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A strategy is an approach that is used to reach an objective. The objective describes what to achieve, the strategy describes how to do it. Strategy bridges the gap between objectives and activities. The implementation of risk management must start with the development of a strategy.

A strategy could be a set of methods or principles describing how to act. However, strategy also incorporates principles for ways of thinking. It is also necessary that the strategies be based on knowledge. Knowledge is an absolutely necessary part of risk management, regardless of risk model, structure and definitions. Without knowledge about the tax gap, taxpayer behaviour and the effectiveness of different treatment options, risk management is of no use. Based on methods, principles, ways of thinking and knowledge it is possible to decide how the objectives are going to be reached.

The strategies of this model are based on Tax Compliance.

Tax administrations must foster, and not simply enforce, tax compliance. This includes facilitating compliance, monitoring compliance and dealing with non-compliance.

Facilitating compliance involves such elements as improving services to taxpayers by providing them with clear instructions, understandable forms, and assistance and information as necessary.

Monitoring compliance requires information systems as well as appropriate procedures to detect non-compliance.

Improving compliance requires a mix of both these measures and such additional measures to deter non-compliance such as the effective application of penalties. As a rule, successful strategies require an appropriate mix of all these approaches.

1 E.U. RISK MANAGEMENT PROCESS MODEL:

E.U. TAX RISK MANAGEMENT PROCESS

The E.U. RISK MANAGEMENT PROCESS MODEL is divided in 5 phases.

• Firstly, we are going to define very briefly each of these phases.

• Later we will analyze each of these phases in more detail.

1st Phase: RISK IDENTIFICATION

This phase is about identifying the risks that exist in the management of taxes.

External risks and internal risks must be analyzed.

External risks are those related to causes external to the functions of the Administration, such as: registration risks, risks in declarations, risks in the veracity of declarations and risks regarding the effective income of taxes.

Internal risks are due to causes inherent to the tax administrations, such as: characteristics of human resources (training, skills, etc.), characteristics of computer management processes, problems of infectiousness of technological systems, incorrect behavior of the staff, etc.

TAs. INTERNAL RISKS (Note: For the assessment they use surveys of taxpayers)	TAs. EXTERNAL RISKS

Assessment of the EXTERNAL RISK of the Tax Administrations.

Risks can be identified and described at different levels: General level; Medium Level; Detailed level. To introduce medium level identification, we preent 2 concepts:

a Risk area: Different risk areas can be identified and described in a risk register, a national risk database. It is important to identify risks area by area but it is equally important to recognise that a risk in one area can have an impact on one or more risks in other areas.

b Groups of taxpayers: Taxpayers can be grouped in different ways:

– By sectors (such as construction or electronic commerce),

– level of importance,

– legal form,

– compliance level or a combination of these.

The compliance level is of course always a rough calculation based on a number of criteria that say something about the degree of the known (tax) behaviour by a taxpayer, for example:

– the regularity of the tax returns;

– the appearance of any supplementary payments;

– the quality of the administration (bookkeeping);

– the appearance of corrections on tax returns in the past;

– the regularity of payment.

The compliance level can be shown in the shape of a triangle, the compliance pyramid

Sources for risk identification

For risk identification, several sources are available. None of them are perfect or sufficient for a 100% result. This only can be approached by a balanced and combined use of all the available sources.

1 Horizon scans.

2 Society support.

3 New legislation.

4 Data mining/risk analysis.

5 Random audits.

6 Pioneer investigations: ‘test drilling/piloting’.

7 Signals from the shop-floor.

Risk picture: The result of the risk identification stage is the risk picture. It shows areas, groups of taxpayers or sectors where risks are expected.

2nd Phase: RISK ANALYSIS:

Once risks have been identified, it is necessary to analyse what types of risk they are. For this, the following variables are used:

– Frequency of Risk.

– Probability of risk.

– Consequences of Risk.

