Tax Administration
Information on Selected Foreign Practices That May Provide Useful Insights Gao ID: GAO-11-439 May 24, 2011The Internal Revenue Service (IRS) and foreign tax administrators face similar issues regardless of the particular provisions of their laws. These issues include, for example, helping taxpayers prepare and file returns, and assuring tax compliance. Understanding how other tax administrators have used certain practices to address common issues can provide insights to help inform deliberations about tax reform and about possible administrative changes in the U.S. existing system to improve compliance, better serve taxpayers, reduce burdens, and increase efficiencies. GAO was asked to describe (1) how foreign tax administrators have approached issues that are similar to those in the U.S. tax system and (2) whether and how the IRS identifies and adopts tax administration practices used elsewhere. To do this, GAO reviewed documents and interviewed six foreign tax administrators. In some cases, GAO also interviewed tax experts, tax practitioners, taxpayers, and trade-group representatives who were selected based on their expertise or involvement in developing or using the foreign systems. GAO also examined documents and met with IRS officials.
Foreign and U.S. tax administrators use many of the same practices such as information reporting, tax withholding, providing Web-based services, and finding new approaches for tax compliance. These practices, although common to each system, have important differences. Although differences in laws, culture, or other factors likely would affect the transferability of foreign tax practices to the United States, these practices may provide useful insights for policymakers and the IRS. For example, New Zealand integrates evaluations of its tax and discretionary spending programs. The evaluation of its Working For Families tax benefits and discretionary spending, which together financially assist low- and middle-income families to promote employment, found that its programs aided the transition to employment but that it still had an underserved population; these findings likely would not have emerged from separate evaluations. GAO previously has reported that the United States lacks clarity on evaluating tax expenditures and related discretionary spending programs and does not generally undertake integrated evaluations. In Finland, electronic tax administration is part of a government policy to use electronic services to lower the cost of government and encourage private-sector growth. Overall, according to Finnish officials, electronic services have helped to reduce Tax Administration staff by over 11 percent from 2003 to 2009 while improving taxpayer service. IRS officials learn about these practices based on interactions with other tax administrators and participation in international organizations, such as the Organisation for Economic Co-operation and Development. In turn, the IRS may adopt new practices based on the needs of the U.S. tax system. For example, in 2009, the IRS formed the Global High Wealth Industry program. The IRS consulted with Australia about its approach and operational practices. GAO makes no recommendations in this report.
GAO-11-439, Tax Administration: Information on Selected Foreign Practices That May Provide Useful Insights
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United States Government Accountability Office:
GAO:
Report to Congressional Requesters:
May 2011:
Tax Administration:
Information on Selected Foreign Practices That May Provide Useful
Insights:
GAO-11-439:
GAO Highlights:
Highlights of GAO-11-439, report to congressional requesters.
Why GAO Did This Study:
The Internal Revenue Service (IRS) and foreign tax administrators face
similar issues regardless of the particular provisions of their laws.
These issues include, for example, helping taxpayers prepare and file
returns, and assuring tax compliance. Understanding how other tax
administrators have used certain practices to address common issues
can provide insights to help inform deliberations about tax reform and
about possible administrative changes in the U.S. existing system to
improve compliance, better serve taxpayers, reduce burdens, and
increase efficiencies.
GAO was asked to describe (1) how foreign tax administrators have
approached issues that are similar to those in the U.S. tax system and
(2) whether and how the IRS identifies and adopts tax administration
practices used elsewhere.
To do this, GAO reviewed documents and interviewed six foreign tax
administrators. In some cases, GAO also interviewed tax experts, tax
practitioners, taxpayers, and trade-group representatives who were
selected based on their expertise or involvement in developing or
using the foreign systems. GAO also examined documents and met with
IRS officials.
What GAO Found:
Foreign and U.S. tax administrators use many of the same practices
such as information reporting, tax withholding, providing Web-based
services, and finding new approaches for tax compliance. These
practices, although common to each system, have important differences.
This report describes the following six foreign tax administration
practices that address common issues in tax administration.
Table: Selected Foreign Tax Administration Practices:
Foreign administrator: New Zealand;
Practice: Does integrated evaluations of tax expenditures and
discretionary spending programs to analyze their effects and improve
program delivery.
Foreign administrator: Finland;
Practice: Uses the Internet to calculate individual tax withholding
rates and revise preprepared tax returns to improve service at lower
costs.
Foreign administrator: European Union;
Practice: Uses multilateral treaty information exchange on interest
payments to member nations‘ citizens to spur compliance by individual
taxpayers.
Foreign administrator: United Kingdom;
Practice: Uses information reporting and withholding so most wage
earners do not need to file a tax return.
Foreign administrator: Australia:
Practice: Uses a compliance program for high-net-wealth individuals
that focuses on their full set of business interests to improve
compliance.
Foreign administrator: Hong Kong;
Practice: Uses semiannual payments instead of periodic withholding for
the Salaries Tax.
Source: GAO.
[End of table]
Although differences in laws, culture, or other factors likely would
affect the transferability of foreign tax practices to the United
States, these practices may provide useful insights for policymakers
and the IRS. For example, New Zealand integrates evaluations of its
tax and discretionary spending programs. The evaluation of its Working
For Families tax benefits and discretionary spending, which together
financially assist low- and middle-income families to promote
employment, found that its programs aided the transition to employment
but that it still had an underserved population; these findings likely
would not have emerged from separate evaluations. GAO previously has
reported that the United States lacks clarity on evaluating tax
expenditures and related discretionary spending programs and does not
generally undertake integrated evaluations. In Finland, electronic tax
administration is part of a government policy to use electronic
services to lower the cost of government and encourage private-sector
growth. Overall, according to Finnish officials, electronic services
have helped to reduce Tax Administration staff by over 11 percent from
2003 to 2009 while improving taxpayer service.
IRS officials learn about these practices based on interactions with
other tax administrators and participation in international
organizations, such as the Organisation for Economic Co-operation and
Development. In turn, the IRS may adopt new practices based on the
needs of the U.S. tax system. For example, in 2009, the IRS formed the
Global High Wealth Industry program. The IRS consulted with Australia
about its approach and operational practices.
What GAO Recommends:
GAO makes no recommendations in this report.
The IRS provided technical comments that are included in this report.
View [hyperlink, http://www.gao.gov/products/GAO-11-439] or key
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Background:
Examples of Selected Tax Administration Practices to Address Known Tax
Administration Issues:
IRS Considers Foreign Tax Practices That Might Merit Adoption:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: New Zealand Does Integrated Evaluations of Tax
Expenditures and Discretionary Spending Programs:
Appendix III: Finland Uses the Internet to Calculate Individual Tax
Withholding Rates and Revise Preprepared Tax Returns:
Appendix IV: EU's Multilateral Treaty Information Exchange on Interest
Payments to Member Nations' Citizens:
Appendix V: The UK Uses Information Reporting and Withholding So Most
Wage Earners Do Not Need to File a Tax Return:
Appendix VI: Australia Uses a Compliance Program for High-Net-Wealth
Individuals:
Appendix VII: Hong Kong Uses Semiannual Payments Instead of Periodic
Employer Withholding for the Salaries Tax:
Appendix VIII: Overview of Tax Systems for Five Nations:
Appendix IX: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Selected Foreign Tax Administration Practices:
Table 2: Joint Administration of New Zealand's WFF Tax Credits Program:
Table 3: Range of Highest Personal Income Tax Rate for EU Countries,
2010:
Table 4: Revenue, Governmental Structure, and Population Data for Five
Nations, 2008:
Figures:
Figure 1: Australian Individual Income Tax Paid and Number of
Taxpayers by Taxable Income for 2007-2008:
Figure 2: Hong Kong Tax Year 2009 to 2010 Revenue Sources:
Figure 3: Hong Kong's Salaries Tax Process Timeline:
Abbreviations:
ATO: Australian Taxation Office:
CIAT: Center for Inter-American Tax Administration:
EU: European Union:
FTA: Forum on Tax Administration:
HMRC: Her Majesty's Revenue and Customs:
HNWI: High Net Wealth Individuals:
IRD: Inland Revenue Department:
IRS: Internal Revenue Service:
JITSIC: Joint International Tax Shelter Information Centre:
MOU: Memorandum of Understanding:
MSD: Ministry of Social Development:
OECD: Organisation for Economic Co-operation and Development:
OMB: Office of Management and Budget:
PAYE: Pay As You Earn:
RDF: Risk Differentiation Framework:
TIN: Taxpayer Identification Number:
UK: United Kingdom:
VAT: Value Added Tax:
WFF: Working For Families:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 24, 2011:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin G. Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on the Judiciary:
United States Senate:
Tax administrators around the world all strive to address similar
issues regardless of the specific provisions of their laws. These
issues include helping taxpayers prepare and file tax returns, keeping
track of taxes owed and paid by various types of taxpayers, and
assuring tax compliance. Understanding how other tax administrators
have used certain practices to address these common issues can provide
insights to help inform deliberations about tax reform and about
possible administrative changes in our existing system to improve
compliance, better serve taxpayers, reduce burden, and increase
efficiencies. To assist you in considering the potential applicability
of foreign tax administration practices for U.S. policy and practices,
we will describe (1) how foreign tax administrators have approached
issues that are similar to those in the U.S. tax system and (2)
whether and how the Internal Revenue Service (IRS) identifies and
adopts tax administration practices used elsewhere.
We selected six foreign tax administrators' approaches to practices
that were different than the approach to a similar practice in the
United States as shown in table 1.
Table 1: Selected Foreign Tax Administration Practices:
Foreign tax administrator: New Zealand;
Practice: Does integrated evaluations of tax expenditures and
discretionary spending programs to analyze their effects and improve
program delivery.
Foreign tax administrator: Finland;
Practice: Uses the Internet to calculate individual tax withholding
rates and revise preprepared tax returns to improve service at lower
costs.
Foreign tax administrator: European Union;
Practice: Uses multilateral treaty information exchange on interest
payments to member nations' citizens to spur compliance by individual
taxpayers.
Foreign tax administrator: United Kingdom;
Practice: Uses information reporting and withholding so most wage
earners do not need to file a tax return.
Foreign tax administrator: Australia;
Practice: Uses a compliance program for high-net-wealth individuals
that focuses on their full set of business interests to improve
compliance.
Foreign tax administrator: Hong Kong;
Practice: Uses semiannual payments instead of periodic withholding for
the Salaries Tax.
Source: GAO.
[End of table]
We based our selection of these practices on several factors,
including whether the tax administrators had advanced economies and
tax systems, tax information was available in English, and the foreign
tax administrator's approach differed, at least in part, from how the
United States approaches similar issues. We primarily used
documentation from each government's reports that are publicly
available. When possible, we confirmed additional information provided
to us by officials. To identify taxpayers' attitudes toward Hong
Kong's semiannual payment system, we interviewed experts who were
either university professors, were the authors of publications on Hong
Kong's tax system, or were practitioners in well-known law or
accounting firms. To understand the development of Finland's Internet-
based withholding estimation and prepared returns system, we met with
the public interest and trade groups that provided assistance to
Finland's Parliament during the system's development.
To describe whether and how the IRS identifies and adopts tax
administration practices used elsewhere, we reviewed related documents
and interviewed IRS officials. To help ensure the accuracy of the
information we present, we shared a summary of our descriptions with
representatives of the six foreign tax administrators and incorporated
their comments as appropriate. The IRS provided technical comments
that are included in this report.
The descriptive information on the practices of foreign administrators
presented in this report may provide useful insights for Congress and
others on enhancements to current U.S. tax policies and practices.
However, it was beyond the scope of this report to identify and assess
the factors that might affect the transferability of the practices to
the United States. For example, nations have differing cultures and
differing attitudes toward government, sometimes called "tax morale."
Generally, higher tax morale has been found to be positively related
to high levels of voluntary tax compliance. To the extent that
taxpayers in some countries are more willing to fully comply with tax
rules, voluntary tax compliance is higher and less enforcement action
is needed by the tax administrator. Thus, those nations' tax
enforcement practices may not be as appropriate in other nations where
citizens have lower tax morale. Measurements of tax morale generally
are not well defined or uniform; nor are measurements of voluntary tax
compliance.
We conducted our work from October 2009 to May 2011 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions
in this report. A more detailed discussion of our methodology for each
objective is in appendix I.
Background:
The IRS and tax administrators worldwide generally use similar
administrative practices.
Information reporting. Information reporting is a widely accepted
practice for increasing taxpayer compliance. Under U.S. law, some
types of transactions are required to be reported to the IRS by third
parties who make payments to, or sometimes receive payments from,
individual taxpayers. Typically, information returns represent income
paid to the taxpayer, such as wages or bank account interest.[Footnote
1] After tax returns are filed, the IRS then matches the amounts
reported on information returns to the amounts reported on the
taxpayer's return. For any differences, the IRS may send a notice to
the taxpayer requesting an explanation. If the taxpayer does not
respond to the notice, the IRS may make an additional assessment. For
fiscal year 2010, the IRS received over 2.7 billion information
returns, sent 5.5 million notices on differences between information
returns and tax returns, and assessed an additional $20.7 billion in
taxes, interest, and penalties.
Withholding. Withholding is a widely accepted practice to increase
taxpayer compliance. Under U.S. law, employers must withhold income
tax from the wages paid to employees.[Footnote 2] Withholding from
salaries requires wage earners to pay enough tax during the tax year
to assure that they will not face a large payment at year end. Also,
withholding can be required as a backup to information reporting if a
payee fails to furnish a correct taxpayer identification number (TIN).
