London, 1947. Hugh Dalton, chancellor of the exchequer, is standing in the lobby of the Houses of Parliament. In his hand he's holding the case containing this year's much-talked-about budget. Incautiously, he answers a journalist's question which reveals one tiny budgetary point. In just that moment his career is in ruins. Dalton resigns from his post a few days later.
It would never happen today. Secrecy over proposed legislation and rulings is a thing of the past in most jurisdictions. Governments and revenue authorities are falling over themselves to appear transparent and open when drafting tax rules. But is the change merely cosmetic? And why should the authorities listen to businesses who are only trying to minimize their own tax bill? Taxpayers worldwide say consultation processes are far from perfect, but perhaps that's because they always want their own way.
It takes two
Jurgen Hartmann, from KPMG in Germany, feels that it is necessary for the government to consult businesses and tax advisers to produce workable legislation. "There is a need for the government to talk more to professionals and to the industry. The issues are getting so complex that we need a lot of input from experts." Peter Nias, from McDermott, Will & Emery in London, agrees that government's need input from business. "Few in the government have the commercial experience of working in a business environment."
But, as French tax adviser Chris Potter, at Bureau Francais LeFebvre, points out, the tax authorities don't always feel that way. "There's an elitist culture in France, by the time you reach the top of the civil service you think you are too good to consult at all. We're still in a very them and us mentality."
While France has an unusually closed policy on consultation, this raises the question of why the authorities should bother consulting business groups and advisers. While tax advisers like Ulrich Michaelis, from Arthur Andersen in Germany, say that the government needs "experience that isn't from a theoretical point of view," the fact that businesses have a definite agenda may be one reason why the government doesn't always seem to hear their complaints on proposals.
Is anyone listening?
Albrecht Van Der Hagen, at the BDI, which represents the views of German industry, is exasperated by his new government's attitude to its latest tax reforms. "The government appeared to be listening, but it didn't learn anything," he says.
Australians, going through their largest-ever tax reforms, are also unsure of the efficacy of their process. "We're a little concerned as to the extent to which this consultation is a sham," says Ross Higgins, tax partner at Deloitte & Touche in Melbourne. "There's a lot of navel-gazing going on as to how well the system works."
It's the same in the UK. Nias, of McDermott Will & Emery says: "I believe that consultation does improve things, but I have a tinge of scepticism. Cynics would say that this is the government going through the motions."
This pessimistic view persists in the US. Tim Timmerman, a tax director at Ford Motor Company in the US, takes a similarly cynical line. "It's a shot in the dark each time," he says.
Paying the price
And that shot in the dark can cost a great deal. Tax practitioners estimate that the task of commenting on legislation takes up a staggering amount of time and resources. Richard Shaddick, of Shaddick & Spence in Melbourne, estimates that 15% of his firm's practice time is taken up with consultation. KPMG's Hartmann has a slightly more conservative estimate, at 10%. Nias says he spends around 30-50 hours a year on discussing changes in tax legislation.
Advisers see benefits from placing their expertise at the services of the government. Despite misgivings about the process, all are keen to point out that participation in consultation has its own rewards.
Marvin Rust, tax partner at Arthur Andersen in London, cites the example of UK legislation on advance pricing agreements. "A lot of our comments resulted in text," he says. Shaddick, in Australia, has also seen positive results "Ten to 20% of our efforts result in meaningful change."
"Participation is a must, because we have to help our clients", says Hartmann, from Germany. For advisory firms, the benefits are concrete, and submissions are often client-led. Penny Hamilton, at PricewaterhouseCoopers in London, says that most of their participation involves making client representations, which are obviously good for business.
Nias sees a difference in emphasis between the lawyers' and accountants' views of consultation. "Lawyers are very concerned that the changes in law are clear, while accountants are more concerned from a business point of view. I'm prepared to commit my own time to this." Shaddick, in Australia, agrees: "we're not out to bill all our hours."
That's fine for the advisers. But for a company that doesn't feel the government is listening, the price of consultation is often too high. Timmerman, at Ford in the US, says that participation in consultation can be prohibitive for the corporate tax professional. "The only way to keep up with the government is to hire additional resources." Ford doesn't spend much time on consultation anymore because of financial constraints. "It's the area of least certainty, so it's the first to go," Timmerman explains.