– Causes of risk: complexity of the rules, insufficient or inefficient control, inadequate sanctions, etc.

Risk analysis normally requires the use of computer systems because of the sheer volume of data.

3rd Phase: RISK RANKING, PRIORITISATION AND ASSESSMENT

Tax administrations normally detect a very high volume of risks. That is why they must prioritize the risks they want to face. For this, what they do is a risk prioritization, ranking which activities and procedures they are going to carry out and which they not, taking into account the impact of these procedures as well as the available resources. Scarce resources have to be allocated to growing needs. This is precisely why voluntary compliance is greatly enhanced.

The central goal of the phase of risk assessment is to choose which risks are to be addressed, given the available options and resources (for example, staff time in hours and competences). Information about both risks, and also available resources, is therefore necessary in this stage.

The extent gives an indication of the direct loss of tax in the case of risk acceptance. Other tax losses are possible, such as the potential decrease in the compliance level of a group of taxpayers. Other possibilities can also occur beyond direct or indirect tax losses. Unfair competition is an example of this as are feelings of inequality and social criticism, which can have possible negative effects on the tax administration’s reputation.

Indicators used to prioritize risks:

1.– The amount of tax which is involved directly.

2.– The amount of tax which is involved indirectly.

3.– The deterrent.

4.– The social and compliance effects.

5.– The political desires.

6.– The image.

7.– At random.

Compliance continuum

4 Phase: RISK TREATMENT:

Once the risks have been ranked, it is necessary to decide on the appropriate treatment for each risk.

For this, all the tools available to the tax administration are used, such as:

– ATTENDANCE AND EDUCATION

– MASSIVE CONTROLS

– AUDITS

– MEETINGS WITH SECTORS

– PAYMENT FACILITIES

– COMPLAINTS FOR FISCAL CRIME

– DECLARED JURISDICTIONS

– HORIZONTAL SUPERVISION

– TAX COMPLIANCE POLICY MAKING

– OTHER

5 Phase: EVALUATION AND PERFORMANCE

Even if a large number of activities (e g audits) have been carried out, it is not certain that this will have a positive impact on the compliance level.

The final goal and effect could be to reduce the tax gap. This should be accomplished by increasing the level of voluntary compliance.

These are some possible methods:

A. Taxpayer surveys can be used to measure taxpayer confidence (in the tax system and in the tax administration), perceived risk of detection and attitudes (social norms).

B. Analysing auditing methods:

Audit through random selection can be used as an effective tool to measure the size of the “tax gap” within specific areas. A small sample is selected randomly within a larger group of taxpayers. The purpose can be to measure the number and size of both intentional and unintentional errors.

It may be preferable to choose a specific item or specific risk area to audit, e g different deductions, capital gains, items on the balance sheet or specific problems with VAT as this requires a smaller sample and provides a more accurate result. The results of random audits are always influenced by the skill and commitment of the auditors. The results are therefore not always reliable. In order to make the result more reliable is it normally better to focus on one specific item (instead of the whole tax return) and to concentrate the work to a limited number of tax officials.

The measurement can also focus only on the number of errors (and not amount) because this requires a smaller sample. The same risk area or item should be audited every year (or every second year). The changes in the number of errors are an indicator of the effect.

The number of obvious mistakes in the tax returns can be measured by selection systems. Often the selection systems only select an appropriate workload. This means that available resources constrain the number of tax returns that can be altered (even when it comes to obvious mistakes like calculation mistakes) by the use of threshold values.

C. Changes in tax returns can be followed from year to year. It is then possible to detect unexpected changes (e g increase in the frequency of a particular deduction or decrease of the turnover in a specific trade sector).

D. The use of comparative groups can be of value when measuring the effect of a specific treatment or the effect within a specific group of taxpayers. The proportion of taxpayers claiming a certain deduction after service/education or audit can be compared with a group who has not been educated or audited at all. It is also possible to compare changes in total tax paid within a group that have been subject to some sort of treatment with a control group that have not been subject to the same kind of treatment.

