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74–610—PDF 2011

S. HRG. 112–438 

BEST PRACTICES IN TAX ADMINISTRATION: 

A LOOK ACROSS THE GLOBE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

APRIL 12, 2011 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 2 

WITNESSES 

Brostek, Michael, Director, Tax Policy and Administration, Strategic Issues, 

Government Accountability Office, Washington, DC ........................................ 4 

Erard, Brian, Ph.D., B.E. and Associates, Reston, VA ......................................... 6 

Gaffney, Michael, tax partner, PricewaterhouseCoopers, New York, NY ........... 8 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 23 

Brostek, Michael: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 25 

Erard, Brian, Ph.D.: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 43 

Gaffney, Michael: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 54 

Responses to questions from committee members ......................................... 59 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 60 

COMMUNICATION

Technology Policy Institute ..................................................................................... 63 

(III) 

(1) 

BEST PRACTICES IN TAX ADMINISTRATION: 

A LOOK ACROSS THE GLOBE 

TUESDAY, APRIL 12, 2011 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:08 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Hatch, Grassley, and Thune. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; Lily 

Batchelder, Chief Tax Counsel; Jeff Vanderwolk, International Tax 

Counsel; and Tiffany Smith, Tax Counsel. Republican Staff: Chris 

Campbell, Staff Director; Mark Prater, Deputy Chief of Staff and 

Chief Tax Counsel; and Theresa Pattara, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Recently, Neal Mishler, a veteran from Great Falls, MT, wrote 

me to lament how difficult tax compliance can be, and here is what 

he said: ‘‘The tax laws are now so complex and complicated that 

businesses and individuals pay billions of dollars to lawyers and accountants to determine ways to minimize their tax burden and to 

calculate the tax amount they owe the government.’’ 

Neal runs a couple of small businesses in Great Falls. One of 

them has operations outside of our State. Neal said his tax situation has become so complicated that he has to pay lawyers and accountants thousands of dollars each year just to learn how much 

his tax liability will be. ‘‘And even then,’’ he said, ‘‘no two accountants ever come up with exactly the same tax liability.’’ 

Unfortunately, Neal is right. Today’s Federal income tax laws 

are far too complicated. They are often uncertain, unclear, and difficult to meet. 

Our tax forms and instructions are often lengthy and confusing. 

The form 1040 alone has 14 schedules and instructions totaling 

hundreds of pages. The tax code—together with the tax regulations—equals a stack of 12 Bibles, Old and New Testament. 

In 1981, nearly 40 million taxpayers used paid tax preparers. 

Back in 1981, 40 million people. Today, that number has more than 

doubled. Tax compliance is an increasing burden on U.S. businesses, and surveys have found that the U.S. lags far behind other 

countries in terms of effective tax administration. 

2 

Our hearing today will examine tax administration practices 

around the world. We will look at lessons learned and best practices that could work here in the United States. No single system 

stands out as an ideal model for the rest of the world, but examples 

of successful techniques from other countries provide insight into 

how we can improve. 

Providing taxpayers with returns personalized with their own 

tax data already filled out could improve the filing process. Countries like Finland, Denmark, Sweden, Spain, and the U.K. all use 

this system, or one like it. In these countries, many taxpayers just 

have to review a tax return that the government prepares for them 

rather than having to fill out the return from scratch. 

In Ireland, it takes businesses about 91⁄2 work days per year to 

do their taxes. For an average Canadian business, it takes about 

15 work days. But in the U.S., the estimated time it takes a business to do its taxes is significantly longer. The average business 

spends about 23 work days on their taxes. 

In another recent survey, the United States ranked 62nd overall 

in ease of paying taxes for businesses. By comparison, the U.K. 

ranked 16th, not 62nd, worldwide, and Hong Kong ranked 3rd. We 

could do better, and we must. Good tax administration is essential 

for good government. It is critical to making our tax code work as 

intended. We could develop the best tax policy, but the administration of that policy is critical to ensuring those laws are successfully 

executed. We should simplify the code, and that is a topic this committee has already started to review. 

Tax reform will be an opportunity to reduce the compliance burden on taxpayers and make it easier for people to meet their obligations. It will give us a chance to ensure forms and instructions 

are kept as simple and easy to use as possible, and the opportunity 

to make recordkeeping requirements more clear and easy to meet. 

So let us work to improve tax administration before, during, and 

after people file their taxes. Let us make it easier for folks like 

Neal Mishler of Great Falls, MT, to easily meet their tax obligations so they can devote more time to building their businesses and 

contributing to the growth that our economy needs. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. Senator Hatch? 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. Thank you for 

holding this hearing on tax administration around the globe. 

According to some sources, just at this time of year several decades ago, when attempting to fill out his U.S. tax return, Albert 

Einstein threw up his hands in frustration and said, ‘‘The hardest 

thing to understand is the United States income tax system.’’ Keep 

in mind, the father of the Theory of Relativity made this complaint 

about the complexity of the U.S. code, U.S. tax law. 

That was prior to the AMT, the Alternative Minimum Tax; prior 

to PEP, the Personal Exemption Phaseout; prior to Pease, that is, 

the limitation on itemized deductions; prior to subpart F; prior to 

the Making Work Pay credit; prior to extenders; and prior to worldVerDate Nov 24 2008 21:37 Jun 25, 2012 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\74610.000 TIMD
3 

wide interest apportionment for purposes of calculating foreignsource income for foreign tax credit limitation purposes, just to 

mention a few of the doozies. 

I wonder what that Nobel Prize winner in Physics would say now 

about the tax system’s complexity. My guess is, it would not be fit 

for polite conversation. So we are here today to hear about how 

other countries are improving tax administration and tax compliance. Surely one way to improve tax administration and compliance is by reducing complexity, or at least by not increasing complexity. 

There are other ways to improve tax administration. One way to 

improve tax administration is through better computer software 

and greater interaction via the Internet between the revenue authority and taxpayers. However, it is worth considering to what extent greater reliance on technology actually enables greater complexity in the tax code. 

That is, it is certainly the case that computers could always be 

improved and programmed to handle an ever-greater complexity in 

the tax code, but this may come at the cost of leaving human understanding of the code behind. As human beings become even 

more mystified as to the workings of the code, they have become 

less responsive to tax incentives and less understanding of how 

their government is funded. 

Another way to improve tax administration and compliance could 

be through government-prepared or ‘‘pre-populated’’ tax returns. 

While this certainly would reduce the time that many individuals 

would have to spend on tax return preparation, it also makes them 

less aware of what the tax law really is. 

We see this trade-off between making administration and compliance easier, while decreasing the citizenry’s awareness of government financing in another area: withholding. A system of income 

tax withholding on wages has been in place since 1943. Now, while 

it has assured the government a steady system of revenue and reduces the chance that some individuals will not have enough 

money to pay their taxes come April 15, withholding also makes 

taxpayers less aware of the substantial amount of money they are 

paying to the government. 

