Cooperative Tax Compliance --A Path to Fiscal Sustainability?

• Author: Stanimirovic, Tatjana

1. Introduction

   Voluntary tax compliance seems to be a self-evident tax issue, implemented even as a fundamental principle in the USA tax system. Starting from the principle of efficient (having the lowest possible costs to collect taxes) tax collecting, the administration (governance) is providing the maximum possible benefits (Slemrod, 1990). One of the most efficient ways of taxation is voluntary tax compliance (Alm, Kirchler and Muehlbacher, 2012a), contrary to the long-standing prevailing view which argued that deterrence from unlawful conduct is possible through rigid controls or investigations and harsh penalties. The psychological aspect of strict controls and penalties might cause negative side effects, which is the reason for intensive observations and research of social components of taxation strategies nowadays. Social control in general, and especially investigations as key activities of a regulated society, follow the realization that people observe legal order primarily because it represents the legitimate structure of a regulated society and not out of fear of sanctions and penalties (May and Wood, 2003; Sever and Jovanovic, 2019).

   Those scientific findings have challenged several countries to consider 'alternative' approaches to the relationship with taxpayers. Contrary to the hierarchically based tax authority --taxpayer relationship, OECD has introduced principles of a cooperative compliance model (also named enhanced relationship, meaning tax compliance on the voluntary basis), which can be described as the monitoring, forecasting, and prevention of problems that appear in the relationship between taxpayers and the tax authority (Jovanovic, 2018). So far, the new model has been introduced in several countries while in many more it is still in the development phase.

   The Republic of Slovenia started the first activities of improved relations between the tax authority and taxpayers in 2010, under the project of horizontal monitoring and with the strategic objective to increase voluntary tax compliance. After the pilot project of horizontal monitoring, in autumn 2015, the instrument of voluntary tax compliance for medium-sized and large taxpayers was enacted. The main objective of the paper is to evaluate the tax instrument of voluntary tax compliance, focusing mainly on the important factors that influence taxpayers to enter the status. It is important to emphasize that only 10 taxpayers have applied for the voluntary status. Specifically, the current paper will provide answers to two main research questions:

1. What opinions do the taxpayers (within the status) and the tax authority have about the four most important issues of the status: (a) internal tax control implementation, (b) collaboration/relationship between taxpayers and the tax authority, (c) advantages and disadvantages of the status, (d) possibility of tax inspection for taxpayers with voluntary status; and

2. Which factors can be identified that inhibit and which accelerate the entry of taxpayers into the special status, and which recommendations can be addressed to the tax authority and taxpayers to make the status more attractive for taxpayers?

   The paper is divided into five sections; the first one is the introduction, focusing the reader on the theme. The second section presents a literature and legislation review, while the third is dedicated to the results of the research. The discussion is in the fourth section and the conclusion in the fifth and final section.

2. Cooperative compliance

   2.1. Literature overview

   The welfare state can be organized on the basis of 'sustainable' tax compliance. The national tax authorities are forced to manage a multi-dimensional factor, called tax risks. Traditionally, ensuring tax compliance involves two key approaches: economic and behavioral (Batrancea et al., 2012). The economic rationality is a precondition for the economic approach, assuming that potential taxpayers will act rationally in making economic decisions. According to the economic approach, those engaged in tax non-compliance are supposed to be rational economic actors: calculating the costs compared to the benefits (Hanlon, Mills and Slemrod, 2005; Kirchler and Wahl, 2010) and considering the tax rate, the probability of being audited, and the penalty rate, as important factors of the calculation (Inasius, 2019). The behavioral approach combines sociological and psychological factors, expressing doubts that deterrence from unlawful conduct is possible through rigid controls or investigations and harsh penalties. However, it has been shown that strict controls and penalties can also have unintended side effects, which is why psychological variables (e.g. attitude to taxation, social norms, the perception of fairness, etc.) are increasingly taken into account. The recognition that many do not engage in tax non-compliance when the benefits are greater than the costs has led to an alternative voluntary compliance approach (Alm et al., 2012b; Kirchler, 2007; Williams, Horodnic and Windebank, 2015). According to this, taxpayers are social actors, whose tax non-compliance is the result of a lack of vertical trust in government, but also of the lack of horizontal trust in each other (Williams, 2020).

