governance, proportionality, transparency and sustainability. In particular, with reference to compliance risks, the International Organization for Standardization adopted in 2014 the ISO 19600, that aims to facilitate legal compliance, reduce penalty risks, and protect corporate reputation. As this standard only gives benchmark and is not a certifiable management system like the ISO 9001, it could be adapted to SMEs dimensions and structures to fit their needs and increase their reliability in their relationship with tax authority.
SMEs play a key role in the development and growth of societies. Therefore, tax compliance strategies should fit their specific growth needs: apart from the few cases of cooperative systems, tax compliance is most of the time entrusted to simplification measures, as they do not entail structural changes in tax systems. This seems to be insufficient to change their approach to tax corporate governance issues. In this sense, standards may represent an important tool to increase competitiveness of SMEs and to help them respect policies and legislation for the benefit of their growth and development. By ensuring quality management with reference to services or products provided, businesses can increase innovation, customer satisfaction and company reputation, as well as enhance their risk management strategies. Nonetheless, standards have to be sufficiently flexible and suitable to their dimension and structure so that they do not incurr in excessive and unjustifiable costs.