From the U.S. Government Accountability Office, www.gao.gov Transcript for: Watchdog Report: Insights from Foreign Tax Practices Audio interview by GAO staff with Mike Brostek, Director, Strategic Issues Related GAO Work: GAO-11-439: Tax Administration: Information on Selected Foreign Practices That May Provide Useful Insights Released on: June 23, 2011 [ Background music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the Government Accountability Office. It's June 23, 2011. The United States and some foreign countries face similar tax administration issues. Understanding how other countries have addressed these issues can help inform our own domestic discussions about tax reform. A group lead by Mike Brostek, a Director in GAO's Strategic Issues team, recently reviewed the tax administration practices of six foreign countries. GAO's Jeremy Cluchey sat down with Mike to learn more. [ Jeremy Cluchey: ] Your team looked at tax practices in six foreign countries. What countries did you pick and how did you go about selecting them? [ Mike Brostek: ] We went about selecting countries that faced a tax challenge that was similar to what the Internal Revenue Service faces but that handled that challenge differently and where there was some evidence that they were at least happy with their approach to dealing with it. The countries we picked was actually a mixture of countries, a multilateral organization, and a sort of a Province of China. We looked at New Zealand, Finland, the United Kingdom, Australia, the European Union, and Hong Kong. [ Jeremy Cluchey: ] Can you provide a few examples of some of the innovative foreign tax practices that you found there? [ Mike Brostek: ] Yes. One of my favorites was in New Zealand. New Zealand is of course a small country but it often has good examples for others. They have tax expenditures just as we do. A tax expenditure is sort of a spending program built within the tax code. We have a problem of trying to get those evaluated routinely and looked at with corresponding outlay programs, so for instance there are higher education tax expenditures in the U.S. but they're also grant and loan programs intended to help people with their higher education expenses. We don't evaluate those together. In New Zealand, they set up a system to evaluate tax expenditures and related outlay programs at the same time. They've overcome a major obstacle that the U.S. has which is that in our country no one except the tax administrator can have access to tax data. Well, it's the same thing in New Zealand but they were able to figure out a way for those in the outlay programs to have access to tax peer data for the limited purpose of evaluating how effective these outlay tax expenditures work together. Another practice that I was particularly interested in was in the Australian tax administrator where they have identified individuals with high wealth as having unusual characteristics that need to be looked at differently than they do the normal taxpayer. High wealth individuals tend to have very complex investments, they tend to be involved with a network of entities that they control directly or perhaps their spouse or their children or business associates control and those are very difficult tax situations for the tax administrator to get a handle on. This is a case where IRS has actually adopted the practice of the other country. IRS now has a global high wealth initiative where they're trying to look separately at high wealth individuals, their unique tax characteristics, and to unravel these networks of entities that they may be involved in to ensure that they're paying their proper amount. [ Jeremy Cluchey: ] You noted an example where IRS has adapted their tax practices based on another country's example. Your report also notes that cultural as well as legal differences can affect the transferability of some of these practices to the United States. Can you elaborate on this a bit? [ Mike Brostek: ] Sure. IRS in addition to adopting this practice that I mentioned is active in a lot of international tax administrative organizations and they develop a reasonably good understanding of what's going on, certainly in terms of major initiatives around the country, but there are practices that take place in other countries that may or may not be adaptable here. In Hong Kong, they have the salaries tax like our wages being taxed. But unlike here, where we have our taxes withhold from every pay check we receive, they pay voluntarily twice a year. They don't have the taxes withheld from their wages. It might work here but it would be a major cultural change for us. [ Jeremy Cluchey: ] What would you say for taxpayers interested in how the U.S. administers tax programs is the take away of this report? [ Mike Brostek: ] I think the take away is that it's always useful to look at others and how they're doing their work because we might learn something that's of use to us. It can be of useful to the tax administrator and may be adapted or adopted by the tax administrator under their own authority or there's situations where policymakers like Congress may learn something that they would like to adapt or adopt. [ Background music ] [ Narrator: ] To learn more, visit GAO's Web site at GAO.gov and be sure to tune in to the next edition of GAO's Watchdog Report for more from the congressional watchdog, the Government Accountability Office.