## INTERNATIONAL TAX COMPLIANCE RISKS

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**Canonical URL:** [INTERNATIONAL TAX COMPLIANCE RISKS](https://www.imf.org/-/media/files/topics/fiscal/revenue-portal/international-tax-compliance-risks.pdf)

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### Importance of managing international tax compliance risks
- Revenue mobilization is at the forefront of priorities for many countries.
- Understanding the potential risks to a country’s tax base due to international tax issues is increasingly important in a globalized economy.
- Digitalization of the economy poses an additional risk that electronic sales of goods and services are not taxed in the country where the profits are generated.
- International tax arrangements can be used to minimize an entity’s overall tax burden by shifting profits and exploiting jurisdictional differences in tax laws.

### Consequences of inadequately addressing international tax issues
- Voluntary compliance can suffer if domestic taxpayers perceive that others are not paying the right amount of tax.
- Reduced tax revenue and threats to the community’s perception of the fairness and integrity of the tax system.
- Foreign entities can gain an unfair competitive advantage over domestic entities, threatening the level playing field needed for a healthy economic environment.

### Prioritization and risk management approach
- Both international and domestic compliance risks should be evaluated, and the most severe risks to the tax base should be given priority for treatment.
- A standardized approach to identifying and quantifying the risks should be adopted using modern compliance risk management (CRM) approaches.
- Addressing international tax risks can be costly and time consuming but can produce significant revenue results.
- A quantification of the materiality of various compliance risks should guide decisions on resource allocation.

### IMF methodology and framework
- The IMF has developed a methodology to evaluate a country’s capacity in managing international tax risks and to measure progress toward good practice.
- Figure 1. IMF’s Framework for International Tax Administrative Strengthening (FITAS) outlines the six key tax administration areas that work together to effectively manage international tax risks.

### Examples of international tax compliance risks (Box 1)
- Transfer mis-pricing to shift profits
- Misclassifying offshore payments to avoid Withholding Tax
- Shifting capital gains to low tax jurisdictions
- Using tax driven losses to limit source country tax
- Creating artificial arrangements to get treaty benefits
- Abusive business restructuring to shift profits
- Contrived exploitation of jurisdictional differences
- Artificial arrangements to inappropriately access tax incentives (e.g., credits, exemptions, holidays)

### Six key tax administration areas in FITAS
- People. Staff with appropriate skills to effectively identify and address compliance risks.
- Systems and Compliance Risk Management (CRM). Systems and processes in place to support data analysis and international tax CRM.
- Tools. Access to analytical tools for risk assessment and audit support mechanisms.
- Data. Sufficient, appropriate data to facilitate international tax risk assessment and ability to protect data confidentiality.
- Legislative Framework. The necessary provisions are in domestic law to protect the domestic tax base.
- Organization Structure and Governance. Sufficient resources are in place, with management oversight of activities, along with efficient organizational arrangements.

### Practical considerations and recommendations
- Invest in evaluating the existence and potential revenue loss from international tax compliance risks without delay.
- Building international tax capacity is a long-term process; not effectively addressing international tax risks poses reputational and revenue loss risks.
- Get started with existing resources and capabilities and build as progress is made.
- Deliberate, incremental improvements over time will have a positive impact.
- You may be able to request IMF assistance; for capacity development support, contact IMF’s Fiscal Affairs Department at revenueportal@imf.org.

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_Source: https://www.imf.org/-/media/files/topics/fiscal/revenue-portal/international-tax-compliance-risks.pdf_