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United States Government Accountability Office: 
GAO: 

Testimony: 

Before the Committee on Finance, U.S. Senate: 

For Release on Delivery: 
Expected at 10:00 a.m. EDT:
Tuesday, April 12, 2011: 

Tax Administration: 

Preliminary Information on Selected Foreign Practices That May Provide 
Useful Insights: 

Statement of Michael Brostek, Director: 
Strategic Issues Team: 

GAO-11-540T: 

GAO Highlights: 

Highlights of GAO-11-540T, testimony to the Committee on Finance, U.S. 
Senate. 

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. 

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 as well as tax experts, tax practitioners, taxpayers, 
and trade group representatives. GAO also examined documents and met 
with IRS officials. This preliminary information is based on GAO’s 
ongoing work for the Committee to be completed at a later date. 

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 testimony 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 impacts and improve 
program delivery. 

Foreign administrator:	Finland; 	
Practice: Uses the internet to calculate individual tax withholding 
rates and revise pre prepared 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 analysis. 

[End of table] 

Although differences in laws, culture, or other factors likely would 
affect the transferability of foreign tax practices to the U.S., 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 U.S. 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, IRS may adopt new practices based on the needs 
of the U.S. tax system. For example, in 2009, IRS formed the Global 
High Wealth Industry program. IRS consulted with Australia about its 
approach and operational practices. 

What GAO Recommends: 

GAO makes no recommendations in this testimony. 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. 

View GAO-11-540T or key components. For more information, contact 
Michael Brostek at (202) 512-9110 or brostekm@gao.gov. 

[End of section] 

Chairman Baucus, Ranking Member Hatch, and Members of the Committee: 

I appreciate this opportunity to discuss how some foreign tax 
administrators have focused on issues similar to those faced by the 
United States (U.S.). All tax administrators strive to address similar 
issues regardless of the specific provisions of their laws. 
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. 

My statement today will draw from our ongoing work for the committee 
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 Internal Revenue Service (IRS) identifies and adopts tax 
administration practices used elsewhere. Our work includes selected 
practices of New Zealand, Finland, European Union (EU), United Kingdom 
(UK), Australia, and Hong Kong.[Footnote 1] Our report, to be issued 
in May 2011, will provide our detailed descriptions of those tax 
administration practices and their differences from U.S. practices. 

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 from how the U.S. approaches 
similar issues. We reviewed documents and interviewed officials from 6 
foreign tax administrations. We primarily used documentation from each 
government's reports that are publicly available. When possible, we 
confirmed additional information provided to us by officials and held 
meetings with experts, public interest groups, and trade groups to 
identify their views about these systems. To describe whether and how 
the IRS identifies and adopts tax administration practices used 
elsewhere, we reviewed related documents and interviewed IRS 
officials. We discussed the information in this statement with 
officials of IRS and six foreign tax administrators and incorporated 
their comments as appropriate. 

We conducted our work from October 2009 to March 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 statement. 

Although the descriptive information presented in this testimony may 
provide useful insights for Congress and others on alternatives to 
current U.S. tax policies and practices, comparisons across tax 
administration systems or even within systems must include a separate 
analytic step to identify the factors that might affect the 
transferability of the practices, such as differences in law, to the 
U.S. Based on such an analysis, countries determine whether others' 
practices could be adopted. For example, nations have differing 
cultures. Generally, attitudes toward government can affect voluntary 
tax compliance. When taxpayers are more willing to accurately comply 
with tax rules, less enforcement action by the administrators is 
needed. Measurements of taxpayers' attitudes are not well defined or 
uniform; nor are measurements of voluntary compliance. 

Examples of Selected Tax Administration Practices to Address Known Tax 
Administration Issues: 

The following examples illustrate how New Zealand, Finland, EU, UK, 
Australia, and Hong Kong have addressed well known tax administration 
issues. 

New Zealand Does Joint Evaluations of Tax Expenditures and 
Discretionary Spending Programs to Analyze Their Effects and Improve 
Program Delivery: 

New Zealand, like the U.S., addresses various national objectives 
through a combination of tax expenditures and discretionary spending 
programs. Tax expenditures are the amount of revenue that a government 
forgoes to provide some type of tax relief for taxpayers in special 
circumstances, such as the Earned Income Tax Credit in the United 
States.[Footnote 2] 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 separately evaluating certain government 
services, 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 Working for Families 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 includes monthly income 
received by its beneficiaries. This required that IRD and MSD keep 
separate datasets, making it difficult to assess the cumulative effect 
of the WFF program. 

