Dutch traditional tax enforcement dates from the early 19th century and is characterised by its hierarchical relationship between the tax administration and taxpayers. The Netherlands Tax and Customs Administration (NTCA) has always had extensive powers in order to pursue correct tax assessments, for instance requiring taxpayers to provide tax information. If a law-based information request is not met, tax audits, sanctions and prosecutions can follow. Lack of information is one of the main problems encountered in levying the proper amount of tax. In the 20th century, the gathering of information increasingly took up the NTCA’s monitoring capacity. Additionally, it became clear that when exercising powers more than just the (statute) law had to be observed due to the development of the ‘principles of proper administrative behaviour’. Taxpayers could no longer be seen as subjects but as citizens who were entitled to proper treatment. As a consequence, the relationship became less hierarchical and mutual expectations began to play a bigger role.
By the end of the 20th century, as a result of the increased pressure on the monitoring capacity partly caused by the very complex tax legislation, the NTCA was losing control. It faced the choice either to increase the monitoring capacity substantially or to proceed on a risk-based strategy. The NTCA chose the latter, as the traditional 100% enforcement strategy was in urgent need of replacement. The loss of control was due to increased opaque fiscal structures used by taxpayers on the one hand, and globalisation on the other hand; with its national view, the tax inspector could no longer oversee all effects and details of the increasing global structures.
From that point onwards, taxpayers were categorised into risk groups based on financial interest, complexity of tax matters, and size. Different approaches with different enforcement activities have been developed for various groups of taxpayers (SMEs, large companies, high-wealth individuals). In the early 21st century, the Dutch government pursued simplification of legislation, more responsibility for companies and individuals and more self-regulation. Trust and transparency became keywords. Consequently, more self-regulation could be observed in Dutch society - both at the government level and in the private sphere. Relationships between the state on the one hand and citizens, companies, or organisations on the other have become more ‘horizontal’. The legitimacy of the state and the law is no longer almost automatically taken for granted, but must be earned. Due to assertive and self-reliant taxpayers, relationships with the NTCA have also become flatter. Authority, not force, has become the basis for tax enforcement. Moreover, due to an increased call for efficiency and cost reductions, tax authorities have become aware of the necessity to cooperate with taxpayers. After two centuries of traditional tax enforcement, the NTCA followed the societal trend towards self-regulation.
In 2005, the NTCA set up a Horizontal Monitoring project for large companies. A sharp distinction between high risk and low risk taxpayers (selective tax enforcement) and the entrusting of administrative tasks to compliant taxpayers (sharing responsibility) created room to tackle non-compliant taxpayers under traditional tax enforcement. Consequently, administrative control of compliant taxpayers could be substantially reduced. The Dutch Horizontal Monitoring (HM) model can be defined as a means of administrative supervision based on (informed) trust, mutual understanding and transparency between individual taxpayers and the NTCA. A company can choose voluntarily whether to join. The starting point is that most taxpayers are willing to reduce tax risks, and the NTCA and taxpayers establish a horizontal monitoring agreement (covenant). By signing, both parties agree to cooperate based on trust, transparency and understanding in order to pursue correct tax assessments. Past tax problems must be resolved before the agreement is signed. In addition, the internal control system of the participating (corporate) taxpayers has to meet the requirements of the Tax Control Framework (TCF). The NTCA trusts the information that emerges from this system. Trust should therefore be seen as ‘informed trust’ as opposed to ‘blind trust’. Horizontal Monitoring is also about behaviour. Both the NTCA and taxpayers are required to adopt a solution-focused attitude, display empathy and listening skills, improve and maintain the mutual relationship, be decisive and build up a relationship of trust.
Horizontal Monitoring does not replace traditional enforcement methods but is complementary. It is a different means of tax enforcement, focused on the start of the chain of fiscal operations (fiscal certainty in exchange for information) instead of the end (through tax audits, sanctions and prosecutions). The moment at which disputes are discussed is the most striking difference between both methods. Under traditional tax enforcement, the tax return is first filed by the taxpayer, and a possible discussion on the correctness will follow afterwards. Under Horizontal Monitoring the discussion takes place before the tax return is filed, so that the final assessment is basically in accordance with the tax return. Horizontal Monitoring has no specific tax law basis. The cooperation is based on the covenant, which can be considered a private law agreement. Civil law principles therefore apply to the agreement itself. However, traditional tax rules also remain applicable.
In addition to the Netherlands, other countries have also made similar breakthroughs. Within the Organisation for Economic Co-operation and Development (OECD) ‘Cooperative Compliance’ has become an important theme. Cooperative Compliance can be defined as the establishment of a trust-based cooperative relationship between taxpayers and the tax authorities on the basis of voluntary tax compliance leading to the payment of the right amount of tax at the right time. Both Horizontal Monitoring and Cooperative Compliance reduce active enforcement measures, leading to a shift towards more self-regulation.
In a paper we have written on the subject, we elaborate on the principles of reciprocal trust, understanding and transparency. Subsequently, we assess the trust-based Horizontal Monitoring relationship and its establishment in the light of the principles of reciprocal trust, understanding and transparency. Furthermore, we evaluate these aspects of the Horizontal Monitoring model in the light of the OECD’s principles of a Cooperative Compliance model. First, the ensuing obligations are classified with a view to the reciprocal nature of this set of obligations. Secondly, these obligations are differentiated with respect to their statutory versus voluntary and extra-statutory nature.
The research shows that the Horizontal Monitoring model fits into the OECD’s concept of Cooperative Compliance. A striking difference between the two models is that the OECD model mainly - but not only - addresses the obligations of the tax authorities. But the Dutch model creates obligations of a more reciprocal nature between tax authorities and taxpayers. Both models, however, aim to increase trust in the tax authorities and build a service climate in order to promote voluntary compliance. Changing views on tax enforcement, tax compliance and tax planning require continual reflection on further improvements to both the Dutch Horizontal Monitoring model and the general concept of cooperative tax compliance.
Although Horizontal Monitoring started out in 2005 as a project that was focused on large companies, now already and in the future it may affect the entire Dutch fiscal practice and beyond. The shift towards Horizontal Monitoring does not only affect the social behaviour of taxpayers, but also the tax inspectors involved. Exercising traditional enforcement powers must give way to cooperation with taxpayers and to further developments in management skills. The advance of Horizontal Monitoring would appear to be unstoppable.
Read our full paper: “Cooperative Compliance and the Dutch Horizontal Monitoring Model”