Taxmen should have dialogue with financial institutions: IMF

Taxmen should have dialogue with financial institutions: IMF

New Delhi: Taxmen worldwide should see the global downturn as a chance to start a better dialogue with financial institutions keeping in view the fact that the economic crisis has made them a risk area for the tax authorities, an International Monetary Fund (IMF) paper said.

“Tax agencies may use the financial crisis as an opportunity to enter into a more co-operative relationship with financial institutions," the paper on ‘Collecting Taxes During an Economic Crisis: Challenges and Policy Options´ said.

A paper prepared by John Brondolo of the multilateral lending institution said that even before the crisis set in, the financial sector’s size and complexity made for a difficult and specialised environment for the tax-collecting authorities.

“During 2008 and 2009, many financial institutions have experienced large losses, some have collapsed and others are undergoing restructuring or mergers," the paper said.

In order to have better co-operation with financial institutions, the tax authorities could work on a unilateral statement on how it intends to work with them or a joint charter by tax agencies and stakeholders could help the move, it said.

The major tax-compliance risk for banks and other financial institutions involves tax avoidance schemes. These usually have highly structured financial transactions, circular and cross-border flows of funds, and intra-group exchanges, the IMF paper said.

Besides, banks’ capital-raising operations present another risk for the tax authorities, the paper said.

During the economic downturn, financial institutions like others are bound to have huge losses. Tax laws in many countries permit loss-sustaining firms to carry forward or carry back their losses.

“Tax agencies will need to carefully evaluate the losses reported by financial institutions," the paper added.