Whatever the case, I very much appreciate our three witnesses 

being here today. I really look forward to their insights about how 

other countries around the globe grapple with tax administration 

and compliance, and I am sure there must be some lessons for 

America in this. So, thank you, Mr. Chairman. I look forward to 

today’s hearing. 

The CHAIRMAN. You bet. 

[The prepared statement of Senator Hatch appears in the appendix.] 

The CHAIRMAN. Senator Grassley, do you wish to make a statement? 

Senator GRASSLEY. I do not. 

The CHAIRMAN. All right. 

Senator GRASSLEY. I know that surprises you. [Laughter.] 

But I will have some questions. 

The CHAIRMAN. If you want to, you sure can. 

4 

Senator GRASSLEY. Well, thank you very much. I may take advantage of that, but not today. 

The CHAIRMAN. Thank you, Senator Grassley. 

I would now like to introduce our witnesses. First is Michael 

Brostek from the Government Accountability Office. Mr. Brostek is 

the Director of Tax Policy and Administration. 

Second, Dr. Brian Erard. Dr. Erard runs an economics consulting 

practice and has extensive experience on tax administration issues 

in Canada. 

Finally, we have Mr. Michael Gaffney with PricewaterhouseCoopers. Mr. Gaffney is familiar with revenue agencies around the 

globe in his former position as global head of tax for Merrill Lynch. 

Thank you all for coming, very much. We look forward to what 

you have to say. It is about time for this Congress to learn a little 

bit more about what other countries are doing; we might learn 

something. I encourage you to put your statements in the record, 

and I also encourage you to speak briefly and summarize for about 

5, 6 minutes. 

Mr. Brostek, you are first. 

STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX POLICY 

AND ADMINISTRATION, STRATEGIC ISSUES, GOVERNMENT 

ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Mr. BROSTEK. Chairman Baucus, Ranking Member Hatch, Senator Grassley, thank you for inviting me to discuss the preliminary 

results of our work for the committee on foreign tax administrators’ 

practices. 

We selected tax administration practices from five tax administrators and one multi-national organization. We looked for how 

these tax administrators addressed significant tax administration 

issues in ways that differ from U.S. practices and might offer lessons to the U.S. 

Although differences among nations in their laws, culture, and 

other factors might mean that a foreign practice is not practical for 

the U.S. or needs to be adapted to U.S. circumstances, the practices 

we describe may provide useful insights to U.S. policymakers and 

the IRS. We also reviewed how IRS learns about foreign tax administrators’ practices. 

Given limited time, I will focus on three practices. First, New 

Zealand evaluates its tax expenditures in its related discretionary 

spending programs together to determine whether they are effectively accomplishing their intended purposes. That is in contrast to 

the U.S., where GAO has long noted the lack of systematic evaluation of our tax expenditures and lack of clarity in the roles of 

Treasury, IRS, and related discretionary spending agencies. 

One of the key challenges to integrated tax evaluations in New 

Zealand and in the U.S. is that taxpayer information is private and 

not to be shared with others unless specifically authorized. New 

Zealand overcame this limitation by negotiating a Memorandum of 

Understanding between the tax agency and the Social Services 

Agency. 

This MOU enabled Social Services Agency staff to be sworn in 

as Revenue Agency employees, and therefore to be able to work 

with the data set that linked information from the taxing agency 

5 

with information from the Social Services Agency. Full protection 

of taxpayer privacy was required. 

Through the linked data set, researchers were able to document 

overall success of the tax and related spending programs in furthering the employment of low- and middle-income families, but it 

also enabled them to identify impediments to some citizens’ participation in the programs. 

A second example of foreign practices is Finland’s use of electronic tax administration through the Internet to help lower government costs, provide useful services to taxpayers, and encourage 

private sector growth. Finland created a web-based system for taxpayers to use to adjust their income tax withholding. That system 

enables taxpayers to adjust withholding throughout the year as 

their circumstances change, and thereby better ensure accurate 

withholding as opposed to over- or under-withholding. 

The system enables taxpayers to have withholding adjustments 

automatically sent to their employers as well. In addition, Finland 

pre-populates tax returns for taxpayers, who may then use the 

Internet to make necessary adjustments based on circumstances 

that the Revenue Agency was unaware of. 

Overall, according to Finnish officials, the use of innovative electronic services has helped reduce tax administrator staffing by 11 

percent over 6 years. The several private sector and taxpayer 

groups that we spoke with said that the filing and withholding systems worked well. These processes are part of an overall strategy 

by Finland, recognizing that its population is aging. By making 

government services more efficient, Finland can free up more of its 

labor force to be privately employed. 

The third system that we looked at, or practice we looked at, is 

Australia’s high net worth individual program. Australia recognized that individuals with high wealth had much more complex 

tax situations than others. One of the complexities was that these 

individuals tended to control, or be linked, to multiple entities such 

as corporations, partnerships, and trusts. This web of relationships 

had to be understood in order to discern the correct tax liabilities 

for these taxpayers. 

Australia’s high-wealth individuals program was designed to provide enhanced services to these taxpayers to help them understand 

their obligations and how their complex situations resulted in varying tax liabilities. It was also designed to help the revenue agency 

identify non-compliant taxpayers for further review. 

To identify those needing further review, Australia, in part, created a tax return tailored to high net worth individuals and began 

requiring them to identify all of the entities they were associated 

with. 

IRS learns about foreign tax administrators’ practices by participating in, and sometimes leading, multi-national tax organizations. 

Through contacts with foreign tax administrators, officials learn of 

differing practices, which IRS can then consider for possible U.S. 

adoption. Due to these contacts, IRS, in 2009, created a Global 

High Wealth Industry program that in part is based on the Australian model I just discussed. 

This concludes my oral statement. I would be happy to answer 

your questions. 

6 

The CHAIRMAN. Thank you, Mr. Brostek, very much. That is very 

interesting. 

[The prepared statement of Mr. Brostek appears in the appendix.] 

The CHAIRMAN. Dr. Erard? 

STATEMENT OF BRIAN ERARD, Ph.D., 

B.E. AND ASSOCIATES, RESTON, VA 

Dr. ERARD. Chairman Baucus, Ranking Member Hatch, Senator 

Grassley, thank you for inviting me to testify on best practices in 

tax administration. I have been asked to focus on the case of Canada and potential lessons for the U.S. administration. 

When comparing tax administrations in the two countries, it is 

important to keep in mind that Canada has a much smaller scale 

of operation. The population is about 34 million. It has a national 

value-added tax that is imposed at a rate of 5 percent. The national 

tax agency, the Canada Revenue Agency, or CRA, actually administers the provincial individual income, corporate income, and sales 

taxes on behalf of many of its 10 provinces. 