An example about the “difference of the difference”

*Professor of Financial and Tax Law. University of Barcelona. Extraordinary award both in Law Degree and in Ph.D. in Law. Degree in Economic Sciences and Business. Researcher and consultant of the Global Forum on Law, Justice and Development of the World Bank. Principal Investigator of the DER.15-68768-P Project: International Administrative Co-Operation in Tax Matters and ADR of Transnational Tax Disputes and Models for an Institutional Architecture from a European Perspective-EUDISCOOP PROJECT. Director of the excellence network DER17-90874-INTAXCOOP&GOV: The Global Observatory on Tax Agencies. Towards International Tax Cooperation & Governance; Principal Investigator of the “Comparative ADR Systems on tax Law” Project (Generalitat de Catalunya). Visiting researcher at: Harvard University, European University Institute, Università di Roma ‘La Sapienza’, Università degli Studi di Firenze, International Bureau of Fiscal Documentation, Università di Bologna, School of Economics and Political Science, Leeds University (UK), Georgetown University (Washington, DC), World Bank (Washington, DC).

1.See D’ASCENZO, M. (2008, July 10). Good Governance and Tax Risk Management. Speech of Commissioner Australian Taxation Office to the Australian Risk Policy Institute, University of Canberra. [Online] (URL http://www.ato.gov.au/corporate/content.asp?doc=/Content/00153731.htm); PRICHARD, W. (2010). Taxation and State Building: Towards a Governance Focused Tax Reform Agenda. IDS Working Paper 341; COLLIN, P. & COLIN, N. (2013). Task Force on Taxation of the Digital Economy. Ministere de L’Economie et des Finances. Minister du Redressement Productiv. République Français, January, 2013 (open Access).

2.Akiko Terada-Hagiwara, Kathrina Gonzales, Jie Wang (2019); “Taxation Challenges in a Digital Economy–The Case of the People’s Republic of China” ABD Briefs, May, 2019; Brondolo, J. and Z. Zhang. (2016). Tax Administration Reform in China: Achievements, Challenges, and Reform Priorities. International Monetary Fund WP/16/68. Washington, DC. Chew, J. 2018. Malaysia Officially the Second Country in South East Asia to Introduce a Digital; Casey, P., & Castro, P. (2015). Electronic fiscal devices (EFDs). An empirical study of their impact on taxpayer compliance and administrative efficiency by Peter Casey and Patricio Castro, International Monetary Fund (IMF) WP/15/73; Eui Soon Chang, Elizabeth Gavin, Nikolay Gueorguiev, and MR. Jiro Honda (2020), “Raising Tax Revenue: How to Get More from Tax Administrations?; Volume/Issue: Volume 2020: Issue 142; Lipniewicz, R. 2017. Tax administration and risk management in the digital age. Information System in Management, Vol. 6(1), 26-37; Law, S. B. 2010. Technical Services Fees in Recent Tax Treaties. Bulletin of International Taxation. 64 (5). IBFD; Olbert, M. & Spengel, Ch. (2017). International Taxation in the Digital Economy: Challenge Accepted?; Schall N. & Becker, M. Digital Tax Parcel Mappig, GTZ. http://www.methodfinder.net/download_all.html?…%20Digital%20T; Marija VUKOVIC, Towards the digitalization of tax administration, https://www.cef-see.org/files/Digitization_Tax_Administration.pdf; EY Center for Tax Policy (2016). Tax administration is going digital: Understanding the challenges, EYG no. YY3818, 2016 Ernst & Young LLP. http://www.ey.com/Publication/vwLUAssets/EY-tax-administration-is-going-digital/$FILE/EY-tax-administration-is-going-digital.pdf.