If the payee refuses to furnish a TIN, the payer generally withholds
28 percent of the amount of the payment--for example, interest
payments on a bank account--and remits that amount to the IRS.
Electronic tax administration. Many tax administrators in the United
States and worldwide have increasingly used electronic tax
administration to improve services and reduce costs. The IRS has
focused its electronic tax administration on filing tax returns over
the Internet, providing taxpayer assistance through its Web site, and
providing telephone assistance. To accept electronically filed tax
returns, IRS has authorized preapproved e-file providers to submit the
returns. IRS cannot accept electronically filed returns directly from
taxpayers. Through its Web site, IRS provides taxpayers with
publications explaining tax law and IRS administrative procedure. The
Web site also provides automated services such as "Where's My Refund?"
During the 2010 filing season, the IRS Web site had 239 million total
visits and 277 million searches. IRS also received 77 million
telephone calls of which IRS phone assistors answered about 24 million
calls.[Footnote 3]
Tax enforcement. The U.S. tax system, as well as many other tax
systems worldwide, is based on some degree of self-reporting and
voluntary compliance by taxpayers. Tax administrations worldwide have
enforcement programs to ensure that tax returns are accurate and
complete and taxes are paid. Among others, IRS uses two principal
enforcement programs. After tax returns have been filed, the Automated
Underreporter Program matches data on information returns (usually on
income) provided by employers, banks, and other payers of income to
data reported on taxpayers' tax returns. IRS may contact taxpayers
about any differences. The Examination Program relies on IRS auditors
to check compliance in reporting income, deductions, credits, and
other issues on tax returns by reviewing the documents taxpayers
provided to support their tax return.
IRS, like revenue agencies in many countries, administers tax
expenditures. Tax expenditures are tax provisions that grant special
tax relief for certain kinds of behavior by taxpayers or for taxpayers
in special circumstances. Tax expenditures reduce the amount of taxes
owed and therefore are seen as resulting in the government forgoing
revenues. These provisions are viewed by many analysts as spending
channeled through the tax system. For fiscal year 2010, the U.S.
Department of the Treasury reported 173 tax expenditures costing, in
aggregate, more than $1 trillion.[Footnote 4] Tax expenditures are
often aimed at policy goals similar to those of federal spending
programs, such encouraging economic development in disadvantaged areas
and financing postsecondary education. In 2005, we reported that all
U.S. federal spending and tax policy tools, including tax
expenditures, should be reexamined to ensure that they are achieving
their intended purposes and designed in the most efficient and
effective manner.[Footnote 5]
Examples of Selected Tax Administration Practices to Address Known Tax
Administration Issues:
The following examples illustrate how New Zealand, Finland, the
European Union (EU), the United Kingdom (UK), Australia, and Hong Kong
have addressed well-known tax administration issues.[Footnote 6] Our
work does not suggest that these practices should or should not be
adopted by the United States.
New Zealand Does Integrated Evaluations of Tax Expenditures and
Discretionary Spending Programs to Analyze Their Effects and Improve
Program Delivery:
New Zealand, like the United States, addresses various national
objectives through a combination of tax expenditures and discretionary
spending programs. In New Zealand, tax expenditures are known as tax
credits. New Zealand has overcome obstacles to evaluating these
related programs at the same time to better judge whether they are
working effectively. Rather than doing separate evaluations, New
Zealand completes integrated evaluations of tax expenditures and
discretionary spending programs to analyze their combined effects.
Using this approach, New Zealand can determine, in part, whether tax
expenditures and discretionary spending programs work together to
accomplish government goals.
One example is the Working For Families (WFF) Tax Credits program,
which is an entitlement for families with dependent children to
promote employment. Prior to the introduction of WFF in 2004, New
Zealand's Parliament discovered that many low-income families were not
better off from holding a low-paying job, and those who needed to pay
for childcare to work were generally worse off in low-paid work
compared to receiving government benefits absent having a job. This
prompted Parliament to change its in-work incentives and financial
support including tax expenditures.
The WFF Tax Credits program differs from tax credit programs in the
United States in that it is an umbrella program that spans certain tax
credits administered by the Inland Revenue Department (IRD) as well as
discretionary spending programs administered by the Ministry of Social
Development (MSD). IRD collects most of the revenue and administers
the tax expenditures for the government. Being responsible for
collecting sensitive taxpayer information, IRD must maintain tax
privacy and protect the integrity of the New Zealand tax system. MSD
administers the WFF's program funds and is responsible for collecting
data that include monthly income received by its beneficiaries. Given
different responsibilities, IRD and MSD keep separate datasets, making
it difficult to assess the cumulative effect of the WFF program.
Therefore, to understand the cumulative effect of changes made to the
WFF program and ensure that eligible participants were using it, New
Zealand created a joint research program between IRD and MSD that ran
from October 2004 to April 2010. The joint research program created
linked datasets between IRD and MSD. Access to sensitive taxpayer
information was restricted to IRD employees on the joint research
program and to authorized MSD employees only after they were sworn in
as IRD employees.
The research provided information on key outcomes that could only be
tracked through the linked datasets. The research found that the WFF
program aided the transition from relying on government benefits to
employment, as intended. It also found that a disproportionate number
of those not participating in the program faced barriers to taking
advantage of the WFF. Barriers included the perceived stigma from
receiving government aid, the transaction costs of too many rules and
regulations, and the small amounts of aid for some participants. On
the basis of these findings, Parliament made changes to WFF that
provided an additional NZ$1.6 billion (US$1.2 billion) per year in
increased financial entitlements and in-work support to low-to middle-
income families.[Footnote 7]
Appendix II provides more details on New Zealand's evaluation of tax
expenditures as well as similarities and differences to the U.S.
system.
Finland Uses the Internet to Calculate Individual Tax Withholding
Rates and Revise Preprepared Tax Returns to Improve Service at Lower
Costs:
Finland encourages accurate withholding of taxes from taxpayers'
income, lowers its costs, and reduces taxpayers' filing burdens
through Internet-based electronic services. In 2006, Finland
established a system, called the Tax Card, to help taxpayers estimate
a withholding rate for the individual income tax. The Tax Card, based
in the Internet, covers Finland's national tax, municipality tax,
social security tax, and church tax.[Footnote 8] The Tax Card is
accessed through secured systems in the taxpayer's Web bank or an
access card issued by Finland's government. The Tax Card system
enables taxpayers to update their withholding rate as many times as
needed throughout the year, adjusting for events that increase or
decrease their income tax liability. When completed, the employer is
notified of the changed withholding tax rate through the mail or by
the employee providing a copy to the employer. According to the Tax
Administration, about a third of all taxpayers using the Tax Card--
about 1.6 million people--change their withholding percentages at
least annually. Finland generally refunds a small amount of the
withheld funds to taxpayers (e.g., it refunded about 8 percent of the
withheld money in 2007).
Finland also has been preparing income tax returns for individuals
since 2006. The Tax Administration prepares the return for the tax
year ending on December 31st based on third-party information returns,
such as reporting by employers on wages paid or by banks on interest
paid to taxpayers. During April, the Tax Administration mails the
preprepared return for the taxpayer's review. Taxpayers can revise the
paper form and return it to the Tax Administration in the mail or
revise the return electronically online. According to Tax
Administration officials, about 3.5 million people do not ask to
change their tax return and about 1.5 million will request a tax
change.
Electronic tax administration is part of a governmentwide policy to
use electronic services to lower the cost of government and encourage
growth in the private sector. According to Tax Administration staff,
increasing electronic services to taxpayers helps to lower costs.
Overall, the growth of electronic services, according to Finnish
officials, has helped to reduce Tax Administration staff by over 11
percent from 2003 to 2009 while improving taxpayer service.
According to officials of the Finnish government as well as public-
interest and trade groups, the Tax Card and preprepared return systems
were established under a strong culture of national cooperation. For
the preprepared return system to work properly, Finland's business and
other organizations that prepare information returns had to accept the
burden to comply in filing accurate returns promptly following the end
of the tax year.
Finland's tax system is positively viewed by taxpayers and industry
groups, according to our discussions with several industry and
taxpayer groups. They stated that Finland has a simple, stable tax
system which makes compliance easier to achieve. As a result, few
individuals use a tax advisor to help prepare and file their annual
income tax return.
Appendix III provides more details on Finland's electronic tax
administration system as well as a discussion of similarities to and
differences from the U.S. system.
EU's Multilateral Treaty Information Exchange on Interest Payments to
Member Nations' Citizens to Spur Compliance by Individual Taxpayers:
The EU seeks to improve tax compliance through a multilateral
agreement on the exchange of information on interest earned by each
nation's individual taxpayers. This agreement addresses common issues
with the accuracy and usefulness of information exchanged among
nations that have differing technical, language, and formatting
approaches for recording and transmitting such information. Under the
treaty, called the Savings Taxation Directive, adopted in June 2003,
the 27 EU members and 10 other participants agreed to share
information about income from interest payments made to individuals
who are citizens in another member nation. With this information, the
tax authorities are able to verify whether their citizens properly
reported and paid tax on the interest income. The directive provides
the basic framework for the information exchange, defining essential
terms and establishing automatic information exchange among members.
[Footnote 9]
As part of the directive, 3 EU member nations as well as the 5
European nonmember nations agreed to apply a withholding tax with
revenue sharing (described below) during a transition period through
2011, rather than automatically exchanging information.[Footnote 10]
Under this provision, a 15 percent withholding tax gradually increases
to 35 percent by July 1, 2011. The withholding provision included a
revenue-sharing provision, which authorizes the withholding nation to
retain 25 percent of the tax collected and transfer the other 75
percent to the nation of the account owner. The directive also
requires the account owner's home nation to ensure that withholding
does not result in double taxation. The directive does this by
granting a tax credit equal to the amount of tax paid to the nation in
which the account is located.
A September 2008 report to the EU Council described the status of the
directive's implementation. During the first 18 months of information
exchange and withholding, data limitations such as incomplete
information on the data exchanged and tax withheld created major
difficulties for evaluating the directive's effectiveness. Further, no
benchmark was available to measure the effect of the changes.
According to EU officials, the most common administrative issues,
especially during the first years of implementation of the directive,
have been the identification of the owner reported in the computerized
format. It is generally recognized that a Taxpayer Identification
Number (TIN) provides the best means of identifying the owner.
However, the current directive does not require paying agents to
record a TIN. Using names has caused problems when other EU member
states tried to access the data. For example, a name that is
misspelled cannot be matched. In addition, how some member states
format their mailing address may have led to data-access problems.
Other problems with implementing the directive include identifying
whether investors moved their assets into categories not covered by
the directive (e.g., shifting to equity investments), and concerns
that tax withholding provisions may not be effective because
withholding rates were low until 2011 when the rate became 35 percent.
The EU also identified problems with the definition of terms, making
uniform application of the directive difficult. Generally these terms
identify which payments are covered by the directive, who must report
under the directive, and who owns the interest for tax purposes.
Nevertheless, EU officials stated that the quality of data has
improved over the years. The EU officials have worked with EU member
nations to resolve specific data issues, which has contributed to the
effective use of the information exchanged under the directive. EU
officials told us that the monitoring role by the EU Commission, the
data-corrections process, and frequent contacts to resolve specific
issues have contributed to effective use of the data received by EU
member states.
Appendix IV provides more details on the EU Saving Taxation Directive
and related issues such as avoiding double taxation as well as a
discussion of similarities to and differences from the U.S. system.
UK Uses Information Reporting and Withholding So Most Wage Earners Do
Not Need to File a Tax Return:
The UK promotes accurate tax withholding and reduces taxpayers' filing
burdens by calculating withholding rates for taxpayers and requiring
that payers of certain types of income withhold taxes at standard
rates. The UK uses information reporting and withholding to simplify
tax reporting and tax payments for individual tax returns. Both the
individual taxpayer and Her Majesty's Revenue and Customs (HMRC)--the
tax administrator--are to receive information returns from third
parties that make payments to a taxpayer such as for bank account
interest.
A key element is the UK's Pay As You Earn (PAYE) system. Under the
PAYE system, HMRC calculates an amount of withholding from wages to
meet a taxpayer's liability for the current tax year based on
information reporting from the employer and other income information
employees may provide. According to HMRC officials, the individual tax
system in the UK is simple for most taxpayers who are subject to PAYE.
PAYE makes it unnecessary for wage earners to file a yearly tax
return, unless special circumstances apply. For example, wage earners
do not need to file a return unless income from interest, dividends,
or capital gains exceeds certain thresholds or if deductions need to
be reported. Therefore, a tax return may not be required because most
individuals do not earn enough of these income types to trigger self-
reporting. For example, the first £10,100 (US$16,239) of capital gains
income is exempt from being reported on tax returns.[Footnote 11]
PAYE also facilitates the reconciliation of tax liabilities for prior
tax years through the use of withholding at source for wages. The
withheld amount may be adjusted by HMRC to collect any unpaid taxes
from previous years or refund overpayments. HMRC annually notifies the
taxpayer and employer of the amount to withhold.
HMRC also may adjust the withheld amount through information provided
by taxpayers. If taxpayers provide the information on their other
income such as self-employment earnings, rental income, or investment
income, HMRC can adjust the PAYE withholding. Individuals not under
the PAYE system are required to file a tax return after the end of the
tax year based on their records.