On balance, the individual and corporate income taxes in Canada 

are less complex and burdensome to taxpayers than in the U.S. 

The estimated cost to Canadians to keep records, research the 

laws, purchase software, hire outside assistants, and file their returns is on the order of 3 percent of the revenue raised; in comparison, in the U.S. the estimates are around 9 percent, a rather striking difference. 

The CHAIRMAN. That 3 percent is 3 percent of what? 

Dr. ERARD. Of the revenue raised for the individual income tax. 

The CHAIRMAN. Thank you. 

Dr. ERARD. The cost of a typical client transaction with the government in Canada is estimated to be about a dollar when conducted over the Internet, about $8 by telephone, $38 if it is conducted by mail, and $44 if it is over the counter. In light of this, 

Canada has invested significant resources in recent years to encourage taxpayers to avail themselves of cost-effective self-serve options. 

Here are some examples of what Canadian taxpayers can now securely access and view online: details from their current and up to 

11 prior individual tax returns, account balance and payment information, and certain third party information returns. Canadian taxpayers can also make a variety of changes to their account information online, including amending their current and prior two tax returns, formally disputing a tax assessment, applying for refundable 

credit programs, arranging for direct deposit, making electronic 

payments, and setting up a payment plan. 

Business taxpayers have access to a similarly broad range of online options. Once authorized by their clients, tax professionals can 

access client information for multiple clients from a single point of 

access online. Elderly taxpayers with relatively simple tax circumstances can file their income tax return over the telephone by 

only answering a few yes or no questions. These individuals do not 

have to enter any information at all regarding their income, their 

deductions, or non-refundable credits, as this information is autoVerDate Nov 24 2008 21:37 Jun 25, 2012 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\74610.000 TIMD
7 

matically calculated using information already available to the 

Canada Revenue Agency. 

In a unique cross-channel service initiative, taxpayers who are 

using the online services can arrange for a CRA service agent to 

call them, while they are surfing the CRA website, to provide them 

with additional information or clarification using one of a variety 

of links strategically located throughout the site. Certainly many of 

these services go well beyond what is currently available to taxpayers in the United States and represent a desirable direction for 

U.S. services. 

I would now like to highlight some Canadian initiatives in the 

area of compliance measurement and enforcement. Outside of the 

U.S., very few tax administrations conduct large-scale random 

audit studies. However, the CRA does conduct a modest number of 

random audits for various taxpayer segments under its core audit 

program. 

While the number of such audits does not permit reliable estimation of compliance levels, it does permit reasonably precise estimates of compliance rates, and it is helpful for risk assessment 

purposes. In the U.S., some smaller scale random audit programs 

for selected tax segments may serve as an interesting alternative 

to the National Research Program in those areas where random 

audits are not considered cost-effective or feasible. 

Another CRA program I would like to highlight is called Processing Review. Under this program, selected taxpayers are asked 

to submit evidence, such as canceled checks and receipts, to verify 

their claims for specified deduction and credit items. This targeted 

verification program assists the agency in monitoring and enforcing 

compliance on roughly 30 different credit and deduction items on 

the return, while avoiding the higher cost and intrusiveness of 

more traditional face-to-face auditing methods. 

While the IRS does perform correspondence audits for certain offset items, most commonly the Earned Income Credit, employee 

business expenses, and charitable donations, my impression is the 

approach is less systematic and narrower in scope than the Canadian Processing Review Program. 

As part of its underground economy initiative, the CRA has been 

piloting some alternative approaches for outreach and enforcement. 

I am of the opinion that most tax administrations, including our 

own, do not adequately take advantage of controlled pilot programs 

to systematically test what actually works and what does not when 

it comes to delivering services and promoting compliance. 

In another noteworthy development, the Province of Quebec has 

undertaken a major initiative to address electronic sales suppression activities in the restaurant sector. It is believed that large 

amounts of cash are being skimmed with the aid of software— 

known as zappers or phantomware—that removes selected electronic records from cash registers. 

To combat this activity, all restaurants in the province are now 

required to install what are called Sales Recording Modules. This 

is one of several alternative approaches that can be used to address 

this problem. Electronic sales suppression is an important issue not 

only for sales taxes, but also income taxes. This form of evasion 

may become prevalent in the U.S. industries where cash transVerDate Nov 24 2008 21:37 Jun 25, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 R:\DOCS\74610.000 TIMD
8 

actions are frequently undertaken. Examples are restaurants, grocery stores, convenience stores, and hair stylists. 

Although relatively few instances of zapper usage have been 

identified so far in the U.S., this may be more an issue of nondetection than one of non-existence, as traditional audit methods 

are unlikely to be very effective at uncovering electronic sales suppression. I believe this is an emerging issue that deserves more attention in the U.S. 

Thank you. 

The CHAIRMAN. Thank you very much. 

[The prepared statement of Dr. Erard appears in the appendix.] 

The CHAIRMAN. Mr. Gaffney, you are next. 

STATEMENT OF MICHAEL GAFFNEY, TAX PARTNER, 

PRICEWATERHOUSECOOPERS, NEW YORK, NY 

Mr. GAFFNEY. Chairman Baucus, Ranking Member Hatch, and 

Senator Grassley, my name is Mike Gaffney. I would like to thank 

you all and the committee for the opportunity to testify on best 

practices in tax administration. 

Currently I am a partner at PWC, PricewaterhouseCoopers, in 

New York; however, my comments today will primarily be based 

upon my experiences at Merrill Lynch, where I worked from 2000 

to 2009, and was the co-head of Global Tax during that period. My 

comments are my own and do not necessarily represent the views 

of PWC or my former employer. 

What I would like to do first is sort of, at a high level, analyze 

the common threads of programs or factors that work well and 

should be considered best practices for any tax administration program. The four specific factors that I believe contribute to success 

are, one, senior management buy-in by both the tax authority and 

the taxpayer; two, frequent face-to-face meetings between senior 

tax leadership on both the taxpayer and the tax authority side. 

Those meetings ensure consistency and address any concerns before they can negatively impact the parties’ mutually agreed goals. 

The third of the four factors that I think is critical to success in 

improving tax administration is having the senior management of 

both the taxpayer and the tax authority ensuring that all levels 

within their respective organizations are involved. I have seen, 

when there is no involvement, sometimes there is no commitment 

on both sides. 

Finally, I think what is critical is a high level of trust and 2-way 

transparency between the taxpayer and the tax authority, which 

includes the ability to improvise and react to any changes that are 

required in order to ensure that the best practices achieve their 

stated goals. 