   A very prominent theory that has combined the economic and psychological knowledge of taxpayers' behavior is the so-called slippery-slope framework (Kirchler, Hoelzl and Wahl, 2008). The idea explains that the power of the tax authority and trust in the authority by taxpayers are the two most important factors affecting tax compliance. It was precisely this conclusion that influenced the practices of tax authorities in managing the behavior of taxpayers and the practice of inspection. It turned out that repressive authorities have to promote cooperative compliance far more than relying solely on the deterrent effect of inspections and fines. In the vast majority of cases, partnership-like and preventive assurance of compliance with regulations is more effective among taxpayers (Aliev et al., 2021; Jovanovic, 2018).

   Based on the presented scientific findings and considering the fact that large business taxpayers are qualitatively different from other categories of taxpayers, the need for a specific tax model has arisen. Besides making a significant contribution to tax revenues collected in most countries and consequently posing a significant risk to tax administration effectiveness, they (particularly multinationals) differ in their complex operations and structure. From the late 1990s into 2000s, the shift in thinking from the deterrence approach into a collaborative and responsive approach has occurred. Following Australia, Ireland, the Netherlands, South Africa, the United Kingdom, and the United States, a growing number of tax authorities have introduced cooperative compliance programmes (CCP) in addition to traditional enforcement regimes in recent decades with the idea to more efficiently allocate their limited resources and, at the same time, spare low risk taxpayers from unnecessary or excessive tax audits. Based on the experiences of the pioneer countries with CCP programmes, OECD (2008) has extracted some behavioral elements (1), which were expected to create an enhanced relationship between tax authorities and taxpayers, although there is not any commonly accepted and adopted definition of cooperative tax compliance. The CCPs greatly differ among countries in several aspects; starting with the existence of a formal instrument (any, hard or soft law) between taxpayers and the tax administration, the need to pay past debts before entering the programme, an obligation to implement a tax control framework (TCF), standards and requirements of the TCF, whether the real time solutions are available in respect of tax disputes, etc. (Martini, Russo and Pankov, 2020). Nevertheless, there are few main elements of CCPs that are relevant to incorporate the principles of CCP (cooperation, trust-based, and transparent relationship) between parties in practice. Those main elements are: 'work in the present' allowing tax issues to be solved before the taxable event occurs, the possibility to litigate about specific issues in case the parties could not reach an agreement, the existence of a formal instrument to participate in CCP by which the taxpayer formalizes its intention, and whether the TCF is specified in regulation or companies are free to decide how to establish it (Martini, 2022; Goslinga et al., 2021; Huiskers-Stoop and Gribnau, 2019; Jovanovic, 2018).

   Slovenia has taken the Netherlands' Horizontal Monitoring Programme platform, which is very similar to the Risk Rating Approach in the UK and the Compliance Assurance Process in the U.S. These CCPOs are open to large organizations that are willing to meet the requirements of disclosure and transparency. The requirements of internal tax control frameworks are placed to ensure that they can comply with their tax obligations, and can also detect uncertain tax positions and disclose these to the tax authority. The benefit for tax authorities can be seen as quick, quiet, fair, and final resolution of tax matters. Those programmes are therefore also named 'transparency in exchange for certainty' (OECD, 2013, p. 28).

   Due to the fact that CCPs are a relatively new tax approach, the number of studies in the field has greatly increased over the last two decades. Methodologically observed, several studies have used the qualitative approaches, mostly in-depth interviews, and anthropological methods (Bjorklund Larsen, 2019; De Widt and Oats, 2017; De Widt, Oats and Mulligan, 2019), while the quantitative methodology has been used in fewer cases (Goslinga, Sigle and Veldhuizen, 2019; Sigle et al., 2022). There are a few streams observed in the literature considering CCPs. Several papers have focused on the legal aspect (Hambre, 2019; Huiskers-Stoop and Gribnau, 2019) or even specific...