In addition, HMRC uses information reporting and tax withholding as
part of its two-step process to assess the compliance risks on filed
returns. In the first step, individual tax returns are reviewed for
inherent compliance risks because of the taxpayers' income level and
complexity of the tax return. For example, wealthy taxpayers with
complex business income are considered to have a higher compliance
risk than a wage earner. In the second step, information compiled from
various sources--including information returns and public sources--is
analyzed to identify returns with a high compliance risk. According to
HMRC officials, these assessments have allowed HMRC to look at
national and regional trends. HMRC is also attempting to uncover
emerging compliance problems by combining and analyzing data from the
above sources as well as others.
Appendix V provides more details on the UK's information reporting and
withholding system as well as a discussion of similarities to and
differences from the U.S. system.
Australia Uses a Compliance Program for High-Net-Wealth Individuals
That Focuses on Their Full Set of Business Interests to Improve
Compliance:
The Australian High Net Wealth Individuals (HNWI) program focuses on
the characteristics of wealthy taxpayers that affect their tax
compliance. High-wealth individuals often have complex business
relationships involving many entities they may directly control or
indirectly influence and these relationships may be used to reduce
taxes illegally or in a manner that policymakers may not have
intended. The HNWI program requires these taxpayers to provide
information on these relationships and provides such taxpayers
additional guidance on proper tax reporting.
According to the Australian Taxation Office (ATO), in the mid-1990s,
ATO was perceived as enforcing strict sanctions on the average
taxpayers but not the wealthy. By 2008, ATO found that high-wealth
taxpayers, those with a net worth of more than A$30 million (US$20.9
million), had substantial income from complex arrangements,[Footnote
12] which made it difficult for ATO to identify and assure compliance.
ATO concluded that the wealthy required a different tax administration
approach.
ATO set up a special task force to improve its understanding of
wealthy taxpayers, identify their tax planning techniques, and improve
voluntary compliance. Due to some wealthy taxpayers' aggressive tax
planning, which ATO defines as investment schemes and legal structures
that do not comply with the law, ATO quickly realized that it could
not reach its goals for voluntary compliance for this group by
examining taxpayers as individual entities. To tackle the problem, ATO
began to view wealthy taxpayers as part of a group of related business
and other entities. Focusing on control over related entities rather
than on just individual tax obligations provided a better
understanding of wealthy individuals' compliance issues.
The HNWI approach followed ATO's general compliance model. The model's
premise is that tax administrators can influence tax compliance
behavior through their responses and interventions. For compliant
wealthy taxpayers, ATO developed a detailed questionnaire and expanded
the information on business relationships that these taxpayers must
report on their tax return. For noncompliant wealthy taxpayers, ATO is
to assess the tax risk and then determine the intensity of ATO's
compliance interventions.
According to 2008 ATO data, the HNWI program has produced financial
benefits. From the establishment of the program in 1996 until 2007,
ATO had collected A$1.9 billion (US$1.67 billion) in additional
revenue and reduced revenue losses by A$1.75 billion (US$1.5 billion)
through compliance activities focused on highly wealthy individuals
and their associated entities.[Footnote 13] ATO's program focus on
high-wealth individuals and their related entities has been adopted by
other tax administrators. By 2009, nine other countries, including the
United States, had formed groups to focus resources on high-wealth
individuals.
Appendix VI provides more details on Australia's high-wealth program
as well as similarities and differences to the U.S. system.
Hong Kong Uses Semiannual Payments Instead of Periodic Employer
Withholding for the Salaries Tax:
Although withholding of taxes by payers of income is a common practice
to ensure high levels of taxpayer compliance, Hong Kong's Salaries Tax
does not require withholding by employers. Instead, tax administrators
and taxpayers appear to find a semiannual payment approach effective.
Hong Kong's Salaries Tax is a tax on wages and salaries with a small
number of deductions (e.g., charitable donations and mortgage
interest). The Salaries Tax is paid by about 40 percent of the
estimated 3.4 million wage earners in Hong Kong, while the other 60
percent are exempt from Salaries Tax.
Rather than using periodic (e.g., biweekly or monthly) tax withholding
by employers, Hong Kong collects the Salaries Tax through two payments
by taxpayers for a tax year. Since the tax year runs for April 1st
through March 31st, a substantial portion of income for the tax year
is earned by January (i.e., income for April to December), and the
taxpayer is to pay 75 percent of the tax for that tax year in January
(as well as pay any unpaid tax from the previous year). The remaining
25 percent of the estimated tax is to be paid 3 months later in April.
By early May, the Inland Revenue Department (IRD)--the tax
administrator--annually prepares individual tax returns for taxpayers
based on information returns filed by employers. Taxpayers review the
prepared return, make any revisions such as including deductions
(e.g., charitable contributions), and file it with IRD. IRD then will
review the returns and determine if any additional tax is due. If the
final Salaries Tax assessment turns out to be higher than the
estimated tax previously assessed, IRD is to notify the taxpayer, who
is to pay the additional tax concurrently with the January payment of
estimated tax for the next tax year.
Hong Kong's tax system is positively viewed by tax experts,
practitioners, and a public opinion expert based on our discussions
with them. They generally believe that low tax rates, a simple system,
and cultural values contribute to Hong Kong's collection of the
Salaries Tax through the two payments rather than periodic
withholding. Tax rates are fairly low, starting at 2 percent of the
adjusted salary earned and not exceeding 15 percent. Further, tax
experts told us that the Salaries Tax system is simple. Few taxpayers
use a tax preparer because the tax form is very straightforward and
the tax system is described as "stable." Further, an expert on public
opinion in Hong Kong told us that taxpayers fear a loss of face if
recognized as not complying with tax law. This cultural attitude helps
promote compliance.
Appendix VII provides more details on Hong Kong's Salaries Tax system
as well as a discussion of similarities to and differences from the
U.S. system.
IRS Considers Foreign Tax Practices That Might Merit Adoption:
IRS officials learn about foreign tax practices by participating in
international organizations of tax administrators. IRS is actively
involved in two international tax organizations and one jointly run
program that addresses common tax administration issues. First, the
IRS participates with the Center for Inter-American Tax Administration
(CIAT), a forum made up of 38 member countries and associate members,
which exchange experiences with the aim of improving tax
administration. CIAT, formed in 1967, is to promote integrity,
increase tax compliance, and fight tax fraud. The IRS participates
with CIAT in designing and developing tax administration products and
with CIAT's International Tax Planning Control committee.[Footnote 14]
Second, the IRS participates with the Organisation for Economic Co-
operation and Development (OECD) Forum on Tax Administration (FTA),
which is chaired by the IRS Commissioner during 2011. The FTA was
created in July 2002 to promote dialogue between tax administrations
and identify good tax administration practices. Since 2002, the forum
has issued over 50 comparative analyses on tax administration issues
to assist member and selected nonmember countries.
IRS and OECD officials exchange tax administration knowledge. For
example, the IRS is participating in the OECD's first peer review of
information exchanged under tax treaties and tax information exchange
agreements. Under the peer-review process, senior tax officials from
several OECD countries examine each selected member's legal and
regulatory framework and evaluate members' implementation of OECD tax
standards. The peer-review report on IRS information exchange
practices is expected to be published in mid-2011.
As for the jointly run program, the Joint International Tax Shelter
Information Centre (JITSIC) attempts to supplement ongoing work in
each country to identify and curb abusive tax schemes by exchanging
information on these schemes. JITSIC was formed in 2004 and now
includes tax agencies of Australia, Canada, China, Japan, South Korea,
the United Kingdom, and the United States. According to the IRS,
JITSIC members have identified and challenged the following highly
artificial arrangements:
* a cross-border scheme involving millions of dollars in improper
deductions and unreported income on tax returns from retirement
account withdrawals;
* highly structured financing transactions created by financial
institutions that taxpayers used to generate inappropriate foreign tax
credit benefits;[Footnote 15] and:
* made-to-order losses on futures and options transactions for
individuals in other JITSIC jurisdictions, leading to more than $100
million in evaded taxes.
To date, the IRS has implemented one foreign tax administration
practice. As presented earlier, Australia's HNWI program examines
sophisticated legal structures that wealthy taxpayers may use to mask
aggressive tax strategies. In 2009, the OECD issued a report for a
project on the tax compliance problems of wealthy individuals and
concluded that "high net worth individuals pose significant challenges
to tax administrations" due to their complex business dealings across
different business entities, higher tax rates, and higher likelihood
of using aggressive tax planning or tax evasion.[Footnote 16]
According to an IRS official, during IRS's participation in 2008 in
the OECD Project, IRS staff began to realize the value of Australia's
program to the U.S. tax system. The IRS now has a program focused on
wealthy individuals and their networks.[Footnote 17]
Agency Comments:
The IRS provided technical comments that are included in this report.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
after the report date. At that time, we will send copies to the
Commissioner of Internal Revenue and other interested parties. This
report also will be available at no charge on GAO's Web site at
[hyperlink, http://www.gao.gov].
If you or your staff has any questions about this report, please
contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix IX.
Signed by:
Michael Brostek:
Director, Tax Issues Strategic Issues:
[End of section]
Appendix I: Scope and Methodology:
For our objective to describe how other countries have approached tax
administration issues that are similar to those in the U.S. tax
system, we selected six foreign tax administrators. We based our
selection of these practices on several factors, including whether the
tax administrators had advanced economies and tax systems and the
foreign tax administrator's approach differed, at least in part, from
how the United States approaches similar issues. These tax systems
also needed to have enough information available in English on their
Web site for us to preliminarily understand their tax system and
practices. In addition, we considered practices of interest to the
requesters.
To describe each of the practices, we reviewed documents and held
telephone conferences with officials from each tax administrator. We
also met with officials of Finland's government in Helsinki. When
possible, we confirmed additional information provided to us by
officials to assure that we had a reasonable basis for the data
presented. We used official reports published by the tax
administrators, such as their annual reports, that are made available
to the public on their Internet Web site. To identify taxpayers'
attitudes toward Hong Kong's semiannual payment system, we interviewed
experts who were either university professors, were the authors of
publications on Hong Kong's tax system, or were practitioners in well-
known law or accounting firms. To understand the development of
Finland's Internet-based withholding estimation and prepared returns
system, we met with the public interest and trade groups that provided
assistance to Finland's Parliament during the system's development.
To describe whether and how the Internal Revenue Service (IRS)
identifies and integrates tax administration practices used in other
countries, we interviewed IRS officials and reviewed related
documents. We also followed up with IRS officials based on any
information we found independently about practices that relate to
issues in the U.S. tax system and our comparison of U.S. and other
administrator's practices. The descriptive information on the
practices of foreign administrators presented in this report may
provide useful insights for Congress and others on alternatives to
current U.S. tax policies and practices. However, our work did not
include the separate analytic step of identifying and assessing the
factors that might affect the transferability of the practices to the
United States.[Footnote 18]
To adjust foreign currencies to U.S. dollars, we used the Federal
Reserve Board's database on foreign exchange rates. We used rates that
matched the time period cited for the foreign amount. For current
amounts, we used the exchange rates published for February 25, 2011.
If the amounts were for a previous year, we used the exchange rate
published for the last business day of that year. For example, if
foreign amounts were cited as of 2006, we used exchange rates for
December 29, 2006. We did not adjust amounts from previous years for
inflation.
To help ensure the accuracy of the information we present, we shared a
summary of our descriptions with representatives of the six foreign
tax administrators and incorporated their comments as appropriate. The
IRS provided technical comments that are included in this report.
We conducted our work from October 2009 to May 2011 in accordance with
all sections of GAO's Quality Assurance Framework that are relevant to
our objectives. The framework requires that we plan and perform the
engagement to obtain sufficient and appropriate evidence to meet our
stated objectives and to discuss any limitations in our work. We
believe that the information and data obtained, and the analysis
conducted, provide a reasonable basis for any findings and conclusions
in this report.
[End of section]
Appendix II: New Zealand Does Integrated Evaluations of Tax
Expenditures and Discretionary Spending Programs:
Overview of the New Zealand Tax System:
The New Zealand tax system is centralized through the Inland Revenue
Department (IRD). Most of New Zealand's NZ$49 billion (US$35.5
billion) in revenue for fiscal year 2009 was raised by direct taxation
that includes PAYE (Pay As You Earn), Company Tax, and Schedular
Payments.[Footnote 19] In addition, tax expenditures (tax credits in
New Zealand) for social programs that were administered by IRD in 2009
include KiwiSaver and Working For Families (WFF) Tax Credits programs.
[Footnote 20]
What Is New Zealand's Working For Families Tax Credits Program?
The WFF Tax Credits program, started in 2004, seeks to assist low-to
middle-income families with the goal of promoting employment and
ensuring income adequacy. Prior to 2004, New Zealand had another
program intended to assist families. However, the New Zealand
government discovered that many low-income families were no better off
from holding a low-paying job and that those who needed to pay for
childcare to work generally were worse off in low-paid work compared
to only receiving government benefits. This prompted the government to
change in-work incentives and financial support for families with
dependent children. These changes were incorporated into the WFF
program in 2004. It was estimated that program costs would increase by
NZ$1.6 billion (US$1.2 billion) per year.
The WFF Tax Credits program is an umbrella program that spans certain
tax credits[Footnote 21] administered by the IRD as well as
discretionary spending programs[Footnote 22] administered by the
Ministry of Social Development (MSD). Table 2 shows the tax and
discretionary spending components of the WFF tax credits program and
the agency responsible for them.