I am going to talk about two jurisdictions, the U.K. and the U.S. 

I think both have made significant improvements over the recent 

5- to 10-year period. The United Kingdom’s tax authority has for 

many years embraced developing an enhanced relationship with 

taxpayers. 

If I had to pick a single reason why they have been reasonably 

successful, it is the creation of a role called the Client Relationship 

Manager. The Client Relationship Manager acts as a single point 

9 

of contact within the tax authority for certain large, complex corporate taxpayers. 

The skill and judgment of these Client Relationship Managers 

has always impressed me, with their commercial ability and their 

ability to discern what is an important issue from not as important, 

and they bring the full benefits of the entire tax authority to the 

taxpayer. Things just seem to happen more quickly. Historically, 

while we may not have always agreed with the Client Relationship 

Manager, neither party was disagreeable. I thought there was a 

high level of respect and civility in all the dealings. I thought that 

model worked well. 

The U.S., I believe, has come a long way recently. There are two 

IRS programs that I was privileged to participate in. The first— 

well, there are more than two, but in the limited time I will focus 

on the two—is the Limited Issue Focused Examination. That grew 

out of a desire to achieve currency. I believe that program was 

largely successful due, again, to the buy-in at the senior levels of 

both organizations and the ownership of the examination by the 

IRS field team, which had adequate training in that kind of model. 

The second is the Compliance Assurance Process, which began 

maybe 6 years ago and is really sort of a leap. It is effectively examination in real time, with the goal of having the bulk of the examination conducted prior to the filing of the corporate tax return. 

The burdens on each side are fairly large, but equal. 

The taxpayer is required to bring transactions that have a significant impact on their Federal tax liability to the IRS in real 

time, effectively, prior to the filing of the return. The burden, if you 

will, on the IRS’s part is to endeavor to provide the taxpayer with 

certainty on these issues prior to the filing of the tax return. 

The ultimate goal of the program is to file an agreed-upon tax 

return, which is obviously a very high goal, but I think it is being 

worked on. Recently it has been established from a pilot program 

to a permanent part of the tax administration landscape by Commissioner Shulman last week in an announcement. 

Finally, and I see I have time, I believe taxpayers, corporate taxpayers especially, spend a significant amount of time and resources 

to comply with a complex global tax system, not just their home jurisdiction if it happens to be the U.S., but all the other countries 

they do business in. Second, this complexity likewise challenges tax 

authorities in administering that same tax law. 

If there are a couple of lessons I have taken away, it is sort of, 

first and foremost, any best practice should begin with the tax authority and taxpayer working collaboratively to define the goals, 

the procedures, and the processes to implement the best practice 

program. The involvement of senior leadership within the tax authority and the taxpayer is absolutely essential for success. 

Second, the program should be evaluated on how well it achieves 

the following four criteria: (1) enhancing mutual trust between the 

taxpayer and the tax authority; (2) alleviating tax uncertainty; 

(3) providing some consistency in the application of the tax law; 

and (4) finally, the ultimate goal can be reducing compliance and 

examination burdens on both sides. 

10 

Once again, I would like to thank the committee for the opportunity to testify today, and I look forward to answering any questions that you may have. Thanks very much. 

The CHAIRMAN. Thank you, Mr. Gaffney. Thank you to all of you. 

[The prepared statement of Mr. Gaffney appears in the appendix.] 

The CHAIRMAN. One question comes to my mind. To what degree 

is the complexity of our code an impediment to adopting some of 

the practices that are followed in some other countries, for example, a large number of tax expenditures? Without getting into the 

international aspects, just a plain U.S. citizen, a U.S. company, operating only in the U.S. 

California has this pre-prepared—for a while it did; maybe it still 

does—procedure. Other countries have something similar. So, to 

what degree is the complexity and the number of our tax expenditures an impediment to the U.S. adopting a similar system? Mr. 

Brostek? 

Mr. BROSTEK. Well, I think it is difficult to measure to what extent, but it is certainly a factor, if for no other reason than IRS has 

to administrator these various tax expenditures and other special 

tax provisions, and those have, at least recently, been continually 

changing on them. So they need to devote an awful lot of their resources to making sure that they are just current on the law as it 

has been modified. That takes time away from being able to innovate in different areas. 

The CHAIRMAN. Do other countries change as frequently as we? 

Mr. BROSTEK. Well, that is going to run in a wide spectrum 

across countries. Some have been very stable. In the countries that 

we went to, Hong Kong has a very stable system. Finland had a 

stable system. 

The CHAIRMAN. And I will get to both of you, but what accounts 

for the stability in those two jurisdictions? 

Mr. BROSTEK. Well, I think it may be just satisfaction with what 

they had. I think that is the case in Hong Kong. Both the tax administrator and the citizens seem to be relatively satisfied with the 

system they have. They have debated significant changes and decided not to make those changes. I do not have as firm an impression in Finland as I do for Hong Kong. 

The CHAIRMAN. All right. 

Dr. Erard? 

Dr. ERARD. I have looked a fair amount at the California Ready 

Return program, and I looked a bit at international operations. I 

mean, there are taxpayers with relatively simple circumstances in 

this country who have basically wages, interest, relatively few deductions and credits. These are the ones who are targeted in California. It is kind of a niche program in that way. It is a specialized 

group of taxpayers who feel it is worth participating in that program. I think it is a great program. I think it helps these people 

simply file their taxes. 

On the other hand, the lion’s share of the compliance cost in our 

tax system, you do not put any dent in that because the folks who 

have the complicated tax circumstances account for most of the 

compliance burden in this country. Unless there is much more extensive information reporting, withholding, and fewer complicated 

11 

deductions and credits, these people are going to continue to have 

very complicated tax circumstances. 

At the other end of the scale is a country like Denmark. The 

Danes have a very sophisticated information reporting system. 

Taxpayers are registered more or less at birth. They have very detailed digital records on taxpayers. They reportedly are able to 

track about 97 percent of all the income that is reported on tax returns. Getting to a system like that would be a major, major 

change for the U.S. 

The CHAIRMAN. Mr. Gaffney? 

Mr. GAFFNEY. Yes. I will comment, maybe, more on the corporate 

sector that I am a little more familiar with. 

The CHAIRMAN. Sure. 

Mr. GAFFNEY. I think the question that you posed on the amount 

of tax law change, I mean, I think it goes in peaks and valleys in 

each jurisdiction. I think the velocity of the tax law changes in the 

United States since 2007 or 2008 has been pretty high, but nonetheless I think that occurs in other jurisdictions as well at different 

times. 

Having been the co-head of tax at a large corporate taxpayer 

with operations in 40 countries, it was almost constant that you 

were kind of looking at legislative proposals that might affect operations in Asia, Europe, et cetera, and perhaps they did not get enacted, but you always had to be constantly studying it. So I do not 

think the U.S. necessarily out-performs, other than at certain 

times, the frequency of tax law changes. 