3.Can see BIRD, R.M. (2004); Administrative Dimension of Tax Reform. Asia-Pacific Tax Bulletin, March 2004; Das-Gupta, A., Ghosh, S. and Mookherjee, D. (2004). Tax Administration Reform and Taxpayer Compliance in India. International Tax and Public Finance, 11, 575–600; Black, J. (2005). The Emergence of Riskbased regulation and the New Public Risk Management in the United Kingdom. Public Law; Brautigam, D.A. (2008). Introduction: Taxation and State-building in Developing Countries. In: BRAUTIGAM, D.A., FJELDSTAD O. AND MOORE, M. (Eds.). Taxation and State-Building in Developing Countries: Capacity and Consent. New York: Cambridge University Press; BIRD, R.M. and Zolt, E.M. (2008). Technology and Taxation in Developing Countries: From Hand to Mouse. July 4, 2008. [Online]; EVANS, C. (2003). Studying the Studies: An overview of recent research into taxation operating costs. eJournal of Tax Research, 1(1); Gutierrez, N. (2002). Information Technology in Support of the Tax Administration Functions and Taxpayers Assistance. Third Regional Training Workshop on Taxation, Brasilia, Brazil, December 3-5, 2002; JANTSCHER, M.C. (Eds.). Improving Tax Administration in Developing Countries. Washington: International Monetary Fund, Publication Services; Bergman, M.S. (2003). Tax Reforms and Tax Compliance: The Divergent Paths of Chile and Argentina. Journal of Latin America Studies, 35, 593-624; BIRD, R.M. (2008). Tax Challenges Facing Developing Countries. International Studies Program: Working Paper 08-02, March 2008.

4.OWENS/LEIGH PEMBERTON (EDS.). (2021). Cooperative Compliance. A Multistakeholder and Sustainable Approach to Taxation, Wolters Kluwer. Wolters Kluwer 2021; CAROLINE HEBER (2021); Enhanced Cooperation and European Tax Law, Oxford University Press; LIPNIEWICZ, R. (2017) Tax administration and risk management in the digital age Information Systems in Management. 2017 | Vol. 6, No. 1 | 26-37; Dominik J. GAJEWSKI (2017) Tax Law Management of Tax Risk Incurred by International Holding Companies in The financial Law Towards Challenges of the XXI Century. MASARYK UNIVERSITY FACULTY OF LAW; Sarker, T.K. (2003). Improving Tax Compliance in Developing Countries via Self-Assessment Systems – What Could Bangladesh Learn from Japan? Asia-Pacific Bulletin, 9(6), June 2003; Devos, K. (2007). Measuring and Analyzing Deterrence in Taxpayer Compliance Research. Journal of Australian Taxation. 10 (2); Jackson, B.R. and Milliron, V.C. (1986). Tax Compliance Research: Findings, Problems, and Prospects. Journal of Accounting Literature, 5, 125-165. JAMES, S. and ALLEY, C. (2002). Tax Compliance, Self-Assessment and Tax Compliance. Journal of Finance and Management in Public Services, 2(2); MASON, A. (2008). Harbours and Horizons in Tax Administration, in: Walpole, M. and Evans, C., (Eds.). Tax Administration: Safe Harbours and New Horizons. ATAX Tax Administration Series, 3. Birmingham: Fiscal Publications; Silvani, C.A. (1992). Improving Tax Compliance. In: Bird, R. M. and De Thomson, R. (2008). Strengthening Risk Management and Audit Strategies to Improve Compliance. Paper presented at Caribbean Organisation of Tax administration (COTA) General Assembly. Belize City, Belize. July 2008; Wunder, H.F. (2009). Tax risk management and the multinational enterprise. Journal of International Accounting, Auditing and Taxation, 18, 14-28.