Gordon Slater, director of taxation at Cadbury Schweppes also feels that the cost of consultation is too great: "It's a resource issue. You could spend all your time responding to the administration."
Cost versus benefits
The price is high, but the rewards can be high too. Taxpayers have their complaints, but are positive about the trend towards greater consultation.
Dean Yoost, of PricewaterhouseCoopers in Japan, is cautiously hopeful about the attitude of the administration. "In our experience, the tax authorities will sometimes change their proposal based on our comments." In Japan the government often issues documents outlining changes in legislation, giving businesses and advisers an opportunity to comment, before final legislation is passed.
The biggest gripe across all jurisdictions is that the government is not involving advisers at an early enough stage, but there are indications that this is changing. Arthur Andersen's Michaelis in Germany, is positive about a new group which is discussing tax reforms. "This is a new institution. The group will include judges, advisers and members of business. Now we will be involved right from the start."
The Ralph Committee in Australia is further evidence that governments are involving business at an earlier stage. This group is reviewing business income tax, and consists of government officials, business representatives and advisers. The Treasury describes this review as "open and transparent".
Higgins at Deloitte & Touche hopes that this review will include a commitment to greater consultation, earlier in the process. "They're talking of introducing an independent board outside the tax office itself, which will have some role to play. We're trying to make the process more open and more objective."
France: Bucking the trend
The French administration has a more highhanded attitude towards consultation than the other jurisdictions discussed in this feature. Claude Blanc, head of tax at Danone in Paris, would love the chance, enjoyed by taxpayers elsewhere, to talk to his administration. "I know consultation exists more in the US, Germany and the UK. I would like to see the same in France."
He is disgruntled by his country's attitude towards new tax rules. "The government is sure that it knows the truth, and sure that it knows what's best for the state. This isn't the case, but it thinks so."
Blanc isn't the only one to feel this way. "We are aware of what happens in other jurisdictions, and feel that we have got the bad end of a short stick," says Jean-Yves Mercier, partner at Bureau Francis Lefebvre. He is consulted by the administration informally, but would like there to be a formal process. "Nothing is organized, and if there is any contact between the administration and us then it is initiated by a lawyer."
Getting political
But the consultation process is influenced by economic policy, as well as by a desire to be open.
Ford's Timmerman feels that the strong economy in the US has made it much easier to convince the administration of his point of view. "We have a surplus which makes it a lot easier. The government is sitting on a big fat cushion. Back in 1991 you couldn't propose anything unless it was revenue-neutral."
Politics also has a large part to play in whether a government is eager to consult business. Van Der Hagen, spokesman for the German BDI, feels that the new German government is forced to rush through business-unfriendly legislation because of election promises. "The government promised a lot of things in its election campaign. Now it has to finance those promises. That's probably why the government isn't that interested in discussing taxes with us."
Conversely, in Australia, politics has sparked greater consultation on implementation of a goods and services tax. The opposition party forced the government to agree to extensive reviewing of the idea, which was itself conceived as part of an election strategy. In the UK, the recent election of a Labour government has led to greater consultation on tax policy as part of a commitment to greater openness. They introduced the pre-budget speech to aid discussion between businesses and the government.
They even brought in a code of conduct for tax consultation, although it is vague and means very little. "The government intends to consult on tax policy whenever it is reasonable to do so," says the document. But commitment to consultation can seem like lack of direction. A sceptical tax partner remarked: "The government doesn't have any ideas of its own, that is why it has to consult."
Consultation fantasies
Even where consultation is becoming more common, tax professionals seem to find the process as easy to criticize as the legislation it produces. What would they like to see changed?
Many would like to be approached sooner. Jean-Yves Mercier, of Bureau Francis Lefebvre says: "I would very much like to see something put into place prior to draft legislation. At the moment it's a backwards procedure; we don't get a say in a law's implementation, but we do get a say in whether it's taken down."