Table 2: Joint Administration of New Zealand's WFF Tax Credits Program:
Expenditures/outlays: Family tax credit;
Administered by: IRD; MSD.
Expenditures/outlays: In-work tax credit;
Administered by: IRD.
Expenditures/outlays: Minimum family tax credit;
Administered by: IRD.
Expenditures/outlays: Parental tax credit;
Administered by: IRD.
Expenditures/outlays: Accommodation supplements;
Administered by: MSD.
Expenditures/outlays: Childcare subsidies;
Administered by: MSD.
Expenditures/outlays: Temporary additional support;
Administered by: MSD,
Source: GAO analysis of New Zealand data.
[End of table]
Under the program IRD makes payments to the majority of eligible
recipients during the tax year.[Footnote 23] The IRD and MSD portions
of the WFF tax credit program are intended to work together to assist
low-to middle-income families and promote employment.
Information that IRD collects and uses in administering the tax
credits is subject to New Zealand's protections for the privacy of
sensitive taxpayer information contained in the Tax Administration
Act. The information that MSD collects and uses is not subject to the
same restrictions. To meet their separate needs, IRD and MSD keep
separate datasets.
Why New Zealand Used Joint Research to Evaluate WFF Direct Benefit
Payments and Tax Expenditures:
New Zealand's joint research projects integrated research between IRD
and other governmental agencies with related programs. The projects
were designed to ensure that all disbursements of revenue through
either direct program outlays or tax expenditures were administered
effectively to meet the goals for social programs, making sure people
get the assistance to which they are entitled.
One example of joint research was the study of the WFF tax credits
program. To overcome the problem of the separate datasets and still
protect sensitive tax data, the New Zealand government approved a
joint research program that created interagency linked datasets
between IRD and MSD. Parliament intended that these linked datasets be
used to evaluate the tax expenditures and discretionary spending
programs, to ensure that the benefits of the overall program were
being fully used by its participants.
These linked datasets, known as the "WFF Research Datasets," were
constructed from the combined records of the MSD and IRD. They
contained several years of data, and included information about all
families who had received a WFF payment during these years. The data
included monthly amounts of income received from salary and wages from
employment and from the main benefit payments. The linked dataset
information was to be used solely to analyze the results of WFF. It
could not be used to take any action, whether adverse or favorable,
against a particular individual.
In 2004, MSD and IRD developed a Memorandum of Understanding (MOU) for
the WFF program. The MOU included processes to share information while
ensuring that all sensitive data were protected from unauthorized
disclosure. The MOU permitted IRD to provide MSD with aggregate
taxpayer information needed to conduct evaluations with a restriction
that only allows IRD employees direct access to sensitive taxpayer
information. However, IRD was authorized to distribute sensitive
taxpayer information to authorized MSD employees if they were part of
the joint research team and were sworn in as IRD employees. Swearing
in MSD agents as IRD agents permitted IRD to apply the same sanctions
to IRD and MSD agents who did not adhere to IRD's data-protection
policies.
What Are the Known Results and Effects of the Joint Research Project?
The WFF joint research revealed social and cultural barriers that
prevented targeted participants from taking full advantage of the WFF
program. These barriers included the:
* perceived stigma from receiving government aid if the person could
work or felt that the aid infringed on independence or self-
sufficiency;
* transaction costs from accepting government aid such as taking time
off from work, arranging childcare, or following many rules and
regulations;
* low value of applying for the program when the person was close to
the maximum eligibility threshold; and:
* geographic barriers when the person lived in areas that were remote
or had no transportation, telephone, or Internet.
The WFF joint research provided information needed to identify the
population that benefited from the program and reduce some of the
barriers that kept recipients, particularly an indigenous population,
from participating in the target program. Since the inception of the
WFF program in 2004, the joint research documented the following
benefits from reducing barriers to the targeted population:
* The percentage of single parents working 20 hours or more increased
from 48 percent in June 2004 to 58 percent in June 2007. This
represents 8,100 additional single parents in the workforce.
* The number of single parents receiving benefits from MSD fell by 12
percent from March 2004 to March 2008. Those that received the
benefits did so for a shorter time and stayed off the benefit programs
longer.
Similarities to and Differences from the U.S. Tax System:
While structural differences exist between the New Zealand and U.S.
tax systems, both systems use tax expenditures (i.e., tax credits in
New Zealand). Unlike the United States, New Zealand has developed a
method to evaluate the effectiveness of tax expenditures and
discretionary spending programs through joint research that created
interagency linked datasets. New Zealand did so while protecting
confidential tax data from unauthorized disclosure.
In 2005, we reported that the United States had substantial tax
expenditures but lacked clarity on the roles of the Office of
Management and Budget (OMB), Department of the Treasury, IRS, and
federal agencies with discretionary spending programs to evaluate the
tax expenditures.[Footnote 24] Consequently, the United States lacked
information on how effective tax expenditures were in achieving their
intended objectives, how cost-effectively benefits were achieved, and
whether tax expenditures or discretionary spending programs worked
well together to accomplish federal objectives.[Footnote 25] At that
time, OMB disagreed with our recommendations to incorporate tax
expenditures into federal performance management and budget review
processes, citing methodological and conceptual issues. However, in
its fiscal year 2012 budget guidance, OMB instructed agencies, where
appropriate, to analyze how to better integrate tax and spending
policies that have similar objectives and goals.[Footnote 26]
[End of section]
Appendix III: Finland Uses the Internet to Calculate Individual Tax
Withholding Rates and Revise Preprepared Tax Returns:
Overview of the Finland Tax System:
Finland's national and municipal governments as well as local church
councils levy taxes. Nationally, 39 percent of all taxes are paid
under individual and corporate income taxes and a capital gains tax.
Taxes on goods, services, and property total about 33 percent of
revenue; most of this revenue is from the Value Added Tax (VAT). The
final 28 percent comes from social security taxes (e.g., national
health insurance system and employment pension insurance). Finland's
individual income tax is levied on a graduated rate schedule with four
tax brackets, ranging from 7.0 percent to 30.5 percent for incomes
over €64,500 (US$92,441) with the tax on investment income levied at a
flat rate of 28 percent in 2009. Finland's corporate income tax is
levied at a flat rate of 26 percent.
Under the municipal tax, each municipal council sets its tax rate
annually. For 2009, municipal taxes are levied at flat rates ranging
from 16.5 percent to 21.0 percent of earned income and averaging 18.6
percent. Individuals who are members of the Evangelical-Lutheran
Church or the Orthodox Church pay a church tax. For 2009, local church
communities determine the rate of tax, which is levied at a flat rate
between 1 and 2 percent.
How Do Withholding Estimation and Preprepared Returns Improve Service?
Using electronic means, Finland helps taxpayers in estimating their
tax withholding and by preparing an income tax return for each
individual taxpayer based on third-party information returns. The on-
line Tax Card system, established in 2006, is an Internet-based system
to help Finnish taxpayers estimate the withholding rate for individual
income tax. The Tax Card covers national taxes, municipality tax,
social security tax, and church tax. Taxpayers access the Tax Card
through the Web sites of their bank or the Finland Tax Administration.
Using the Tax Card system, taxpayers can update their withholding rate
as many times as needed throughout the year to adjust for events that
increase or decrease their potential tax liability. For example, if
the taxpayer takes a job with a higher salary, the taxpayer can
estimate the change on his or her income tax liability by using the
Tax Card system. Taxpayers enter information provided by the employer,
based on payroll information, to estimate their adjusted withholding.
Annually, 1.6 million taxpayers, about a third of those using the Tax
Card, change their tax withholding rate.
When the Tax Card has been completed, employees provide the
withholding tax rate to their employer through regular mail or in
person. If the employer is not notified of any withholding rate, the
employer must withhold at the top marginal rate in Finland for all
types of taxes--which is 60 percent of gross pay. Employers manually
enter the withholding rate into their payroll systems.
According to Tax Administration officials, some social benefits can
complicate the estimation of the tax due and may not be accurately
estimated during the tax year. For example, Finland has a deduction
for the cost of travel between a residence and work. If the taxpayer
does not accurately estimate the deductions or make changes as the
year progresses, the Tax Card withholding rate will be inaccurate.
Finland Tax Administration Prepares Returns for Taxpayers:
Finland has been operating a tax-return preparation system since 2006.
The Finnish Tax Administration prepares an income tax return for each
individual taxpayer based on third-party information returns.
According to Tax Administration officials, Finland uses information
from over 30 types of information-return filers (e.g., employers,
banks, and securities brokers). Tax Administration officials said that
they have found very little misreporting on the information returns
used to prepare the tax returns. They use many ways to try to verify
the information. Some taxpayers will correct information returns when
reviewing their prepared tax returns. Third parties can be penalized
for inaccurate information and Finnish tax officials said those
penalties are regularly assessed.
The system prepares the return each tax year, which ends on December
31. According to Tax Administration officials, the individual tax
returns are mailed for review during April. The taxpayer has until May
to make changes to the paper return.[Footnote 27] Taxpayers can mark
up the paper return for revisions and mail it to the Tax
Administration whose staff keys in or electronically scans in the
changes. Also, taxpayers can choose to make the changes to the return
online, using the taxpayer's account with the Tax Administration.
According to Tax Administration officials, typically about 3.5 million
people do not ask to change their tax return and about 1.5 million
request a tax change. About 400,000 taxpayers will revise their return
using the Tax Administration's Internet portal. Typically, the average
taxpayer takes about half an hour to do the adjustments online. One
deduction, the commuting adjustment, is not reported on an information
return. This adjustment accounts for changes to about 800,000 prepared
returns.
Overall, taxpayers need to show some proof to support the change to
the prepared return, including any changes they make to the
information returns the Tax Administration used to prepare the
returns. For example, taxpayers showing deductions for mortgage
interest that were not reported on information returns would need to
show they own a house and the mortgage interest was paid. Or, if an
information return reports interest as income, but taxpayers deduct
the interest as paid on a loan, the taxpayers need to document the
reason for their deduction claims.
Finland does not prepare tax returns if individual taxpayers have
business income. Rather, these taxpayers must file tax returns based
on the data or business records that they maintained. However, some of
these taxpayers with business income may get a partially prepared
return on personal income and deductions based on third party
information on their wages and other personal income in Finland's
prepared return system. All businesses operating in Finland must
register with the government.[Footnote 28]
Why Did Finland Increase Its Use of Electronic Tax Administration?
Providing enhanced electronic services has been widely recognized in
Finland as an approach for improving taxpayer service while reducing
costs. Electronic services provide taxpayers with constant access to
assistance regardless of the time of day or distance from the tax
administration office. According to Tax Administration officials,
electronic systems that provide routine taxpayer assistance allows Tax
Administration staff to respond to more complex taxpayer problems.
Finland also moved to electronic tax administration to support
national policies. As a national policy to encourage economic growth,
Finland seeks to have a large private-sector workforce. According to
an official of the Finland's government, a large number of citizens
are nearing retirement.[Footnote 29] Thus, the government is seeking
to reduce its workforce so that more workers are available for the
private sector. To achieve this goal, Finland focused on making the
delivery of government programs more efficient by using more
electronic transactions.
Another reason for electronic tax administration was to provide equal
access to government services. Finnish law requires all e-services to
be accessible to all Finnish citizens. With a significant segment of
its population living in remote regions, according to officials,
improving e-government provides more equal access to government
services. To encourage equal access and use of the Internet for
delivering services, Finland established standard speeds of Internet
access in July 2009.[Footnote 30]
What Are the Known Results and Effects of Electronic Tax
Administration?
Finland's tax system is viewed positively by taxpayers and industry
groups. Members of several industry and taxpayer groups told us that
Finland has a simple, stable tax system, which makes compliance
relatively easy. They also commented that the Tax Card and preprepared
annual return system work well and are easy to use. As a result, few
individuals use a tax advisor to help prepare and file the annual
income tax return. We were told that individuals using a tax advisor
have complex tax issues, such as from owning a businesses or having
complex investments.
Electronic tax administration has advantages for the government and
Finnish taxpayers. According to tax officials, cost savings result
from spending less time to prepare and process tax returns. These
officials said that electronic tax administration has helped to reduce
their full-time-equivalent positions over 11 percent from 2003 to
2009. Further, the tax withholding system results in a small amount of
individual income tax withheld that needs to be refunded after final
returns are filed. For tax year 2007, 8 percent of the tax withheld
was refunded to taxpayers as compared to 26 percent refunded in the
United States.
Finland's culture of cooperation and the resulting cooperative
arrangements between government, banks, businesses, and taxpayers have
led to acceptance of the new Tax Card Online service. According to
public interest and trade groups in Finland, the Finnish society has a
great deal of confidence in the banking system and its secure access.
This confidence influenced the decision to place the Tax Card online
service on bank Web sites. With taxpayers having regular access to a
banking Web site,[Footnote 31] the banks offer a channel for
delivering government services, according to government officials.
Public interest and trade groups agreed, noting that the banking
industry's willingness to support the Tax Card enhanced its
development. Representatives of a Finnish banking trade group said
that placing the Tax Card system on their Web sites helped banks. That
is, the more time customers spend on banks' Web sites, the more
opportunities the banks had to offer other services, helping to offset
the cost of implementing the system.