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 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 were from an indigenous 
population, which 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. Changes made by Parliament to 
WFF based on these findings 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 3] 

While economic 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 U.S. 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 responsibilities to evaluate the tax 
expenditures.[Footnote 4] Consequently, the U.S. lacked information on 
how effective tax expenditures were in achieving their intended 
objectives, how cost-effective benefits were achieved, and whether tax 
expenditures or discretionary spending programs worked well together 
to accomplish federal objectives.[Footnote 5] 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. 

Finland Uses the Internet to Enable Taxpayers to Adjust Individual Tax 
Withholding Rates and Revise Pre Prepared Tax Returns to Improve 
Service at Lower Costs: 

Finland better ensures 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 6] 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 1.4 to 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 
over the last 5 years. 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 pre-prepared 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 government-wide 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 pre-prepared return 
systems were established under a strong culture of national 
cooperation. For the pre-prepared return system to work properly, 
Finland's business and other organizations who 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. 

In contrast to Finland's self-described "simple and stable" system, 
the U.S. tax system is complex and constantly changing. 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 U.S., the IRS's Website 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 which can be sent through the mail 
or delivered in person, whereas in the U.S. the taxpayer must file a 
form with the employer on the amount to be withheld based on the 
estimation system's results. 

In the U.S., individual income tax returns are completed by taxpayers--
not the IRS--using information returns mailed to their homes and their 
own records.[Footnote 7] Taxpayers are to accurately prepare and file 
an income tax return by its due date. In Finland, very few taxpayers 
use a tax advisor to prepare their annual individual income tax 
return. Unlike in Finland, U.S. individual taxpayers heavily rely on 
tax advisors and tax software to prepare their annual return. In the 
U.S. about 90 percent of individual income tax returns are prepared by 
paid preparers or by the taxpayer using commercial software. 

The EU's Multilateral Treaty Information Exchange on Interest Payments 
Is Envisioned to Spur Compliance: 

The European Union 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 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 8] 

As part of the directive, 3 EU member nations as well as the 5 
European nonmember nations agreed to apply equivalent measures (i.e., 
withholding tax with revenue sharing described below) during a 
transition period through 2011, rather than automatically exchanging 
information.[Footnote 9] 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 
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. 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. 

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 have contributed to the 
effective use of the information exchanged under the directive. 

Comparing the EU and U.S. practices on exchanging tax information with 
other countries, the U.S. agreements and the directive both allow for 
automatic information exchange.[Footnote 10] The U.S. is part of 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 U.S.[Footnote 11] However, the 
U.S. is prevented by IRC 6105 from releasing data about the extent of 
information exchanged with treaty partners or the type of information 
exchange used. 

The 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 who make payments to a taxpayer such as for bank account 
interest. A key element of this system 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. 

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 12] Even so, 
payers of interest or dividend income withhold tax before payments are 
made. 

PAYE also facilitates the payment of tax liabilities by periodic 
withholding at source for wages under the PAYE system. 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. 

Taxpayers can provide HMRC with additional information that can be 
used to adjust their withholding. 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. 

The UK and U.S. 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 U.S. 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 IRS, 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 U.S. 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 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. 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 corresponding data on tax returns. The closest form of 
unique identifier that HMRC uses with some limitations is the national 
insurance number. HMRC officials said they are barred from using the 
national insurance number for widespread document matching, which 
leaves HMRC with some unmatchable information returns. 

Australia Uses a Compliance Program for High Net Wealth Individuals 
That Focuses On Their Full Set of Business Interests to Improve 
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. 
Australia has developed a compliance program that requires these 
taxpayers to provide information on these relationships and that 
provides such taxpayers additional guidance on proper tax reporting. 
The Australian High Net Wealth Individuals (HNWI) program focuses on 
the characteristics of wealthy taxpayers that affect their tax 
compliance. According to the Australian Tax 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,F 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.[Footnote 13] 

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.[Footnote 14] 

According to FY 2008 ATO data, the HNWI program has produced financial 
benefits. Since the establishment of the program in 1996, ATO has 
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 15] 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 U.S., had 
formed groups to focus resources on high wealth individuals. 