Van Der Hagen, at the BDI, thinks that the government is going backwards on this issue. "The first draft of recent legislation was only discussed after it was already in parliament. This is moving away from the consultation they used to have." He would like to see the authorities discuss the wording of the first draft with businesses.
Sometimes the announcements of legislation are less detailed than tax practitioners would like. Higgins of Deloitte & Touche in Melbourne, says: "Our problem is that the Australian authorities announce law changes by press release. The legislation itself isn't issued for a long time afterwards."
Gordon Slater, director of taxation at Cadbury Schweppes says that the procedure in the UK varies enormously. He would like to see a balance between open consultation and guidance. "Some exercises are very vague, for instance the government just asked for our views on capital gains, with others the government is not open to debate."
Formalizing arrangements
Tax professionals are divided on the question of how formally consultation should be arranged. Shaddick, in Australia, likes the process to be quite informal: "If it was overly formalized it would be a disaster. Liaison groups become a layer of bureaucracy away from the real discussion."
That's all very well for Shaddick who gets informal telephone calls from the administration, asking for his views on tax policy. For those who aren't as well-known to government officials, lack of access to the policymakers can be very frustrating.
This is especially true when everyone thinks you have the government's ear. "Your average person thinks that the big corporations control the government and get whatever we want passed, but the administration never really consult us," says Timmerman at Ford.
Where does it go from here?
Administrations are promising to be more and more open, so what will the position be in a few years time? Most agree that things will get better: "I hope there's going to be greater consultation at an earlier point in time", says Ross Higgins, from Deloitte & Touche. Expectations for the consultation process may be high on both sides, but taxpayers and their advisors need to maintain a practical approach to their dealings with the authorities: "Businesses should provide more constructive representations to the government", says Jurgen Hartmann from KPMG. Shaddick, from Shaddick and Spence is equally pragmatic. He says "We can't expect to have our own way all the time.
Consultation: What is happening where?
Rigorous review of business taxation, and introduction of goods and services tax has led to greater consultation. Ralph Committee on business taxation aims at "open and transparent" consultation. Some hopes for an independent body to advise the government.
"Sometimes in the past few years I have been very despondent about our consultation process, it seemed very hollow or worse, used as a way to fend off complaints about legislation. But that isn't the case at the moment. There is no doubt that they listen."
Richard Shaddick, Shaddick & Spence, Melbourne France
Little or no formal procedure. Tax office consults advisers informally. Economic constraints allow little room for manoeuvre on tax policy.
"The officials say that the administration is open but it is not. You couldn't say it is a consultation. We can say what we want and sometimes we arrive at solutions."
Claude Blanc, head of tax, Danone, Paris Germany
Tax system is being overhauled by new government. Introduction of new business group to discuss taxation hints at more consultation ahead. But the government must make changes quickly to support election promises, and can be unwilling to consult industry. Some of these changes will be very unpopular with businesses.
"'The government is listening more and more, but still not satisfying anybody. For planned legislation it looks like the government will discuss things very carefully.We hope it is getting better."
Albrecht Van Der Hagen, BDI, Bonn Japan
Government often issues a proposal for tax legislation. Organizations have an opportunity to consult on these changes. Tax authorities occasionally raise concerns about tax practice in a specific industry. An industry group, helped by tax officials, will then decide on guidelines for that industry.
"In our experience the tax authorities will sometimes change their proposals, based on our comments." Dean Yoost, tax partner, PricewaterhouseCoopers, Tokyo
UK
General trend towards openness and greater consultation. The government has passed a code of practice on how it will consult. The Revenue publishes consultation documents and actively seeks response. But there is still variety in the quality of consultation, and a question mark over how seriously submissions are taken.
"The government appears to be listening, but aren't prepared to hear what they don't want to hear."
Gordon Slater, director of taxation, Cadbury Schweppes, London US
Proposed legislation and a system of hearings in which anyone can take part. Informal meetings are sometimes used before this procedure. Response not always actively sought from industry groups.
"They never really consult us, they'll listen to us, but it's always us going to them. But when the IRS have hearings it's in open format and they very much listen."
Tim Timmerman, head of tax, Ford Motor Company, US
