Tax management

Potential scenario

Following a tax audit, your company’s subsidiary in a foreign country has received a reassessment notice. There are solid arguments for challenging the proposed tax adjustment, and the issue is under discussion with the tax authorities.
However, the tax auditor proposes a discharge or settlement, in return for the payment of a “kickback”.

I. Understanding the risk

 
 
  • In general, corruption offences often constitute breaches under tax law, for example when a bribe is wrongly deducted from income.
  • But operational tax management itself presents a considerable corruption risk, for example:
    1. An attempt to lower a company’s tax burden by bribing tax officials.
    2. Solicitations by tax officials, based on unjustified claims.
    3. Threats from tax officials to delay processing a company’s tax return, when a company is expecting to receive tax refunds.

II. Recognizing practical challenges

 
 
  • In many countries, tax regulations are among the most complex procedures for companies to comply with, thus facilitating corruption. Tax auditors may extort bribes from taxpayers by taking advantage of complex, often unclear laws, regulations, and procedures to fabricate shortfalls.
  • The complexity of the tax system may also force foreign companies to rely on local intermediaries, to navigate the tax system, exposing them to unscrupulous activity.
  • Tax management is a high business risk area also for many other reasons, including:
    1. Concurrent tax jurisdictions, between municipalities, states, national authorities and between countries, make it difficult for companies to understand who to deal with.
    2. High discretionary power of tax officials, combined with low salaries, motivating extortion requests.
    3. Time-consuming and costly appeal processes, leading to corrupt behaviour, simply to get things done.

III. Mitigating the risk

 
 

Companies must address tax management in their anti-corruption programme, in the context of their particular risk exposure.
Additional, practical safeguards should be considered to mitigate the misuse of tax management as a form of corruption, including:

  • Avoid local tax advisers whose inappropriately close relationship to tax authorities could create a conflict of interest.

Training cases

A tax inspector asks for a “kickback” in exchange for granting a discharge or accepting a settlement in a tax dispute
[RESISIT, Scenario 14]

Professionals as intermediaries
[TI UK HTB, Page 25]

Suggested reading

"How To Bribe – A Typology Of Bribe-Paying And How To Stop It”, Section 1.2

"RESIST: Resisting Extortion and Solicitation in International Transactions"

“Expert Answer - Exploring the Relationships between Corruption and Tax Revenue”