According to Finnish trade and public interest groups, Finland's
cooperative culture also supports the preprepared individual income
tax return system. For this system to work properly, business and
other organizations must file accurate information returns within 1
month after the end of the tax year. This short period for filing
information returns creates some burden. The burden includes costs to
purchase and install special software for collecting the information
as well as preparing and filing the returns. According to a
professional accounting organization in Finland, buying the yearly
software updates can be expensive. Any update has to be available well
before the start of the tax year so that transactions can be correctly
recorded at the start of the year and not revised at the end of the
year.
What Are the Similarities to and Differences from the U.S. System?
In contrast to Finland's self-described "simple" system, the U.S. tax
system is complex and changing annually. Regarding withholding
estimation, Finland's Tax Card system provides taxpayers an online
return system for regularly updating the tax amount withheld. For
employees in the United States, the IRS's Web site offers a
withholding calculator to help employees determine whether to contact
their employer about revising their tax withholding. Finland's system
prepares a notice to the employer that can be sent through the mail or
delivered in person, whereas in the United States the taxpayers must
file a form with the employer on the amount to be withheld based on
the taxpayers' estimation.
In the United States, individual income tax returns are completed by
taxpayers--not IRS--using information returns mailed to their homes
and their own records.[Footnote 32] Taxpayers are to file an accurate
income tax return by its due date. Unlike in Finland, U.S. individual
taxpayers heavily rely on tax advisors and tax software to prepare
their annual return. In the United States, about 90 percent of
individual income tax returns are prepared by paid preparers or by the
taxpayer using commercial software.
[End of section]
Appendix IV: EU's Multilateral Treaty Information Exchange on Interest
Payments to Member Nations' Citizens:
Overview of the EU Directive:
In June 2003, the European Union (EU) adopted the Savings Taxation
Directive to encourage tax compliance by exchanging information and in
some cases using withholding. The directive is a multilateral
agreement that establishes uniform procedures and definitions for
exchanging information and facilitating the resolution of common
technical problems. Under the directive, the 27 EU members[Footnote
33] and 10 dependent and associated territories agreed to participate
in the directive.[Footnote 34] With this information, tax authorities
in the citizen's nation are able to verify whether the citizen
properly reported and paid tax on the interest income. Each of the 27
member nations has a separate tax system, and varies in the tax rates
imposed on personal income, as shown in table 3.
Table 3: Range of Highest Personal Income Tax Rate for EU Countries,
2010:
Highest personal income tax rate: 50 percent or greater;
Number of EU countries: 6.
Highest personal income tax rate: 40 percent or greater and less than
50 percent;
Number of EU countries: 10.
Highest personal income tax rate: 30 percent or greater and less than
40 percent;
Number of EU countries: 4.
Highest personal income tax rate: 20 percent or greater and less than
30 percent;
Number of EU countries: 2.
Highest personal income tax rate: 10 percent or greater and less than
20 percent;
Number of EU countries: 5.
Source: GAO analysis of EU data.
[End of table]
The highest personal income tax rates range from 10 percent in
Bulgaria to over 56 percent in Sweden. This range of tax rates is an
important reason for the need for the exchange of information on
income. Residents in higher-tax countries could be motivated to move
capital outside of the country of residence to potentially avoid
reporting income earned on investments of the capital.
How Does the EU Savings Taxation Directive Strive to Encourage Tax
Compliance?
The directive provided a basic framework for information exchanges,
defining essential terms such as beneficial owner of the asset paying
interest, identity and residence of the owner, paying agents,[Footnote
35] interest payments, and information to be reported, and
establishing automatic information exchange among members. The
directive also states that five other nonmember nations agreed to
information exchange upon request for information defined under the
Savings Taxation Directive.[Footnote 36]
During a transition period from 2005 through 2011, Belgium,
Luxembourg, and Austria as well as the five nonmember nations, and six
associated territories, agreed to a withholding tax.[Footnote 37]
Under these agreements, a withholding tax was to be remitted at the
rate of 15 percent during the first 3 years, 20 percent for the next 3
years, and 35 percent thereafter. The directive authorizes the
withholding nations to retain 25 percent of the tax collected and
transfer 75 percent of the revenue to the account owner's home nation.
The withholding nations may develop procedures so that the owners can
request that no tax be withheld. These procedures generally require
that the owner provide identification information to the paying agent
or to the account owner's home nation.
The directive also requires the account owner's home nation to ensure
that the withholding does not result in double taxation. The home
nation is to grant a tax credit equal to the amount of tax paid to the
nation in which the account is located. If the tax paid exceeds the
amount due to the home nation, the home nation is to refund to the
account owner the excess amount that was withheld.
The role of the EU Commission is to coordinate among the participants
in the directive. The commission sets up and maintains contact points
for communications among members. All information to be exchanged must
be submitted no later than June 13 each year to the commission and
follow the standardized Organisation for Economic Co-operation and
Development (OECD) format. The information exchange is completely
electronic and automatic. All information is sent and received through
a secure network that only member countries can access. As of 2010,
all member countries are using this standard format except for
Switzerland which is working with the EU on plans for information
exchange. The commission is to keep the format updated and
periodically review compliance by member countries.
The commission is to gather statistics to measure overall performance
and success of the directive. Member countries have agreed to provide
the commission with the statistics necessary to gauge performance.
Every 2 years the commission hosts a conference to receive feedback
from member nations on its performance and to gauge the directive's
success. Additionally, every 3 years the commission reports to the
European Parliament and Commission of the European Communities. The
first report on the operation of the directive was issued in September
2008.[Footnote 38]
Why Does the EU Use the Multilateral Treaty Information Exchange?
The EU adopted the Savings Taxation Directive to encourage tax
compliance by exchanging information and using withholding. Using a
multilateral agreement provided a way to uniformly establish
procedures and definitions for exchanging information as well as for
resolving any common technical problems to information exchange across
the entire EU.
What Are the Known Results and Effects of the Information Exchange on
Savings?
The September 2008 report to the EU described the status of the
directive. The report found that 25 members started applying the rules
as required in July 2005. In 2006, the first full year in which data
were available, 17 members provided information to the exchange.
Bulgaria and Romania began implementation in January 2007. The report
concluded that the largest economies and financial centers reported
the highest amounts of interest paid to other EU citizens. For 2006,
Germany, France, Ireland, and the Netherlands accounted for over 98
percent of the dollar value of interest paid by all EU nations to
citizens of other EU countries.[Footnote 39]
The report concluded that data limitations created major difficulties
for evaluating the effectiveness of the directive. The EU did not have
information on withholding results or time-series information from
before the directive began. Without this information, the EU had no
benchmark to measure the effect of the changes.
According to EU officials, the most common administrative difficulties
have been information-technology system problems. Some members have
not had the data formatted correctly, which caused problems when other
member nations tried to access the data. For example, how member
countries format their mailing address has led to data access
problems. To overcome this problem, most member countries insert the
taxpayer's mailing address in the free text field, but this makes the
data difficult to efficiently analyze by other nations. Another
example has been accessing data from languages that have special
diacritical marks or characters. When information exchanged included
these special characters, an error was created during the data
importation process. The directive has suffered from other
implementation problems, as follows.
Investor behavior. EU staff said the commission tried to measure
changes in the different types of investments before and after
implementation of the directive. The commission had difficulty in
identifying the overall effect the directive has had on individual
investment choices because the data used are generally limited to
interest-bearing investments. On the basis of decreases in some
investor's total interest savings, the report noted that investors
appeared to change their investments before implementation to
investments that were not covered by the directive.
Withholding. The effectiveness of the withholding system under the
Saving Tax Directive is unclear. The report found that the 14
countries and dependent and associated territories applying the
withholding provisions in 2006 shared €559.12 million (US$738 million)
withheld on income earned in their nation with the account owner's
home nation.[Footnote 40] Some articles have commented that given the
low withholding rates in the early years, taxpayers with higher tax
rates in their home nation may have chosen not to report the income.
Definitions. The EU identified problems with the definition of terms,
making uniform application of the directive difficult. First, the
commission's report raised questions about consistency of coverage of
payments made from life insurance contracts where investments were
made in securities or funds. Second, confusion existed over whether
some paying agents were covered by EU rules on investment managers or
by the definition established under the directive for noncovered
paying agents.[Footnote 41] Third, identifying the account owners was
another problem.
In general, the EU report suggests that improved monitoring and follow-
up by the home nation can help locate paying agents in third counties
and ensure accurate information on the citizen who owns the account.
The EU is considering several solutions such as enforcing existing
customer due diligence rules that are to be used by domestic paying
agents, who would transmit interest payments to the owners. These
rules require that the paying agents must know who they are paying and
should not facilitate transactions to mask the owner(s) and avoid
taxes or other legal requirements.
Nevertheless, EU officials stated that the quality of data has
improved over the years. The EU officials have worked with EU member
nations to resolve specific data issues, which has contributed to the
effective use of the information exchanged under the directive.
What Are the Similarities to and Differences from the U.S. System for
Sharing Tax Information?
Generally, unlike the EU multilateral directive, the United States
establishes bilateral information-sharing agreements. Those agreements
allow for automatic information exchange, but definitions of terms,
technical standards, and other matters are not worked out and adopted
multilaterally. Resolution of some of those issues may be facilitated
by the United States' participation in the Convention on Multilateral
Administrative Assistance in Tax Matters, which includes exchange of
information agreement provisions and has been ratified by 15 nations
and the United States.[Footnote 42]
[End of section]
Appendix V: The UK Uses Information Reporting and Withholding So Most
Wage Earners Do Not Need to File a Tax Return:
Overview of the UK Tax System:
The United Kingdom's (UK) main sources of tax revenue are income tax,
national insurance contributions, value added tax, and corporate tax.
Her Majesty's Revenue and Customs (HMRC) also administers taxes
assessed for capital gains, inheritance, various stamp duties,
insurance premium tax, petroleum revenue, and excise duties.[Footnote
43] The income tax system--where the tax year runs from April 6
through April 5--taxes individuals on their income from various
sources, for example, employment earnings, self-employment earnings,
and property income.
Taxable individuals under 65 years of age receive a tax-free personal
allowance (£6,475, or US$10,410 for the 2010-11 tax year).[Footnote
44] If their total income is below the allowance amount, no tax is
payable. The three main individual income tax rates for income above
the personal allowance are 20 percent (£0-£37,400 or up to US$60,132),
40 percent (£37,401-£150,000 or up to US$241,170), and 50 percent
(over £150,000 or over US$241,170).[Footnote 45] HMRC uses 3 payment
systems to collect income tax from individual taxpayers, depending on
the type of income and whether the individual is employed, self-
employed, or retired.[Footnote 46]
* Pay As You Earn (PAYE) is used to withhold tax on wages and salaries
paid to individuals by employers. Employers are required to notify
HMRC every time an employee starts or stops working for them. Then,
HMRC determines a tax withholding code for each individual and
employers use the tax codes, in conjunction with tax tables, to
calculate the amount of tax to be deducted.
* Self-assessment tax returns are used by some employees with higher
rates of income or complicated tax affairs and by self-employed
individuals with different kinds of business income.
* At-source collection is when the tax, such as on interest and
dividend income, is withheld at source when the income is paid. For
example, tax is deducted from bank interest as it is credited to an
individual.
According to HMRC officials, the majority (68 percent) of taxpayers
pay their tax solely through the PAYE system without having to submit
a return to HMRC. Other actions have helped remove a large number of
taxpayers from submitting a return. For example, the UK requires that
tax on some income paid to individuals (such as bank interest) be
withheld at a 20 percent rate and remitted to HMRC by the payer, and
capital gains income up to the first £10,100 (US$16,239) is exempted
from tax.
The UK also is working towards burden reduction for the average
taxpayer by simplifying the tax return. For example, according to HMRC
officials, information that is not necessary has been removed from the
return to reduce the return filing burden, and those taxpayers who are
required to file a return find it straight-forward.
How Do Information Reporting and Withholding Facilitate Tax Reporting
and Risk Assessment?
HMRC uses data from information reporting and withholding under the
PAYE system to simplify the reporting of tax liability on income tax
returns for individuals. PAYE adjusts income tax withheld so that the
individual's tax liability is generally met by the end of the tax year.
Information reporting helps HMRC and the individual taxpayer determine
the total income tax liability, according to HMRC officials.
Information returns are to report tax-related transactions by the
taxpayer. They are to be supplied by banks and local governments to
the taxpayer and HMRC at the end of the tax year. For example, banks
are to provide interest payment information. Over 400 local government
organizations are to report information on payments made to small
businesses. Local government as both an employer and contractor must
report information on payments made to others.
The information provided by employers enables HMRC to update the
employee's tax record and issue a tax code to the new employer to
start the withholding against employee earnings. HMRC calculates the
PAYE code using information about the previous year's income or other
employment in the current tax year.[Footnote 47] Employers are to
match the PAYE code to a tax table, which shows how much tax to
withhold each pay period. The employer has to remit the withheld tax
to HMRC on a monthly or quarterly basis to fulfill the taxpayer's tax
liability. HMRC annually reviews taxpayer records and issues updated
PAYE codes before the start of the tax year for employers to operate
at the start of the tax year. The individual will receive a notice
showing how the tax code has been calculated. To maintain taxpayer
confidentiality, the employer will only receive the tax code itself.
HMRC can refund income tax overpayments or collect underpayments for
previous tax years through adjustments to the PAYE code. HMRC reported
in 2010 that around 5 million individuals overpaid or underpaid these
taxes. HMRC officials said that they use information returns to help
determine these adjustments under PAYE.[Footnote 48] In lieu of having
their PAYE codes adjusted, taxpayers may receive a onetime refund of
the overpayment or pay the underpaid amount in one lump sum. Taxes
owed usually are collected through code adjustments as long as the
taxpayer stays within the PAYE system.
