6 December 2011 Roundtable, 2011-0427271C6 - 2011 TEI-CRA Liaison Meeting: Qu 7

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Risk Based Audit Approach
i) Will CRA disclose the criteria used in evaluating the risk of a particular taxpayer, and if so, supply that information to the taxpayer?
ii) Will CRA identify which of its personnel are involved in a particular taxpayer's risk evaluation? When will taxpayers be informed of the identity of all CRA individuals making the risk-assessment?
iii) Will CRA share the outcome of the risk-based evaluation with specific taxpayers?
iv) Is CRA implementing a process to ensure consistent application of its criteria across all large business audit teams, TSOs, and, to the extent they are involved, Headquarters personnel?
v) Will CRA conduct a post-evaluation review of the consistency of the application of the criteria for its program?
vi) Is CRA considering any steps to improve the transparency of the program to taxpayers?

Position: See response.

2011 TEI-CRA Liaison Meeting
December 6, 2011

Question 7 - Risk-Based Audit Approach

HM Revenue & Customs in the United Kingdom has published substantial guidance about its risk-based audit approach for large businesses. (footnote 1) The guidance affirms HMRC's publicly stated goal of having a large business framework produce a robust, externally auditable measure of the number of low-risk large business customers. To satisfy its goal HMRC has taken a number of steps, including:

• Publishing the criteria for risk evaluation;
• Asking for an independent review of the application of the criteria to ensure that they are being applied on a uniform basis across the large business taxpayer community;
• Sharing the results of the review with the large business taxpayer community, including the finding that criteria in the program were not applied consistently; and
• Remedying inconsistent application of the criteria.

Since CRA has also implemented a risk-based audit approach for large business taxpayers, we invite CRA's comments on the following questions:

i) Will CRA disclose the criteria used in evaluating the risk of a particular taxpayer, and, if so, supply that information to the taxpayer?

CRA Response

The CRA's Approach to Large Business Compliance (ALBC) discloses the criteria used in risk evaluating all taxpayers, namely:

The large business population is being risk assessed using several techniques, such as:

• Undertaking a historical analysis of audit results and a corresponding analysis of behavioural patterns;
• Regions examining every large business taxpayer in their TSOs and assessing their risk based on analysis and local knowledge;
• Effective Tax Rate analysis being developed and utilized to compare large business taxpayers with average rates within their industries;
• Issue based risk assessment is being conducted to determine whether taxpayers are participating in tax planning schemes; and
• Determining whether there are linkages between tax planning schemes and tax intermediary involvement.

Additionally, consideration is being given to a number of risk factors, such as:

• Audit History;
• Industry Sector Issues;
• Unusual and/or complex transactions;
• Corporate Structure;
• Major acquisitions and disposals;
• International transactions;
• Corporate Governance;
• Participation in aggressive tax planning; and
• Openness and transparency.

These factors will vary by taxpayer and the taxpayers will be advised as to the factors considered in their risk assessment when the ALBC approach is discussed, in the face to face meeting that the CRA will hold with them.

ii) Will CRA identify which of its personnel are involved in a particular taxpayer's risk evaluation? For example, in addition to personnel from the local TSO are others from regional offices or headquarters involved in the risk-evaluation process for specific cases? When will taxpayers be informed of the identity of all the CRA individuals making the risk-assessment?

CRA Response

The ALBC is based on a comprehensive risk assessment involving all the areas within the International and Large Business Directorate (Domestic, International and Aggressive Tax Planning, Industry Specialist services, etc.). The CRA plans to hold face to face meetings with all the large business taxpayers over the 5-year phase-in period of ALBC. The Large File Case Managers (LFCM) are responsible for managing all aspects of the Large Business, including the taxpayers risk assessment. The composition of CRA representatives in the meeting will be dependent upon the nature and extent of risks identified and may include all or some of the individuals involved in the overall risk assessment process.

iii) Will CRA share the outcome of the risk-based evaluation with specific taxpayers? Does CRA have any reports or statistics compiling and reporting how many taxpayers have been advised of the outcome of their evaluation?

CRA Response

The CRA plans to hold face to face meetings with all the large business taxpayers. The objectives of these meetings are:

• To provide the taxpayer with an overview of the ALBC;
• To discuss the ILBD's migration to a risk based approach;
• To fully discuss the taxpayer's tax risk management and corporate governance principles related to tax strategies and decisions;
• To discuss the taxpayer's risk issues;
• To inform the taxpayer of the correlation between the risk issues identified and the planned compliance approach;
• To discuss the potential for the development of an enhanced relationship with the large business taxpayer;
• To provide an opportunity for the taxpayer to share their views on the ALBC; and
• To heighten the ILBD's awareness of any issues that could impede compliance.

At the conclusion of the meeting the LFCM will document the details of the meetings using a specifically designed template. This information will be submitted to CRA Headquarters.

iv) Is CRA implementing a process to ensure consistent application of its criteria across all large business audit teams, TSOs, and, to the extent they are involved, Headquarters personnel?

CRA Response

The comprehensive risk assessment of the large business population is completed using the National Risk Assessment Model (NRAM). The NRAM criteria were developed through a consultative process involving the Regions/TSOs and Headquarters. Risk assessments are completed on an annual basis. The summary of all large business risk assessments are submitted to Headquarters in August and are reviewed by Headquarter personnel. Headquarters personnel also meet annually with the Regions/TSOs to discuss the risk assessment process, and to ensure the consistency of the application of its criteria and for all files nationally. Feedback from the face to face meetings held with large business taxpayers during that phase and any changes required to NRAM or the ALBC are also discussed.

v) Will CRA conduct a post-evaluation review of the consistency of the application of the criteria for its program?

CRA Response

The CRA is undertaking a detailed analysis to determine if there is a correlation between the risk rating assigned to a file and the actual results of that audit. This analysis will continue throughout the ALBC phases to ensure the consistency of the application of the criteria for the program.

vi) Is CRA considering any steps to improve the transparency of the program to taxpayers?

CRA Response

The CRA conducted several meetings with accounting firms, industry associations and other large business representatives prior to the implementation of ALBC. The CRA will be meeting with all large business taxpayers over the next 4-5 years, which will substantially enhance the transparency of the approach. We are also giving consideration to creating an ALBC Website to provide taxpayers with information about the approach.

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained
in the original document are shown below instead:

1 See, e.g., http://www.hmrc.gov.uk/manuals/tcrmanual/index.htm.