The CHAIRMAN. To what degree is the status of the IT structure 

a factor in this question? Some say the IRS IT is not the greatest 

in the world; it is a little antiquated. Some other countries might 

be more wired. I am just curious the degree to which IT and IT infrastructure is important here. My time has expired, but just about 

15-second, 30-second answers each. 

Mr. BROSTEK. It certainly plays a role. IRS has been working on 

modernizing its IT systems for a decade or so. When they do get 

those modernized, it should facilitate some of the kinds of services 

that I talked about in my statement. 

The CHAIRMAN. Is California more modern? 

Mr. BROSTEK. I am not expert in the California system, but it 

may be. 

The CHAIRMAN. All right. 

Dr. Erard? 

Dr. ERARD. IT, I think, is quite important for delivering services 

in a simple way to taxpayers. It does require people to be able to 

access those services. Many taxpayers, even in countries that are 

well-wired, still prefer the telephone, so one has to provide those 

services. One point is, even without a system where you have prefiling or very accurate withholding, you can still have a lot lower 

compliance costs. Canada is a good example where they have neither of those things, yet their costs are about 3 percent of the revenue raised compared to 9 percent in this country. 

The CHAIRMAN. Is that primarily because, if I understood you 

correctly, one agency, one outfit, tends to handle Federal as well 

as provincial returns? 

12 

Dr. ERARD. That certainly is part of it. For example, the individual income tax is administered by the Federal Government authority, the Canada Revenue Agency, for 9 out of the 10 provinces 

in Canada. The one exception is Quebec, which administers its 

own. But it also has, in many ways, a simpler tax system. There 

is no Alternative Minimum Tax, there are somewhat less complex 

credits and deductions. There are some differences in the way that 

the tax return is designed, so that is a big part of it, I think. 

The CHAIRMAN. I will get to you later, Mr. Gaffney. My time has 

expired. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. 

Mr. Brostek, this question will be for you. You say that in the 

U.K. the withholding system and information reporting system is 

such that most wage earners do not have to file a tax return. Now, 

I can see how, to people across America who are cussing their way 

through their 1040 right about now, that that might appear to be 

pretty doggone appealing. 

However, do you think the British system results in less awareness of the tax bill that people there pay, and are they less aware 

of any tax incentives that may be in the law? 

Mr. BROSTEK. We did not come across any factual information 

that would allow us to say whether or not the system they use reduces taxpayers’ awareness of the amount of tax that they pay. On 

the second part of the question about whether or not the tax incentives are less transparent to them, that may be the case. 

But I would also note that it could be not transparent in the U.S. 

to taxpayers what the tax incentives are that they are using. To 

the extent that they are using paid preparers—and over half of individuals do—a lot of the expertise is with the paid preparer. The 

taxpayer turns over the records, takes the answer, and they have 

little knowledge about whether or not they have taken advantage 

of various incentives that are built into the code. 

Senator HATCH. Thank you. 

Professor Erard, I noticed in your written testimony you say, 

‘‘There are no itemized deductions in Canada.’’ But elsewhere you 

write that the Canadian ‘‘government allows taxpayers to claim a 

tax deduction for charitable donations.’’ Now, I generally think of 

charitable donation deductions as an itemized deduction. Are you 

saying that charitable donation deductions are the only itemized 

deduction in Canada? 

Dr. ERARD. Well, the charitable donation credit is available to all 

taxpayers who make specified charitable donations. So in that regard, there is not a special schedule where you itemize deductions 

if you are above a certain threshold on taxes. There are a variety 

of credits and deductions that are available on all taxes in Canada, 

but we do not have this system where you can choose either a 

standard deduction or to itemize a list of specified tax preferences. 

Senator HATCH. Well, in the U.S., rather than itemize their deductions, as you have pointed out, taxpayers may claim a standard 

deduction. Now, since Canada generally lacks itemized deductions, 

do they have a standard deduction concept? 

Dr. ERARD. Well, Senator Hatch, standard deduction can be 

thought of as a threshold, an income threshold below which one 

13 

pays zero tax, so it is simply an additional category at the bottom 

of the income schedule. It used to be called a zero-bracket amount 

in the United States way back when. Canada does, in fact, have 

the equivalent of a zero-bracket amount. Married couples file separately in Canada. Each taxpayer is entitled to the equivalent of a 

deduction of $10,000, roughly, below which they pay no tax. On top 

of that, if they are elderly or they have children, the amount is 

higher. 

Senator HATCH. Mr. Gaffney, one of my longstanding interests, 

along with Chairman Baucus, has been the R&D tax credit. Unfortunately, the R&D credit has proven to be a very contentious issue, 

taking up a lot of taxpayer and government resources. 

Now, the IRS has at various points attempted to address this 

with the ‘‘pre-filing agreement’’ or PFA program, whereby the IRS 

and the taxpayer will sit down and resolve contentious issues even 

before the taxpayer files its return. Do you have an opinion on the 

PFA program, or on programs like that? 

Mr. GAFFNEY. My personal opinion, having been part of a PFA 

filing in one instance, the R&D credit, is that it worked quite well. 

Again, it centers on whether or not the successful principles are 

imbedded, which includes sort of the buy-in on both sides, the ability to be open and transparent, and the willingness to sort of have 

nuanced discussions with fairly senior people within the tax administrator. If those things exist, I think the pre-filing agreements for 

specific issues can be very beneficial. In a way, it is sort of like an 

issue-specific compliance assurance program. 

Senator HATCH. All right. 

Now, Mr. Brostek, the OECD has said that ‘‘withholding at 

source is generally considered to be a cornerstone of an effective income tax system.’’ Nevertheless, we learn from your testimony that 

Hong Kong does not have a system of income tax withholding. As 

best we know, Hong Kong has a high rate of tax compliance. How 

do we explain this? Do you think that Hong Kong challenges the 

OECD’s statement about withholding being so fundamental to an 

effective tax system? Do you think they are challenging that? 

Mr. BROSTEK. I think there are interesting circumstances in 

Hong Kong that make their system work. It is for their salaries tax 

as opposed to the broader income tax system like we have. Some 

of the things that make it work for them are that the people who 

are covered by that tax are the minority of taxpayers. 

Only about a third of taxpayers actually have to pay the salaries 

tax at all. Those who have to pay, pay what, compared to our rates, 

would be low rates. I believe the top rate is 15 percent, and the 

average rate is maybe around 12 percent. So it is a low tax rate. 

It is not so much of an issue for the taxpayer to come up with the 

money that is needed to make payments. 