HMRC also uses information reporting and withholding to assess the
compliance risks on filed returns. In assessing compliance risks, HMRC
is attempting to identify underpaid and overpaid tax. The majority of
the information for risk assessment is collected centrally from
information returns, tax withholdings, filed tax returns, and public
sources. This information is mined for risks by special risk-
assessment teams. According to HMRC officials, the outcomes of such
mining are to be used to verify tax compliance. If low compliance is
found, risk specialists are to develop programs to increase compliance.
The data mining uses electronic warehouse "Data Marts" that HMRC has
had for about 10 years.[Footnote 49] They have been configured with
subsets of data and have been supplemented by sophisticated analysis
tools for doing risk assessments. For example, an analyst can create
reports to assess the risk for all self-assessment income tax returns
where the legal expense is above a specified amount. HMRC officials
told us that Data Marts had recently been revamped and a strategic
capability was added that links related information such as a business
that files a corporate tax return for its business profits, pays value
added tax, and has directors who submit self-assessment returns.
According to HMRC officials, the use of Data Marts combined with their
more recent Strategic Risking Capability has allowed them to assess
risks at the national and regional levels. HMRC officials said that
they have moved towards national risk assessments because risk has not
proven to be geographically based at regional levels. HMRC officials
noted that while a return is being assessed for one type of risk,
another type of risk can be found. HMRC is attempting to uncover
emerging compliance risks by combining and reviewing data from the
various sources in the Data Marts and elsewhere.
The risk assessment process has two steps, resulting in identifying
tax returns for examination. The first step is to identify tax returns
that have an inherent risk because of the taxpayers' size, complexity
of the tax return, and past tendency for noncompliance. For example,
returns filed by high-wealth individuals are viewed as risky returns
that are sent to a related specialty office. The second step assesses
risk on returns that are not sent to a specialty office. HMRC
officials said that a relatively large proportion of the risk-
assessment effort focuses on the self-employed, who are seen as having
the greatest risk for tax noncompliance since they usually are not
under the PAYE system (unless they have some wage income) and instead
are to file a self-assessment return. HMRC has separate risk-
assessment approaches, depending on the type of individual taxpayer,
as discussed below.
* For individuals under the PAYE system, HMRC's computers capture most
of the necessary data and the system carries out routine checks to
verify data and link it to the taxpayer record. A risk to the PAYE
system arises when employees receive benefits from their employers
that are not provided to HMRC at the time it determines the annual tax
code. Employer benefits may include a car, health insurance, or
professional association fees that employers report on information
returns after the tax year and that may be subject to income tax. If
these benefits received are not included in the tax code then an
underpayment of tax is likely to arise. The unpaid tax can be
recovered by an annual reconciliation or when the employee reports the
benefits on the employee's self-assessment tax return.
* Individuals not under the PAYE system are required to file a self-
assessment tax return. To assess risk, HMRC checks some self-
assessment tax returns for consistency by comparing them to returns
from previous years, focusing on small businesses. For example, if the
legal expense jumped from £5,000 to £100,000 (US$8,039 to US$160,780)
over 2 years, HMRC may decide to review the reason. HMRC permits any
self-employed small business with gross receipts of less than £68,000
(US$109,330) to file a simple three-line tax return to report business
income, expenses, and profit. HMRC officials said that the threshold
allows over 85 percent of all self-employed businesses to file
simplified returns with less burden.
Why Did the UK Use Information Reporting and Withholding for Tax
Reporting and Risk Assessment?
According to HMRC officials, their policy is to collect as much data
as possible up front through information returns, and correct the
amounts of tax due with the PAYE system, facilitating the payment of
tax liabilities. Since information is shared with HMRC, taxpayers are
likely to voluntarily comply if they have to file a tax return.
Further, data from information reporting and withholding are to help
simplify or eliminate tax reporting at the end of a tax year.
According to HMRC officials, the PAYE system makes it unnecessary for
most wage earners to file an annual self-assessment tax return.
HMRC conducts risk assessments because staff cannot check every tax
return in depth due to the large number of taxpayers and the need to
lower the costs of administering the tax system. Data from information
reporting and withholding provide consistent sources for doing risk
assessments.
What Are the Known Results and Effects from Using Information
Reporting and Withholding to Facilitate Tax Reporting and Risk
Assessment?
HMRC officials said the income tax system has been simplified because
most individual taxpayers fall under the PAYE system, which generally
relieves them of the burden of filing a tax return. Even so, some
implementation problems have occurred. The House of Commons identified
problems with an upgrade to the PAYE information system in 2009-10.
[Footnote 50] The upgrade was to combine information on individuals'
employment and pension income into a single record to support more
accurate tax withholding codes and reduce the likelihood of over-and
underpayments of tax. However, software problems delayed processing
2008-09 PAYE returns for a year. In addition, data-quality problems
from the upgraded PAYE system for 2010-11 generated about 13 million
more annual tax coding notices than HMRC had anticipated and some were
incorrect or duplicates. With these problems, of the 45 million PAYE
records to be reconciled, 10 million cases needed to be reconciled
manually.
The House of Commons reported a backlog of cases before the PAYE
system was upgraded. Limitations of the previous PAYE system and
increasingly complex working patterns have made it difficult to
reconcile discrepancies without manual intervention. As of March 2010,
a backlog of PAYE cases affected an estimated 15 million taxpayers
from 2007-08 and earlier; the backlog included an estimated £1.4
billion (US$2.25 billion) of tax underpaid and £3 billion (US$4.82
billion) of tax overpaid.
HMRC has reported that risk assessment has provided three benefits:
(1) improved examination decisions to ensure that they are necessary
and reduce the burden on compliant taxpayers; (2) tailored
examinations to the risk in question; and (3) deterred taxpayers from
concealing income. HMRC's risk-assessment approach has increasingly
focused on providing help and support to individuals and smaller
businesses to voluntarily comply up front. To minimize the need for
examinations, HMRC aims to help larger businesses achieve greater and
earlier certainty on their tax liabilities. HMRC's sharper focus on
risk assessment means that businesses with reliable track records of
managing their own tax risks and being open in their dealings with
HMRC benefit from fewer HMRC examinations while those with the highest
risks can expect a more robust challenge from dedicated teams of
specialists.
What Are the Similarities to and Differences from the U.S. System?
The UK and United States both have individual income tax returns and
use information reporting and tax withholding to help ensure the
correct tax is reported and paid. However, differences exist between
the countries' systems.
* The United States has six tax rates that differ among five filing
statuses for individuals (i.e., single, married, married filing
separately, surviving spouse, or head of household) and covering all
types of taxable income. In general, the UK system has three tax
rates, one tax status (individuals), and a different tax return
depending on the taxable income (e.g., self-employed or employed
individuals).
* U.S. income tax withholding applies to wages paid but not interest
and dividend income as it does in the UK.
* U.S. wage earners, rather than the Internal Revenue Service, are
responsible for informing employers of how much income tax to
withhold, if any, and must annually self-assess and file their tax
returns, unlike most UK wage earners.
Another major difference is that the United States automatically
matches data from information returns and the withholding system to
data from the income tax return to identify individuals who
underreported income or failed to file required returns. Matching is
done using a unique identifier taxpayer identification number (TIN).
HMRC officials told us that they have no automated document-matching
process and the UK does not use TINs as a universal identifier, which
is needed for wide-scale document matching. The closest form of unique
identifier in the UK is the national insurance number. HMRC officials
said they are barred from using the national insurance number for
widespread document matching. Instead, HMRC officials said that they
may do limited manual document matching in risk assessments and
compliance checks. For example, HMRC manually matches some taxpayer
data--such as name, address, date of birth--from bank records to data
on tax returns.
[End of section]
Appendix VI: Australia Uses a Compliance Program for High-Net-Wealth
Individuals:
Overview of the Australian Tax System:
Australia has a federal system of government with revenue collected at
the federal, state, and local levels. For 2009-2010, about 92 percent
of federal revenue was collected from taxes rather than nontax
sources, like fees. The principal source of federal revenue for
Australia is the income tax, which accounted for about 71 percent.
Australia's state and local governments rely on grants from the
national government and have limited powers to raise taxes. The states
receive significant financial support from the federal government. In
2009-10, total payments to the states were 28 percent of all federal
expenditures.
Individuals accounted for about 65 percent of the 2009-2010 income tax
revenue. The system is progressive with tax rates up to 45 percent for
taxable income in excess of A$180,000 (US$161,622). In 2007-2008, a
small proportion of Australian taxpayers paid a large proportion of
Australian taxes, as shown in figure 1.
Figure 1: Australian Individual Income Tax Paid and Number of
Taxpayers by Taxable Income for 2007-2008:
[Refer to PDF for image: vertical bar graph]
Australian dollars: $0 to $30,000;
Percent of taxpayers: 27.6%;
Percent of tax paid: 7.4%.
Australian dollars: $30,001 to $40,000;
Percent of taxpayers: 18.1%;
Percent of tax paid: 9.5%.
Australian dollars: $40,001 to $55,000;
Percent of taxpayers: 21.5%;
Percent of tax paid: 17.9%.
Australian dollars: $55,001 to $70,000;
Percent of taxpayers: 13.7%;
Percent of tax paid: 16.8%.
Australian dollars: $70,001 to $100,000;
Percent of taxpayers: 12.2%;
Percent of tax paid: 20.8%.
Australian dollars: $100,001 or more;
Percent of taxpayers: 7.0%;
Percent of tax paid: 27.7%.
Source: GAO analysis of government of Australia data.
[End of figure]
What Is the Australian High Net Wealth Individuals Program?
The Australian High Net Wealth Individuals (HNWI) program focuses on
the characteristics of wealthy taxpayers that affect their tax
compliance. According to the Australian Taxation Office (ATO), in the
mid 1990s, it was perceived as enforcing strict sanctions on the
average taxpayers but not the wealthy. ATO found that high-wealth
taxpayers, those with a net worth of more than A$30 million (US$20.9
million), tend to have complex business arrangements, which made it
difficult for ATO to identify and assure compliance. ATO concluded
that the wealthy required a different tax administration approach.
ATO set up a special task force to improve its understanding of
wealthy taxpayers, identify their tax planning techniques, and improve
voluntary compliance. Initially, the program focused on the tax return
filed by a wealthy individual. Due to some wealthy taxpayers'
aggressive tax planning, which ATO defines as investment schemes and
legal structures that do not comply with the law, ATO quickly realized
that it could not reach its goals for voluntary compliance for this
group by examining taxpayers as individual entities.
To tackle the problem, ATO began to view wealthy taxpayers as part of
a group of related business and other entities. Focusing on control
over related entities rather than on just individual tax obligations
provided a different understanding of wealthy individuals' compliance
issues. To address the special needs of the wealthy, ATO developed
publications that included a separate high-wealth income tax return
form, a questionnaire on the wealthy as an entity and a tax guide,
Wealthy and wise--A tax guide for Australia's wealthiest people.
Why Australia Developed the High Net Wealth Program:
According to ATO, a number of factors led to the HNWI program. First,
ATO was dealing with a perceived public image that it showed
preference to the wealthy while enforcing strict sanctions on average
taxpayers during the 1990s. Second, ATO was perceived as losing
revenue from noncompliant taxpayers. Third, high-wealth individuals
used special techniques to create and preserve their income and wealth
through a "business life cycle." The cycle includes creating,
maintaining, and passing on wealth through complex tax shelters. For
example, businesses owned or controlled by wealthy individuals are
more likely to have more diverse businesses arrangements, which tend
to spread wealth across a group of companies and trusts. Each of these
groups controlled by wealthy individuals was classified as a separate
taxpayer entity, which made understanding the tax implications of
these networks of entities difficult for the ATO.
The HNWI approach followed ATO's general compliance model. The model's
premise is that tax administrators can influence tax compliance
behavior through their responses and interventions. Since taxpayers
have different attitudes on compliance, ATO used varied responses and
interventions tailored to promote voluntary tax compliance across
different taxpayer groups.
The first part of the standard model is to understand five factors
that influence taxpayer compliance. The factors are Business,
Industry, Social, Economic, and Psychological. For example, the
Business factor included the size, location, nature, and capital
structure of the business as well as its financial performance--all of
which help ATO understand why compliance or noncompliance occurs.
[Footnote 51]
The second part of the model involves taxpayers' attitudes on
compliance. It refers to one of four attitudes that a taxpayer may
adopt when interacting with tax regulatory authorities. These
attitudes are:
* willing to do the right thing,
* try to do the right thing,
* do not want to comply, and:
* decided not to comply.
The third part of the model aligns four compliance strategies with the
four taxpayer attitudes on compliance[Footnote 52] and refers to the
degree of ATO enforcement under the concept of responsive regulation.
ATO prefers to simplify the tax system and promote voluntary
compliance through self-regulation. If the taxpayer tries to comply,
ATO should respond by helping the taxpayer be compliant. If the
taxpayer is not motivated to comply, ATO should respond to the level
of noncompliance with some degree of enforcement, ending with harsh
sanctions for the truly noncompliant.