5.OECD (2010b). Tax Compliance and Tax Accounting Systems. Forum on Tax Administration: Information Note. April 2010; OECD (2010c). Understanding and Influencing Taxpayers’ Compliance Behaviour. Forum on Tax Administration: Small/Medium Enterprise (SME) Compliance Subgroup. Information Note. November 2010; International Monetary Fund (IMF); ISBN: 9781513550831; ISSN: 1018-5941; European Commission. (2018). Digital Tax Pacage, NOVE. https://nove.eu/wpcontent/uloads/2018/03/NOVE-Note-on-Digital-Taxation.pdf ICAEW. (2016); European Commission (2006). Risk Management Guide for Tax Administrations. The European Commission’s Taxation and Customs Union Directorate General. 1.02, February 2006; European Commission (EC) (2010). Compliance Risk Management. Guide for Tax Administrations. Fiscalis Risk Management Platform Group; European Commission. The Digital Economy and Society Index (DESI). https://ec.europa.eu/digital-single-market/en/desi.

6.HMRC (2007). HMRC Approach to Compliance Risk Management for Large Business. March 2007. [Online]. (URL: http://www.hmrc.gov.uk/lbo/riskupdate.pdf) (Accessed 10 May 2009); AUSTRALIAN TAXATION OFFICE (ATO) (2009) Compliance Program 2008-2009. [Online]; (http://www.ato.gov.au/content/downloads/COR_0015516_CP0809.pdf). IOTA. Digitalization of tax: international perspectives. https://www.icaew.com/en/technical/technology/technology-and-the-profession/digitalisationof-tax-international-perspectives IOTA’s e-book. 2016, etc.

7.European Commission (2006). Risk Management Guide for Tax Administrations. The European Commission’s Taxation and Customs Union Directorate General. 1.02, February 2006; This guide. was prepared by tax officials for tax officials. The team was headed by a representative of DG TAXUD of the Commission and comprised of delegates of the following Member States: Germany, Greece, Italy, The Netherlands, Austria, Sweden, United Kingdom and Poland. European Commission (EC) (2010). Compliance Risk Management. Guide for Tax Administrations. Fiscalis Risk Management Platform Group.

8.DÍAZ YBERO, F., COLLOSA, A., Compliance Risk Management (CRM) Passing Trend or Necessity for the Tax Administrations? CIAT. https://www.ciat.org/compliance-risk-management-crm-passing-trend-or-necessity-for-the-tax-administrations/?lang=en et alter. See: – OECD (2004) Compliance Risk Management: managing and improving tax compliance: guidance note; overview, information note and compendium in OECD “Evaluating the effectiveness of compliance risk treatment strategies (online); – Revised Kyoto Convention”, with the following risk management process phases: Establish context; Identify risks; Analyse risks, Assess and priorities risks and Treat risks; – HMRC (UK) (2007) “Approach to compliance risk management for large business”; – ISO 31000 Risk management A complete guide (by G. Blokdyk); – ATO (2012) Review into aspects of the ATO’s use of compliance risk assessment tools, between others ATO sources, highlighting the document ATO (2021) “Practical compliance guideline (draft PGD 2021/d4) on intangibles arrangements” (complete framework to assess compliance risks on international intangible arrangements), etc.

9.Working document of Professor Eva Andrés, included in the framework of the LLM International Tax MASTER of A&M TEXAS UNIVERSITY (directed by William Byrnes). Course: EUROPEAN UNION (E.U.) Tax Risk Management. The whole content of the module: Study of the basic principles of E.U. Tax Risk Management, including the European Union General Framework of Compliance. The impact of the EU’s Fundamental Freedoms on taxation, in particular the Free Movement of Capital (especially regarding investment funds). The course will also analyse the Parent-Subsidiary Directive; the Interest and Royalties Directive; and the European Union proposal of a Carbon Border Tax and its compatibility with World Trade Organization rules. The course is completed with the following topics: Cross-Border Losses and ATAD, new DACs 6, Abuse). [Professors: E. Andrés-Aucejo, X. Fernández-Pons, S. Ibánez-Marsilla; A. Olesti-Rayo, B. da Silva].