They also have a pretty robust enforcement system. According to 

the officials whom we spoke with in Hong Kong, they have information returns that they receive. They are able to identify taxpayers who may not be making their payments. They have, for instance, a process of being able to identify people who have left the 

country who owe salaries tax. If they come back in, they can be 

stopped at the airport and detained until they are able to make arrangements to pay their tax. So it is a combination of several 

14 

things, including possibly some cultural issues. We were told that 

individuals in Hong Kong tend to be savers, so they are more likely 

to have the funds that they would need to voluntarily pay their tax 

at the two times during the year when they are required to. 

Senator HATCH. Well, thank you. 

Senator Grassley? 

Senator GRASSLEY. Mr. Brostek, in your testimony you note that 

New Zealand undertook a study on the efficiency of its Working for 

Families tax credit. It is similar to our Earned Income Tax Credit. 

That is the way I understand it. You also note that this tax credit 

is administered jointly by Inland Revenue Department and the 

Ministry of Social Development. 

One of your colleagues testified at a recent Ways and Means 

Committee Human Resource Subcommittee hearing, testifying that 

in the United States families can receive benefits from one or more 

government programs, such as Temporary Assistance to Needy 

Families, Earned Income Tax Credit, child support enforcement, as 

well as subsidized child care assistance. 

It states further that complexity and variation in eligibility rules 

and other requirements among programs contribute to timeconsuming and duplicative administrative processes, adding to 

overall costs. In a report from February of this year, the Treasury 

IG for Tax Administration estimated that the Earned Income Tax 

Credit improper payment rate for fiscal year 2009 was between 23 

percent and 28 percent. In dollars, that is somewhere between 

$11 billion and $13 billion of EITC improper payments. The Treasury IG goes on to state that the risk remains high that no significant improvement will be made in reducing improper Earned Income Tax Credit payments. 

So, to follow on with the Treasury IG’s fear, I ask this question 

of you: your colleague’s recent testimony and the Treasury IG’s latest report highlight the continued problems of the EITC. Can you 

tell us if there is anything the IRS can learn from New Zealand’s 

administration of its Working for Families credit? 

Mr. BROSTEK. A few thoughts come to mind on that question, sir. 

In the case of the EITC, the IRS actually announced an initiative 

earlier this year, I believe, to try to work more closely with the social services programs that are administered, for instance, by the 

States to see if they can share information that would help reduce 

the non-compliance rate there. 

The estimate that IRS had was that that initiative might reduce the improper payments by about $100 million per year, which is a 

pretty small fraction of the $11 to $13 billion of non-compliance 

that you mentioned. The New Zealand study was looking at the effectiveness of the program in encouraging people to obtain employment, which is similar to what the EITC is intended to do. 

I think it was very useful for them to be able to share information between their social services agency and their tax administrator, but I do not think that effort shed a lot of light on compliance issues. In fact, I am not aware that there is a non-compliance 

estimate for their program. 

But the last thing I would like to mention on that is the two 

largest factors for EITC non-compliance: the filing status of the 

filer, and who gets to claim the qualifying child. That depends on 

15 

whether the child lived with someone for more than half of a year. 

Unfortunately, there is no database that I am aware of that really 

precisely can identify whether a child lived with one or another individual for more than that period of time. 

Senator GRASSLEY. Well, are there any barriers to the IRS coordinating with other Federal agencies here to make sure that we 

get that information? 

Mr. BROSTEK. There are no barriers in the sense of—that I am 

aware of—IRS obtaining information from other agencies, unless 

that is a restriction in their statutes on their ability to share their 

data. But in general, IRS can receive information from other agencies. What IRS is not able to do, absent specific authorizations, is 

to share information they might have that comes from tax returns 

with other agencies. 

So the kind of system that New Zealand used, where they swore 

in Social Service Agency employees as employees of the tax administrator, was one way they were able to facilitate this kind of evaluative research that I was talking about in my statement. I do not 

know whether that kind of sharing would be helpful for dealing 

with non-compliance issues. 

Senator GRASSLEY. Dr. Erard, carrying on the fact that 47 percent of the filers in the United States have no tax liability, comparing with Canada, how many individual income tax returns are 

filed with the Canada Revenue Agency each year, and how many 

of those filers have zero tax liability because of refundable tax credits like we have in the United States? Then, do you know what the 

improper payment rate is for credits in Canada? 

Dr. ERARD. All very good questions, Senator Grassley. A very 

large percentage of taxpayers in Canada file tax returns. I believe 

the recent numbers are on the order of 27 million returns are filed. 

Part of the reason it is such a big number is that married couples 

file separately in Canada. 

Many of the people who file, file solely to claim refundable credits. There are several different refundable credits in Canada: there 

is one called the Child Tax Benefit for Families With Children; another is a credit for low- and moderate-income families who pay 

sales taxes; and a third is a more recent one called a Working Income Tax Benefit, which has some similarities to the Earned Income Credit. 

With regard to compliance, I have not seen any estimates yet for 

the Working Income Tax Benefit. My understanding for the Canadian Child Tax Benefit is that compliance rates are estimated to 

be about 95 percent based on random verification efforts, so much, 

much higher than with the Earned Income Credit. I think it is 

partly a somewhat simpler program in terms of the rules. 

I think also it is helped to some extent, both in terms of takeup and also in terms of compliance, by the fact that children are 

registered typically at birth in Canada for these programs. The 

hospitals actually have forms, and the provincial registries share 

information with the Central Tax Agency. So I think they learn 

about the children earlier, and they have records that are available 

online that show who is responsible for the dependent child, according to the tax records. 

Senator HATCH. Well, thank you, Senator. 

16 

Senator Thune? 

Senator THUNE. Thank you, Mr. Chairman. Thank you for holding this hearing and for taking a look at what many of us agree 

are provisions in our tax code that make it awfully difficult for a 

lot of Americans to comply. It is unwieldy. It costs way too much 

to comply with. There has to be a better way of doing it, and I am 

intrigued by some of the efforts that other nations have been making in order to make it easier for their citizens to comply with the 

tax law, and at the same time improve tax compliance. So, I appreciate you all sharing some perspectives on those and how we might 

learn from some of those examples to find areas that might be applicable to the U.S. tax system. 

Mr. Gaffney, we recently repealed the 1099 reporting provision, 

which was enacted as part of the health care law last year. I think 

most would agree, it was a big bipartisan vote, that it was an 

undue and disproportionate burden on businesses, especially small 

businesses, yet it was originally justified as a means to reduce the 

tax gap and potential under-reporting of income. 

How can we ensure that we do not repeat this mistake as we try 

to increase taxpayer compliance? I guess what I am trying to get 

at here is, in other words, is there a way for Congress to evaluate 

the burden on taxpayers before we enact new tax compliance provisions? 