ATO created a High Wealth Individual (HWI) taskforce to assess wealthy
individuals on their probability of compliance and place them into one
of four broad risk categories using its Risk Differentiation Framework
(RDF). RDF is similar to the compliance model in that it is to assess
the tax risk and determine the intensity of the response for those
with high net wealth, ranging from minimizing burden on compliant
wealthy taxpayers to aggressively pursuing the noncompliant. The four
broad categories of the RDF are as follows:
* Higher Risk Taxpayers--ATO performs continuous risk reviews of them
with the focus on enforcement.
* Medium Risk Taxpayers--ATO periodically reviews certain transactions
from them or where there is a declining trend in effective tax
performance with a focus on enforcement.
* Key Taxpayers--ATO continuously monitors them with the focus on
service.
* Low Risk Taxpayers--ATO periodically monitors them with the focus on
service.
What Are the Known Results and Effects of the Australian High Net
Wealth Program?
The HNWI program has produced financial benefits since its
establishment in 1996. ATO 2008 data showed that the program had
collected A$1.9 billion (US$1.67 billion) in additional revenue and
reduced revenue losses by A$1.75 billion (US$1.5 billion) through
compliance activities focused on highly wealthy individuals and their
associated entities. ATO's approach also has been adopted by other tax
administrators. According to a 2009 Organisation for Economic Co-
operation and Development (OECD) study, nine other OECD countries,
including the United States, had adopted some aspect of Australia's
HNWI program.[Footnote 53]
Similarities to and Differences from the U.S. Tax System:
Like ATO, the IRS is taking a close look at high-income and high-
wealth individuals and their related entities. In 2009, IRS formed the
Global High Wealth Industry (GHWI) program to take a holistic approach
to high-wealth individuals. IRS consulted with the ATO to discuss
ATO's approach to the high-wealth population as well as its
operational best practices. As of February 2011, GHW field groups had
a number of high-wealth individuals and several of their related
entities under examination.
One difference is that Australia has a separate income tax return for
high-wealth taxpayers to report information on assets owned or
controlled by HNWIs. In contrast, the United States has no separate
tax return for high-wealth individuals and generally does not seek
asset information from individuals. According to IRS officials, the
IRS traditionally scores the risk of individual tax returns based on
individual reporting characteristics rather than a network of related
entities.[Footnote 54] However, IRS has been examining how to do risk
assessments of networks through its GHWI program since 2009. Another
difference is that ATO requires HNWIs to report their business
networks, and IRS currently does not.
[End of section]
Appendix VII: Hong Kong Uses Semiannual Payments Instead of Periodic
Employer Withholding for the Salaries Tax:
Overview of the Hong Kong Tax System:
Hong Kong's Inland Revenue Department (IRD) assesses and collects the
"earnings and profits tax," which includes a Profits Tax,[Footnote 55]
Salaries Tax, and Property Tax. IRD also assesses and collects certain
"duties and fees" including a stamp duty, business registration fees,
betting duty, and estate duty. Hong Kong only taxes income from
sources within Hong Kong. Principle revenue sources for tax year 2009-
10 are shown in figure 2.
Figure 2: Hong Kong Tax Year 2009 to 2010 Revenue Sources:
[Refer to PDF for image: pie-chart]
Profits Tax: 42.8%;
Stamp Duty: 23.7%;
Salaries Tax: 23.0%;
Other: 10.5%.
Source: GAO analysis of Hong Kong data.
[End of figure]
According to a Hong Kong tax expert, Hong Kong created the Salaries
Tax at the start of World War II without using periodic tax
withholding. The lack of withholding was not then, and is not now,
considered to be a significant problem.[Footnote 56] The Salaries Tax
is paid by about 40 percent of the estimated 3.4 million wage earners
in Hong Kong, while the 60 percent are exempt from the Salaries Tax.
Taxpayers whose salary income is lower than their entitlement to
deductions (i.e., basic allowance, child allowance, dependent parent,
etc.) are exempt from paying Salaries Tax and neither they nor IRD
prepare a tax return for this income. However, exempt taxpayers may
receive a tax return from IRD once every few years to verify their tax-
exempt status. If these exempt taxpayers receive a tax return from
IRD, they are required to complete and submit it within 1 month.
[Footnote 57]
The Salaries Tax rates are fairly low, according to Hong Kong tax
experts. The Salaries Tax has progressive rates starting at 2 percent
of the adjusted salary earned and may not exceed the standard rate of
15 percent. In comparison, the highest personal income tax rates in
the EU range from about 10 percent to over 56 percent as described in
appendix IV.[Footnote 58]
How Does Hong Kong Collect Salaries Tax?
Hong Kong does not use periodic tax withholding (e.g., biweekly or
monthly) by employers to collect Salaries Taxes. Rather, IRD collects
the Salaries Tax through two payments from taxpayers for a tax year,
which runs from April 1 to March 31. The first payment is due in
January (9 months into the tax year) and is to be 75 percent of the
estimated tax for the whole year. The second payment is for the
remaining 25 percent, which is due 3 months later in April--
immediately after the end of the tax year.
In May, IRD is to mail the tax return to the individual for the just-
completed tax year based on information provided by employers and
other sources. Information reporting to IRD has four parts. First,
employers must report when each employee is hired and the expected
annual salary amount. Second, at the end of the tax year, employers
must report the salary paid to each employee. Third, the employers
must report when the employee ceases employment. Fourth, employers
must report and temporarily withhold payments to an employee they know
intends to leave Hong Kong. If the employer fails to comply with these
requirements without a reasonable excuse, penalties may be imposed.
Individuals have 1 month to file the return.[Footnote 59] For those
who elect to file their returns electronically, IRD will prefill the
return based on information provided in their past returns and by
their employers. They have a month and a half to review the prepared
tax return, make any revisions such as changes to deductions, and file
it with IRD.
IRD reviews the filed tax returns to determine the final Salaries Tax.
IRD electronically screens all returns to check for consistency
between the information provided by the employer and taxpayer.
Assessments will normally be made based on the higher amount reported,
and taxpayers have the right to object within 1 month. IRD also can
cross-check reported salary amounts with salary deductions claimed by
businesses on Profit Tax returns, which should normally be supported
by information returns on employee salary amounts. If the final
Salaries Tax for the tax year turns out to be higher than the
estimated tax assessment, taxpayers are to pay the additional tax
along with the first payment of the estimated tax for the next tax
year during the following January, as shown in figure 3.
Figure 3: Hong Kong's Salaries Tax Process Timeline:
[Refer to PDF for image: timeline]
April 1:
Tax year begins.
January:
First payment equaling 75% of estimated Salaries Tax is paid.
March 31:
Tax year ends.
During April, second payment equaling 25% of estimated Salaries Tax is
paid.
May:
IRD mails tax returns for Salaries Tax.
Tax returns should be filed within:
* 1 month (June) if Salaries Tax only;
* 3 months (August) if taxpayer owes any unincorporated Profits Tax.
January:
Final Salaries Tax is paid for previous year.
Source: GAO analysis of IRD data.
[End of figure]
Why Does Hong Kong Collect Salaries Tax through Two Yearly Payments?
Several factors contribute to Hong Kong's collection of the Salaries
Tax through two payments for a tax year without resorting to periodic
withholding by employers.
* The tax only affects about 40 percent of the wage earners who have
the highest salaries and uses relatively low tax rates, making it more
likely that the taxpayers will have the funds necessary to make the
two payments when due.
* The simplicity of Hong Kong's tax system, according to Hong Kong tax
experts, makes it easier to compute tax liability and to manage the
payments.
* IRD uses a combination of controls to assure that tax payments are
made, according to a senior IRD official. In addition to information
reporting, island geography contributes to the controls. Hong Kong
entry/departure points are limited and tax evaders are likely to be
identified. Hong Kong government can detain a tax evader from leaving
or entering Hong Kong until the tax is paid. IRD has varied processes
to trace the assets of delinquent taxpayers as part of collecting any
unpaid tax.
* Culture encourages taxpayers to pay their taxes. Hong Kong experts
said taxpayers fear a loss of face if they are recognized as
noncompliant, which could reflect negatively on the family. A Hong
Kong official told us that residents try to avoid being taken to court.
An expert on public opinion in Hong Kong told us that this cultural
attitude generates high tax morale. The expert told us that Hong Kong
residents have high regard for Hong Kong's government as being
"cleanly" run and as putting tax revenues to good use. IRD is viewed
as having fair and equal treatment of all taxpayers.
What Are the Known Results and Effects from Collecting the Salaries
Tax through Two Yearly Payments?
A senior official of Hong Kong's IRD believes that the Salaries Tax
collection system leads to high tax compliance. Low tax rates in
concert with a simple tax system that offers generous deductions and
effective enforcement mean that taxpayers are fairly compliant,
according to the Hong Kong official. It also means that few taxpayers
use a tax preparer because the tax forms are very straightforward and
the tax system is "stable."
The official also said that taxpayers comply because the cost of
noncompliance is high. If a taxpayer does not pay by the due date, the
costs include paying the tax liability, interest surcharges on the
debt, and legal costs. Further, submitting an incorrect tax return
without reasonable excuse may carry a fine of HK$10,000 (US$1,283)
plus three times the amount of tax underpaid and imprisonment.
What Are the Similarities to and Differences from the U.S. System?
Unlike Hong Kong's twice-a-year payments for the Salaries Tax, the
U.S. income tax on wages relies on periodic tax withholding. IRS
provides guidance (e.g., Publication 15) on how and when employers
should withhold income tax (e.g., every other week) and deposit the
withheld income taxes (e.g., monthly). Further, the U.S. individual
tax rates are higher and the system is more complex. These tax rates
begin at 10 percent and progress to 35 percent. Further, the United
States taxes many forms of income beyond salary income on the
individual tax return.
[End of section]
Appendix VIII: Overview of Tax Systems for Five Nations:
Nations have many choices on how to structure their tax systems across
the federal, as well as state and local, government levels. The
proportion of revenue collected at each governmental level can widely
vary. Finland, New Zealand, and the United Kingdom (UK) have a unitary
system in which government, including tax administration, is generally
centralized at the national level with limited state and local
government. For example, in New Zealand, the national government
assessed about 90 percent of all the revenue collected across the
nation. In contrast, the United States has a federal system in which
the national level shares governmental authority with state and local
governments. In the United States about half of all tax revenue is
collected by the national government and about half is collected by
the 50 states and tens of thousands of local governments.
The revenue data in table 4 below were provided by each nation and
compiled by the Organisation for Economic Co-operation and Development
(OECD) for consistent presentation.[Footnote 60] These data cover all
taxes in each nation including federal and state/local levels. Using
these data, we computed the percent that each type of tax represents
of the nation's total revenue. OECD provided the following definition
for each of the major categories of tax in the table:
* Taxes are compulsory unrequited payments to general government and
are not for benefits provided by government to taxpayers in proportion
to their payments. Governments include national governments and
agencies whose operations are under their effective control, state and
local governments and their administrations, certain social security
schemes and autonomous governmental entities, excluding public
enterprises.
* Taxes on income, profits, and capital gains cover taxes levied on
the net income or profits (i.e., gross income minus allowable tax
deductions) of individuals and businesses (including corporations).
Also covered are taxes levied on the capital gains of individuals and
enterprises, and gains from gambling.
* Social security contributions are classified as all compulsory
payments that confer an entitlement to receive a (contingent) future
social benefit. Such payments are usually earmarked to finance social
benefits and are often paid to institutions of general government that
provide such benefits. These social security benefits would include
unemployment insurance benefits and supplements, accident, injury and
sickness benefits, old-age, disability and survivors' pensions, family
allowances, reimbursements for medical and hospital expenses or
provision of hospital or medical services. Contributions may be levied
on both employees and employers.
* Taxes on payroll and workforce cover taxes paid by employers,
employees, or the self-employed either as a proportion of payroll or
as a fixed amount per person, and which do not confer entitlement to
social benefits.
* Taxes on property, goods, and services cover recurrent and
nonrecurrent taxes on the use, ownership, or transfer of property.
These include taxes on immovable property or net wealth, taxes on the
change of ownership of property through inheritance or gift, and taxes
on financial and capital transactions. Taxes on goods and services
include all taxes and duties levied on the production, sale, and lease
of goods or services. This category covers multistage cumulative
taxes; general sales taxes, value added taxes, excise taxes, or taxes
levied on imports and exports of goods.
Table 4 shows that the largest source of revenue for 4 of 5 countries
is the tax on individuals' and corporations' income, profits, and
capital gains. Also, the tax paid by individuals is a larger
percentage of revenue than the corporation tax in each country. The
tax on property, goods, and services is the next most important tax
except in the UK where the income tax is the second largest source. A
large component of the taxes on property, goods, and services is the
value added tax and sales tax. In Australia, New Zealand, the UK, and
Finland, value added tax and sales tax ranged from 25 percent to 31
percent of the taxes collected in the nation. The United States does
not have a value added tax, but sales taxes alone totaled about 14
percent of all U.S. revenue.
Table 4: Revenue, Governmental Structure, and Population Data for Five
Nations, 2008:
Source of revenue: Taxes on income, profits and capital gains
(percent);
United States: 45%;
United Kingdom: 40%;
Finland: 39%;
New Zealand: 60%;
Australia: 59%.
Source of revenue: Taxes on income, profits and capital gains:
Individuals (percent);
United States: 38%;
United Kingdom: 30%;
Finland: 31%;
New Zealand: 41%;
Australia: 38%.
Source of revenue: Taxes on income, profits and capital gains:
Corporate (percent);
United States: 7%;
United Kingdom: 10%;
Finland: 8%;
New Zealand: 13%;
Australia: 22%.