Like the ATO, the IRS is taking a close look at high income and high 
wealth individuals and their related entities. As announced by the 
Commissioner of Internal Revenue in 2009, the IRS formed the Global 
High Wealth (GHW) industry to take a holistic approach to high-wealth 
individuals. The IRS consulted with the ATO as GHW got up and running 
to discuss the 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 U.S. 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 16] However, the IRS has been examining how to do 
risk assessments of networks through its GHW program since 2009. 
Another difference is that the ATO requires HNWIs to report their 
business networks and the IRS currently does not. 

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 and 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. 

To collect the Salaries Tax, Hong Kong does not use periodic (e.g., 
biweekly or monthly) tax withholding by employers. Rather, Hong Kong 
collects it 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), 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, Inland Revenue Department (IRD)--the tax administator-- 
annually prepares individual tax returns for taxpayers based on 
information returns filed by employers. Taxpayers review the prepared 
return and make any revisions such as including deductions (e.g., 
charitable contributions), and file 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 these groups. 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. 

Unlike Hong Kong's twice a year payments for the Salaries Tax, the 
U.S. income tax on wages relies on periodic tax withholding in which 
tax is paid as income is earned. 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 U.S. taxes many forms of income 
beyond salary income on the individual tax return. 

IRS Considers Foreign Tax Practices That Might Merit Adoption: 

IRS officials learn about foreign tax practices by participating in 
international organizations of tax administrators. By doing so, IRS 
officials say they regularly exchange ideas and learn about other 
practices. As the IRS learns of these practices, it may adopt the 
practice based on the needs of the U.S. tax system. 

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 and transparency of tax administrators, promote 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 17] 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 Australia, Canada, China, Japan, South Korea, United Kingdom 
and the U.S. tax agencies. 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 18] 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 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 19] 
According to an IRS official, during IRS's participation in the OECD 
High Wealth Project in 2008, IRS staff began to realize the value of 
this program to the U.S. tax system. As we stated, the IRS now has a 
program focused on wealthy individuals and their networks. 

Chairman Baucus, Ranking Member Hatch, and Members of the Committee, 
this concludes my statement. I would be happy to answer any questions 
you may have at this time. 

Contacts and Acknowledgments: 

For further information regarding this testimony, please contact 
Michael Brostek, Director, Strategic Issues, on (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 
statement. Individuals making key contributions to this testimony 
include Thomas Short, Assistant Director; Leon Green; John Lack; Alma 
Laris; Andrea Levine; Cynthia Saunders; and Sabrina Streagle. 

[End of section] 

Footnotes: 

[1] The Hong Kong Special Administrative Region is part of the 
People's Republic of China. Throughout this statement we will use Hong 
Kong as the abbreviation for this region. 

[2] The Earned Income Tax Credit (EITC) is a refundable credit to 
reduce individual income tax for certain people who work and have less 
than $48,362 of earned income for tax year 2010. The amount of the 
credit varies depending on the filing status and number of qualifying 
children. 

[3] To adjust foreign currencies to U.S. dollars, we used the Federal 
Reserve Board's database on foreign exchange rates. New Zealand 
dollars converted to U.S. dollars as of December 31, 2004. 

[4] 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). 

[5] 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). 

[6] 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. 

[7] 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. 

[8] Under automatic information exchange, countries agree to routinely 
provide information about tax-related transactions. 

[9] 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 specific justification for the information needed 
by the requesting tax authority. 

[10] U.S. agreements include tax treaties, tax information exchange 
agreements, mutual legal assistance treaties, and mutual legal 
assistance agreements. 

[11] 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. 

[12] 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. 

[13] Australian dollars converted to U.S. dollars as of December 31, 
2008. 

[14] 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.: September 
24, 2010). 

[15] Australian dollars converted to U.S. dollars as of December 31, 
2007. 

[16] 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). 

[17] Center for Inter-American Tax Administration, [hyperlink, 
http://www.ciat.org]. 

[18] 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. 

[19] OECD, Engaging with High Net Wealth Individuals on Tax 
Compliance, 2008. 

[End of section] 

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