Mr. GAFFNEY. It is an excellent question, Senator. I will take a 

stab at it. I think, clearly, the cost associated with compliance is 

sometimes not adequately factored in when things are scored, especially when you take into account it is spread across multiple businesses. 

My background is more in the large business aspect, where I 

think a lot of times, when new rules, regulations, or laws are 

passed, it is not a tremendous incremental burden on a large global 

business to figure out how to comply, but when you spread sort of 

a provision across literally hundreds of thousands of smaller businesses, obviously the impact of some new reporting regime will be 

much more significant to that smaller business, especially when 

you have businesses that have 5, 7, or less than 50 employees. It 

is just very difficult to comply. 

So I am not sure I have an exact answer, other than to say I 

think one thing that has happened recently with both this committee and the House committee, working together with business, 

is to come up with a provision to report cost basis of certain securities, which I think was passed around 2008 and went into effect 

in 2011. 

I think that was one of the first steps in perhaps closing the tax 

gap, where, by and large, it was quite difficult for people who may 

have received securities from their parents at the parents’ death, 

or purchased securities many, many years ago that had undergone 

reorganization, to establish what their basis was in order to determine their gain or loss. 

I think this committee and the House committee worked very 

diligently, and I had the opportunity to participate in some of those 

discussions starting in 2003 or 2004, to really come up with the 

provision that was enacted in 2008 and then went into the law effective January 1, 2011. I think the learning from that is, when 

17 

you create what appears to be a new provision, which does have 

a great goal, in that respect it was to have some certainty on the 

calculation of gain or loss. 

I think that is a perfectly laudable way to construct a tax system, 

and it sounds like, from the testimony of my colleagues here, some 

other jurisdictions may have something like that already. It was 

carefully done in a way where, really, the Senate Finance Committee and the House Ways and Means Committee worked with 

the industry, mainly the securities dealers, brokers, and bankers 

that have the responsibility for reporting basis, for a period of 4 to 

5 years and really fleshed out what all the issues were. 

So when it was finally implemented, then there was also a period 

to transition to make sure the reporting of that cost basis could be 

imbedded in the systems of the dealers, and then it was rolled out 

beginning effective January this year. 

I think the lesson from that is perhaps to really take a breath 

before something gets passed and have a hearing and think about 

really what the broader impact is of a legislative change. Just the 

one you referenced, the 1099, I am not sure it went through a rigorous analysis that included sort of the feedback from the businesses. I think it happened very quickly. 

Senator THUNE. My time has expired, Mr. Chairman. I do have 

another question having to do with uncertainty. 

The CHAIRMAN. Go ahead. 

Senator THUNE. Well, let me ask quickly, if I could. The trouble 

is with tax uncertainty, which you referenced. But could you discuss it in relation to the large sections of our tax code which are 

temporary, including many of the business tax breaks, large portions of the individual tax code, and how that uncertainty increases 

the burden of compliance by taxpayers? 

Mr. GAFFNEY. Sure. I think the one thing that leaps out when 

you have a provision that may only be of 2-year duration or 5-year 

duration, not a permanent part of the code, is generally the legislation comes with committee reports that are very informative to see 

what the intent of Congress is, but oftentimes there is a need for 

subsequent regulatory guidance. 

The IRS comes out with a business plan, I think, twice a year, 

updates where they are on regulatory guidance. I forget how many 

hundreds of projects are currently sort of in the queue that need 

to have regulatory guidance in order to be fully understood by people who are attempting to comply with the system. 

The difficulty with temporary provisions, I have always seen, is 

that, if a provision is only going to be around for a year or two and 

you have 500 or 600 things in the hopper to issue regulations on, 

the bulk of which are permanent parts of the tax system, writing 

regulations to clarify, if you will, a temporary provision—not that 

I have this knowledge—seems to go to the bottom of the pile, just 

empirically looking at it. 

So I think that is sort of one down side, because then of course 

it becomes part of the code and keeps getting re-upped every 2 

years. Then you are kind of living with that forever because, again, 

you are balancing, if you will, the many very important regulatory 

projects that the IRS Chief Counsel’s Office and the Treasury’s Tax 

Policy Office are working on. You can just see that the normal beVerDate Nov 24 2008 21:37 Jun 25, 2012 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 R:\DOCS\74610.000 TIMD
18 

havior would be to deal with things that are permanent as opposed 

to something that is ad hoc. 

Senator THUNE. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

What systems tend to do a better job at detecting and rooting out 

fraud? I mean, is there a system? Is there a correlation here between one country’s system and a minimum amount of fraud or 

dealing with the tax gap? It kind of gets at satisfaction rates. If you 

could just look at these different countries, is there one or two that 

seem to get at the question of fraud, the tax gap, and those kinds 

of issues a little bit better than we do, or is that just a random occurrence? Anybody? 

Mr. BROSTEK. I will take an initial shot at this. I guess the first 

thing is, measurements of tax gaps are not done consistently across 

countries. Even when there is a tax gap measurement, discerning 

what portion of that tax gap is due to fraud versus unintentional 

errors, et cetera, is a virtual impossibility. So it is actually very difficult to compare across tax administrators and make the judgement that you are talking about. 

There are some practices that do seem to be highly associated 

with compliance, and I think the key there is visibility to the taxpayer and to the revenue agency. The more that the revenue agency and the taxpayer have the same facts in front of them, I think 

I kind of heard that earlier in the large corporation environment, 

the higher the compliance rate is. 

The CHAIRMAN. All right. But what do you mean ‘‘same facts?’’ 

What are you talking about? 

Mr. BROSTEK. Well, for instance, what sources of income do you 

have? How much is that income? What kind of expenses do you 

have? What is the amount of those expenses? The more of those 

factors that go into actually calculating your income tax liability 

are directly known to the taxpayer—— 

The CHAIRMAN. Separately? Independently? 

Mr. BROSTEK. Well, they both need to have the same information. I think that is more the key to the high levels of compliance, 

but it is also very difficult to extend to some taxpayers, small businesses, businesses that are in a cash economy. It is very difficult 

to get independent information that actually or accurately tells you 

what the income and expenses are that need to be weighed in order 

to determine a final tax—— 

The CHAIRMAN. So what do other countries do about the small 

business cash economy? 

Mr. BROSTEK. Well, there are number of different techniques that 

people use. I do not know that any are entirely successful. In the 

U.K., they have a system in the construction industry. An employer 

of a contractor must withhold from the payment to those contractors unless that contractor has registered with the revenue agency. 

So that is an effort to ensure that a contractor cannot earn income 

unless they have registered with the revenue agency, are known to 

the revenue agency, and have a good filing history with the revenue agency. 

