Tax Administration: Information on Selected Foreign Practices That May Provide Useful Insights
Published: 2011-05-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service (IRS) and foreign tax administrators face similar issues regardless of the particular provisions of their laws. These issues include, for example, helping taxpayers prepare and file returns, and assuring tax compliance. Understanding how other tax administrators have used certain practices to address common issues can provide insights to help inform deliberations about tax reform and about possible administrative changes in the U.S. existing system to improve compliance, better serve taxpayers, reduce burdens, and increase efficiencies. GAO was asked to describe (1) how foreign tax administrators have approached issues that are similar to those in the U.S. tax system and (2) whether and how the IRS identifies and adopts tax administration practices used elsewhere. To do this, GAO reviewed documents and interviewed six foreign tax administrators. In some cases, GAO also interviewed tax experts, tax practitioners, taxpayers, and trade-group representatives who were selected based on their expertise or involvement in developing or using the foreign systems. GAO also examined documents and met with IRS officials.
section_title: What GAO Found
paragraphs: Foreign and U.S. tax administrators use many of the same practices such as information reporting, tax withholding, providing Web-based services, and finding new approaches for tax compliance. These practices, although common to each system, have important differences. Although differences in laws, culture, or other factors likely would affect the transferability of foreign tax practices to the United States, these practices may provide useful insights for policymakers and the IRS. For example, New Zealand integrates evaluations of its tax and discretionary spending programs. The evaluation of its Working For Families tax benefits and discretionary spending, which together financially assist low- and middle-income families to promote employment, found that its programs aided the transition to employment but that it still had an underserved population; these findings likely would not have emerged from separate evaluations. GAO previously has reported that the United States lacks clarity on evaluating tax expenditures and related discretionary spending programs and does not generally undertake integrated evaluations. In Finland, electronic tax administration is part of a government policy to use electronic services to lower the cost of government and encourage private-sector growth. Overall, according to Finnish officials, electronic services have helped to reduce Tax Administration staff by over 11 percent from 2003 to 2009 while improving taxpayer service. IRS officials learn about these practices based on interactions with other tax administrators and participation in international organizations, such as the Organisation for Economic Co-operation and Development. In turn, the IRS may adopt new practices based on the needs of the U.S. tax system. For example, in 2009, the IRS formed the Global High Wealth Industry program. The IRS consulted with Australia about its approach and operational practices.
section_title: What GAO Recommends
paragraphs: GAO makes no recommendations in this report.

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