The Effects of Cooperative Compliance on Firms\u2019 Tax Risk, Tax Risk Management and Compliance Costs

Maximilian Zieser,Eva Eberhartinger

doi:10.1007/s41471-021-00108-6

Maximilian Zieser, Eva Eberhartinger

Open Access

https://doi.org/10.1007/s41471-021-00108-6

Copy DOI

Abstract

In cooperative compliance programs, firms and tax administrations agree on cooperation instead of confrontation. Firms provide full transparency and advanced tax control frameworks. Tax administrations, in turn, offer certainty as to the tax treatment of complex transactions. In this study, we test how firms’ perceptions of tax risk, the quality of tax risk management, and compliance costs are related to cooperative compliance. To our knowledge, this is the first study that attempts to analyze both reasons for and consequences of participation in cooperative compliance programs. We examine the Austrian cooperative compliance pilot project known as horizontal monitoring that was aimed at large businesses and launched in 2011. We use survey data from representatives of firms participating in the pilot project and a sample of comparable firms under a traditional ex-post audit regime. We conduct group comparisons to test differences between these groups, as well as mediation analyses to shed light on more complex relationships between variables. Results show that horizontal monitoring firms perceive a significantly higher increase in tax certainty, which is associated with significant relative decreases in tax risk and compliance costs. Furthermore, while the quality of tax risk management upon entering the pilot project appears significantly higher for horizontal monitoring firms, they do not report greater improvement in tax risk management compared to the control group. These results are relevant for the development of cooperative compliance programs and the decision to participate in them.

Highlights

We test whether cooperative compliance (CC), designed as a trust-based alternative to conventional tax audits, is an effective tool to decrease firms’ tax risk, to foster the quality of their tax risk management (TRM), and, at the same time, to reduce firms’ compliance costs
We examine the Austrian cooperative compliance pilot project known as horizontal monitoring that was aimed at large businesses and launched in 2011
We cannot directly assess differences in tax risk and tax risk management that may have led to horizontal monitoring (HM) participation, we examine how much of the differences in current tax risk management and tax risk are explained by perceived changes and to what extent these differences might be explained otherwise, in particular by pre-HM differences in these variables

Summary

Introduction

We test whether cooperative compliance (CC), designed as a trust-based alternative to conventional tax audits, is an effective tool to decrease firms’ tax risk, to foster the quality of their tax risk management (TRM), and, at the same time, to reduce firms’ compliance costs. To this end, we consider the Austrian setting, where the CC pilot project known as horizontal monitoring (HM) was carried out from 2011 to 2018 and subsequently integrated into Austrian law in 2019. Surveys conducted with Austrian firms confirm the central role of tax certainty, i.e., early agreement between tax authority and firm on the appropriate tax treatment of specific cases and circumstances, to avoid later disagreement and litigation (Enachescu et al 2019)

Objectives

Methods

Results

Conclusion