The CHAIRMAN. I suppose the real fundamental question here, 

and some of it is cultural, is how to encourage compliance and 

19 

transparency, assuming people want to follow the law, on the one 

hand, and maintaining liberty and freedom, and to not have Big 

Brother looking over your shoulder, on the other. Any thoughts? 

Mr. GAFFNEY. I will give it a crack. I guess I share the view, I 

think cultures definitely differ and play a part in the administration of tax systems. I mean, I really think, just in my experience 

maybe working with certain Anglo-Saxon systems that operate 

under a common law, provided there are the same kind of principles established where there is buy-in at all levels and a significant amount of trust and the ability to sort of deal with things on 

the fly, I think tax administration, at least in the large corporate 

sector, can benefit in having better administration with sort of an 

open dialogue. 

I think it is a little harder in, perhaps, other jurisdictions where 

there is that, if you will, sort of a cultural stand-off between the 

tax authority and the person being taxed. So I do not know how 

to bridge that, other than, you tend to try to work with things that 

work. If you can get sort of increased 2-way transparency and 

eliminate tax uncertainty in jurisdictions A and B, but not C, it 

still makes sense to do it with A and B, and you just kind of take 

your chances with C. You cannot force it, I think. That is my experience. 

The CHAIRMAN. Any other thoughts? 

Dr. ERARD. I think that the U.S. is a little better at measuring 

tax gap than most countries. 

The CHAIRMAN. Oh? That is interesting. 

Dr. ERARD. I think that part of the solution is, where compliance 

costs are reasonably low and there is a sensible system for collecting information, it should be collected. The more line items that 

you can make compliance disappear on, the easier it is to target 

the problem areas. 

The second is, you have to have good information on what the 

problem areas are. Canada has a couple of examples where it has 

been successful, but I would not say overall it is better at rooting 

out fraud than the U.S. But they, too, have an initiative in the underground economy called the Contract Payment Reporting Initiative, where contractors have to report payments to subcontractors 

in areas like construction. The Federal Government has requirements to have information returns regarding payments to contractors for public services. 

There is a pilot where taxpayers who claim a home renovation 

credit, they match that information against the contractor who was 

used for the renovation to see if they have been reporting. You 

have to, one, measure where the problems are and figure out what 

is going on, and then you have to have an effective means of rooting it out. Quebec is another good example where it has been documented there is a huge amount of skimming going on in certain industries, such as the restaurant industry. They found a technological solution that does impose some costs on the businesses, but 

is probably justified to help them be more compliant. That is the 

zapper issue. 

The CHAIRMAN. Zapper? 

Dr. ERARD. Zapper. Yes. 

20 

The CHAIRMAN. It gets into hacking, too, does it not? How easily 

can these systems be hacked into? 

Dr. ERARD. Well, the fascinating thing is, in Quebec, a lot of the 

operation was by the salesmen at the cash register, who would provide the technology to skim. By putting in these electronic units, 

called SRMs, they are able to basically eliminate that problem to 

a large extent. Other countries have had other approaches. It has 

been suggested by one author that, with the streamlined sales tax 

initiative, you can have a certified service provider who certified 

that the amount being recorded is proper, and they could use a variety of techniques to do that. So there are alternative solutions to 

problems like that, but first you have to know they exist. 

The CHAIRMAN. Thank you very much. 

Senator Hatch? 

Senator HATCH. Well, let me finish with just a series of questions 

to you, Mr. Brostek. You mentioned that Hong Kong has a culture 

of saving. Do you know why that is? To what extent do you think 

tax has anything to do with that culture of saving? 

Mr. BROSTEK. I do not know, sir. 

Senator HATCH. All right. 

Are interest and dividends subject to Hong Kong income taxes? 

Mr. BROSTEK. I do not recall off the top of my head. A number 

of the countries that were involved in our study have withholding 

on interest and dividend payments. I do not recall for sure in Hong 

Kong. They have a number of items that are not subject to tax. For 

instance, I do not believe capital gains are subject to tax in Hong 

Kong. 

Senator HATCH. All right. 

Are interest and dividends? 

Mr. BROSTEK. I would need to get back to you for the record on 

that. 

Senator HATCH. All right. 

Does Hong Kong have anything equivalent to IRAs or 401(k)s? 

Mr. BROSTEK. Not that I am aware of. 

Senator HATCH. All right. 

Well, thank you, Mr. Chairman. 

The CHAIRMAN. I have just been informed by staff that dividends 

and interest are not taxed in Hong Kong. 

Mr. BROSTEK. Thank you. Having been a resident of Hong Kong 

recently, I am sure that is accurate information from you, sir. 

The CHAIRMAN. That is right. Thank you. 

Senator HATCH. Thank you so much. 

The CHAIRMAN. We want accurate information. 

Thank you very much, all three of you. Clearly, we can learn a 

lot from some of these countries. It is just interesting to me that 

what is 3 percent of revenue collected in Canada is dedicated to the 

administration of the code, and in the United States it is 9 percent. 

That has to be somewhat illustrative of something we have to be 

doing. 

Before we leave, any other thoughts at the back of your minds? 

What questions should we have asked that we did not ask? 

Mr. BROSTEK. If I could. 

The CHAIRMAN. Yes. 

21 

Mr. BROSTEK. On your last question about how to encourage 

compliance without having too much of a Big Brother presence. 

The CHAIRMAN. Yes. Right. 

Mr. BROSTEK. One of the things that we learned as we were 

doing our work is, there may be an association with compliance 

and citizens’ attitudes towards government, whether they think 

their tax system is fair or whether they think their government is 

efficiently using the monies that they pay over. So one of the things 

that I think might be focused on here are those issues: is our system fair across taxpayers, are we using their money effectively? 

The CHAIRMAN. Different people have different views on that. 

Mr. BROSTEK. Yes, they do. Yes, they do. 

The CHAIRMAN. Thanks very much. 

The hearing is adjourned. 

[Whereupon, at 11:14 a.m., the hearing was concluded.] 

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59 


74610.037
60 


74610.038
61 


74610.039
(63) 

COMMUNICATION


74610040.eps
64 


74610.041
65 


74610.042
66 


74610.043
67 


74610.044
68 


74610.045
69 


74610.046
70 


74610.047
71 


74610.048
72 


74610.049
73 


74610.050
74 


74610.051
75 


74610.052
76 


74610.053
77 


74610.054
78 


74610.055
79 


74610.056
80 


74610.057
81 


74610.058
82 


74610.059
83 


74610.060
84 


74610.061
85 


74610.062
86 


74610.063
87 


74610.064
88 


74610.065
89 


74610.066
90 


74610.067
91 


74610.068
92 


74610.069
93 


74610.070
94 


74610.071
95 


74610.072
96 


74610.073
97 


74610.074
98 


74610.075
99 


74610.076
100 

Æ 


74610077.eps