Source of revenue: Taxes on income, profits and capital gains:
Unallocable between individual and corporate (percent);
United States: 0;
United Kingdom: 0;
Finland: 0;
New Zealand: 7%;
Australia: 0.
Source of revenue: Social security contributions (percent);
United States: 25%;
United Kingdom: 19%;
Finland: 28%;
New Zealand: 0;
Australia: 0.
Source of revenue: Taxes on payroll and workforce (percent);
United States: 0;
United Kingdom: 0;
Finland: 0;
New Zealand: 0;
Australia: 5%.
Source of revenue: Taxes on property, goods, and services (percent);
United States: 30%;
United Kingdom: 41%;
Finland: 33%;
New Zealand: 40%;
Australia: 36%.
Source of revenue: Taxes on property, goods, and services: Value added
and sales taxes (percent);
United States: 14%;
United Kingdom: 28%;
Finland: 29%;
New Zealand: 31%;
Australia: 25%.
Source of revenue: Total tax revenue, excluding customs duties
(percent);
United States: 100%;
United Kingdom: 100%;
Finland: 100%;
New Zealand: 100%;
Australia: 100%.
Other data:
Source of revenue: Total tax revenue as a percentage of GDP (2008);
United States: 26.1%;
United Kingdom: 35.7%;
Finland: 43.1%;
New Zealand: 33.7%;
Australia: 27.1%.
Source of revenue: Structure of government;
United States: federal;
United Kingdom: unitary;
Finland: unitary;
New Zealand: unitary;
Australia: federal.
Source of revenue: 2008 population;
United States: 304.4 million;
United Kingdom: 61.4 million;
Finland: 5.3 million;
New Zealand: 4.3 million;
Australia: 21.4 million.
Sources: GAO analysis of OECD and World Bank data.
Note: Data are from OECD, Revenue Statistics 2010 - Special feature:
Environmental Related Taxation (OECD Publishing, 2010), and World Bank
Population data set, 2000 to 2009 by Country, [hyperlink,
http://www.worldbank.org] (downloaded Dec. 23, 2010).
[End of table]
[End of section]
Appendix IX: GAO Contact and Staff Acknowledgments:
GAO Contact:
Michael Brostek, (202) 512-9110 or brostekm@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Thomas Short, Assistant
Director; Juan P. Avila; Debra Corso; Leon Green; John Lack; Alma
Laris; Andrea Levine; Cynthia Saunders; Sabrina Streagle; and Jonda
VanPelt made key contributions to this report.
[End of section]
Footnotes:
[1] See 26 U.S.C. § 6041-6050W.
[2] 26 U.S.C. § 3402.
[3] GAO, 2010 Tax Filing Season: IRS's Performance Improved in Key
Areas, but Efficiency Gains are Possible in Others, [hyperlink,
http://www.gao.gov/products/GAO-11-111] (Washington, D.C.: Dec. 16,
2010). The Web site data are from January 1 to July 31, 2010, and the
telephone call data are from January 1 to June 30, 2010.
[4] Revenue loss estimates are intended to provide information about
the value of tax expenditures. However, separate tax expenditure
estimates do not incorporate any behavioral responses and thus do not
necessarily represent the exact amount of revenue to be gained by
repealing a specific tax expenditure.
[5] For a discussion of the issues related to tax expenditures, see
GAO, Government Performance and Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Reexamined,
[hyperlink, http://www.gao.gov/products/GAO-05-690] (Washington, D.C.:
Sept. 23, 2005), and Office of Management and Budget, Analytical
Perspectives, Budget of the United States Government, Fiscal Year 2012
(Washington, D.C.: 2010).
[6] Details on these practices are provided in the appendixes. In
addition, The Hong Kong Special Administrative Region is part of the
People's Republic of China. Throughout this report, we will use Hong
Kong as the abbreviation for this region.
[7] To adjust foreign currencies to U.S. dollars, we used the Federal
Reserve Board's foreign exchange rates. New Zealand dollars converted
to U.S. dollars as of December 31, 2004.
[8] Individuals who are members of the Evangelical-Lutheran Church or
the Orthodox Church pay a flat-rate church tax. Local church
communities determine the tax rate, which varies between 1 and 2
percent of taxable income. Individuals who are not members of either
church do not pay the tax.
[9] Under automatic information exchange, countries agree to routinely
provide information about tax-related transactions. Under another
information exchange practice, information exchange upon request, the
exchange generally requires a specific justification for the
information needed by the requesting tax authority.
[10] These nations are the Swiss Confederation, the Principality of
Liechtenstein, the Republic of San Marino, the Principality of Monaco,
and the Principality of Andorra.
[11] We used rates that matched the time period cited for the foreign
amount. The currency conversion for the capital gains amount is as of
February 25, 2011.
[12] Australian dollars converted to U.S. dollars as of December 31,
2008.
[13] Australian dollars converted to U.S. dollars as of December 31,
2007.
[14] Center for Inter-American Tax Administration, [hyperlink,
http://www.ciat.org].
[15] When JITSIC uncovered transactions used by large corporations to
generate inappropriate foreign tax credit benefits, the information
was shared among members. The IRS made the generator a compliance
concern for large corporations and has been pursuing these cases.
[16] OECD, Engaging with High Net Worth Individuals on Tax Compliance
(2009).
[17] For more information on IRS's related entities program, see GAO,
IRS Can Improve Efforts to Address Tax Evasion by Networks of
Businesses and Related Entities, [hyperlink,
http://www.gao.gov/products/GAO-10-968] (Washington, D.C.: Sept. 24,
2010).
[18] For more information about factors that limit the comparability
of tax administration systems, see Organisation for Economic Co-
operation and Development (OECD), Tax Administration in OECD and
Selected Non-OECD Countries: Comparative Information Series (2008).
[19] PAYE is an amount an employer deducts from an employee's salary
and wages to satisfy income tax and other obligations. Company Tax is
income taxed at the company rate. Schedular Payments are paid by self-
employed contractors and companies often in the agricultural,
horticultural, and viticulture industries. The business or person
paying the contractor is required to deduct a pre-determined
percentage of income and remit this to IRD.
[20] KiwiSaver is a voluntary, work-based retirement savings
initiative.
[21] The Family tax credit provides payments to families with
dependent children age 18 or younger earning less than specified
minimum income levels and varying depending on the number of children.
The In-work tax credit provides payments for parents based on the
number of hours of weekly paid employment. The Minimum family tax
credit provides payments to parents with dependent children based on
the number of hours of weekly paid employment. The Parental tax credit
provides payments for a newborn baby for the first 8 weeks and is an
alternative to Paid Parental Leave, which is administered on behalf of
the Department of Labour.
[22] Accommodation supplements assist families with rent, board, or
costs of owning a home. Childcare subsidies assist families with
childcare costs for children under 14. Temporary additional support is
a weekly payment to help families meet essential living costs.
[23] Generally, IRD makes WFF tax credit payments (weekly, biweekly or
annually). MSD may make the Family tax credit payment instead of IRD,
such as when recipients are receiving welfare benefits. MSD makes its
WFF tax credit payments mainly through the benefit system.
[24] GAO, Opportunities to Reduce Potential Duplication in Government
Programs, Save Tax Dollars, and Enhance Revenue, [hyperlink,
http://www.gao.gov/products/GAO-11-318SP] (Washington, D.C.: Mar. 1,
2011).
[25] GAO, Government Performance And Accountability: Tax Expenditures
Represent a Substantial Federal Commitment and Need to Be Reexamined,
[hyperlink, http://www.gao.gov/products/GAO-05-690] (Washington, D.C.:
Sept. 23, 2005).
[26] A similar approach is now required under the recently enacted
GPRA Modernization Act of 2010, Pub. L. No. 111-352, 124 Stat. 3866
(2011). The act requires OMB, in coordination with agencies, to
develop federal government priority goals including a limited number
of crosscutting goals, and assess the contributions made toward those
goals by various agencies and federal activities--including spending
programs and tax expenditures.
[27] All returns are final at October 31. The taxpayer must appeal
before the end of the 5th year following the assessment year.
[28] Finland has about 500,000 businesses, of which about half were
solely owned by individual taxpayers as of 2010.
[29] Based on 2011 estimates, the population median age in Finland is
42.5 years as compared to the U.S. median age of 36.9 years.
[30] A Decree of the Ministry of Transport and Communications
specifies the minimum rate of functional Internet access as a
universal service and requires a functional rate for downstream
traffic as 1 megabit per second.
[31] About three-quarters of Finnish citizens use an Internet bank.
[32] If the taxpayer fails to file a return and enough information
returns reporting income have been filed, the IRS can create a return,
based on that information, and mails it to the taxpayer for acceptance
or adjustment. IRS prepares these returns under a compliance program
and the taxpayer may be assessed penalties.
[33] EU members include Austria, Belgium, Bulgaria, Cyprus, the Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary,
Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands,
Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the
United Kingdom.
[34] In addition to EU members, certain dependent and associated
territories of member countries have agreed to participate with the
directive. These territories include the Cayman Islands, Anguilla,
Turks and Caicos Islands, Montserrat, Aruba, Jersey, Guernsey, the
Isle of Man, the British Virgin Islands, and the Netherlands Antilles.
Four of the territories (Anguilla, Aruba, Cayman Islands, and
Montserrat) have agreed to information exchange. As of October 2010,
the Netherlands Antilles became an independent nation.
[35] Paying agents are defined as intermediaries responsible for
paying interest income received from debtors to owners of the debt.
For example, a bank can be considered a paying agent.
[36] These nations are the Swiss Confederation, the Principality of
Liechtenstein, the Republic of San Marino, the Principality of Monaco,
and the Principality of Andorra. The information upon request exchange
generally requires a more detailed justification for the information
needed by the requesting tax authority.
[37] Six dependent and associated territories (Turks and Caicos
Islands, Jersey, Guernsey, the Isle of Man, the British Virgin
Islands, and the Netherlands Antilles) have agreed to the withholding
provisions.
[38] See Commission of the European Communities, Commission Staff
Working Document, Presenting an economic evaluation of the effects of
the Council Directive 2003/48/EC on the basis of the available data;
SEC(2008) 2420 (Brussels: Sept. 15, 2008).
[39] The United Kingdom reported information from July 1, 2005, to
April 5, 2006.
[40] The amount corresponds with 75 percent of the total withholding
tax or about €745.47 million (about US$984 million). The British
Virgin Islands and the Netherlands Antilles did not share withholding.
[41] An example would be Liechtenstein foundations where payments made
are covered by the directive, but in practice the payments rarely were
reported as interest payments.
[42] The convention is in force among Azerbaijan, Belgium, Denmark,
Finland, France, Iceland, Italy, the Netherlands, Norway, Poland,
Slovenia, Spain, Sweden, Ukraine, and the United Kingdom.
[43] Excise duties are levied on items such as alcohol products,
tobacco products, and mineral oils.
[44] After April 2011, the personal allowance will be reduced for
those with income above £100,000 (US$160,780).
[45] The UK has additional tax rates for interest savings and dividend
income. The rates for both savings and dividend income start at 10
percent, and higher rates may apply depending on the amount of the
related income.
[46] Retired individuals receiving a pension will pay income tax
through the Pay As You Earn (PAYE) or self-assessment systems.
[47] The employees can also ask HMRC to include other income such as
some self-employment, rental, or savings income in determining their
PAYE code.
[48] HMRC officials said that only HMRC can adjust PAYE codes because
only HMRC knows a taxpayer's total income. A taxpayer can provide HMRC
with additional information that can be used to adjust the PAYE code.
[49] Data mining is a technique for extracting knowledge from large
volumes of data. See GAO, Data Mining: Federal Efforts Cover a Wide
Range of Uses, [hyperlink, http://www.gao.gov/products/GAO-04-548]
(Washington, D.C.: May 4, 2004).
[50] House of Commons Committee of Public Accounts, HM Revenue and
Customs' 2009-10 Accounts (January 2011).
[51] For the list of all factors and their elements, see the ATO
publication on Large Business and Tax Compliance, Australian Taxation
Office (June 2010).
[52] Kristina Murphy, Moving forward towards a more effective model of
regulatory enforcement in the Australian Taxation Office, Centre for
Tax System Integrity, Research School of Social Sciences, Australian
National University (2004).
[53] OECD, Engaging with High Net Worth Individuals on Tax Compliance
(2009).
[54] GAO, IRS Can Improve Efforts to Address Tax Evasion by Networks
of Businesses and Related Entities, [hyperlink,
http://www.gao.gov/products/GAO-10-968] (Washington, D.C.: Sept. 24,
2010).
[55] Profits tax is paid on all profits arising in or derived from
Hong Kong from a trade, profession, or business carried on in Hong
Kong.
[56] Michael Littlewood, Taxation Without Representation: The History
of Hong Kong's Troublingly Successful Tax System, University of Hong
Kong Press, Hong Kong, (2010).
[57] In addition to declaring income and any claimed deductions and
allowances, the return includes name and address, and a Hong Kong
Identity Card number or passport number.
[58] The Salaries Tax is imposed on income from employment or pension,
while income tax generally is imposed on income from many sources
beyond salaries, including interest, dividends, and capital gains.
[59] Individuals have 3 months to file if they solely-owned any
unincorporated business.
[60] OECD, Revenue Statistics 2010--Special feature: Environmental
Related Taxation (2010). More information about these taxes can be
obtained from the OECD publication Annex A.
[End of section]
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