Tax Administration: Preliminary Information on Selected Foreign Practices That May Provide Useful Insights
Published: 2011-04-12T00:00:00

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. GAO was asked to describe (1) how foreign tax administrators have approached issues that are similar to those in the U.S. tax system and (2) whether and how the IRS identifies and adopts tax administration practices used elsewhere. To do this, GAO reviewed documents and interviewed six foreign tax administrators as well as tax experts, tax practitioners, taxpayers, and trade group representatives. GAO also examined documents and met with IRS officials. This preliminary information is based on GAO's ongoing work for the Committee to be completed at a later date.
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 U.S., these practices may provide useful insights for policymakers and the IRS. For example, New Zealand integrates evaluations of its tax and discretionary spending programs. The evaluation of its Working For Families tax benefits and discretionary spending, which together financially assist low- and middle-income families to promote employment, found that its programs aided the transition to employment but that it still had an underserved population; these findings likely would not have emerged from separate evaluations. GAO previously has reported that the U.S. lacks clarity on evaluating tax expenditures and related discretionary spending programs and does not generally undertake integrated evaluations. In Finland, electronic tax administration is part of a government policy to use electronic services to lower the cost of government and encourage private-sector growth. Overall, according to Finnish officials, electronic services have helped to reduce Tax Administration staff by over 11 percent from 2003 to 2009 while improving taxpayer service. IRS officials learn about these practices based on interactions with other tax administrators and participation in international organizations, such as the Organisation for Economic Co-operation and Development. In turn, IRS may adopt new practices based on the needs of the U.S. tax system. For example, in 2009, IRS formed the Global High Wealth Industry program. IRS consulted with Australia about its approach and operational practices.

section_title: Letter
paragraphs: I appreciate this opportunity to discuss how some foreign tax  administrators have focused on issues similar to those faced by the United  States (U.S.). All tax administrators strive to address similar issues  regardless of the specific provisions of their laws. Understanding how  other tax administrators have used certain practices to address these  common issues can provide insights to help inform deliberations about tax  reform and about possible administrative changes in our existing system  to improve compliance, better serve taxpayers, reduce burden, and  increase efficiencies.
My statement today will draw from our ongoing work for the committee to  describe (1) how foreign tax administrators have approached issues that  are similar to those in the U.S. tax system and (2) whether and how the  Internal Revenue Service (IRS) identifies and adopts tax administration  practices used elsewhere. Our work includes selected practices of New  Zealand, Finland, European Union (EU), United Kingdom (UK), Australia,  and Hong Kong.  Our report, to be issued in May 2011, will provide our  detailed descriptions of those tax administration practices and their  differences from U.S. practices.
We based our selection of these practices on several factors, including  whether the tax administrators had advanced economies and tax systems,  tax information was available in English, and the foreign tax  administrator’s approach differed from how the U.S. approaches similar  issues. We reviewed documents and interviewed officials from 6 foreign  tax administrations. We primarily used documentation from each  government’s reports that are publicly available. When possible, we  confirmed additional information provided to us by officials and held  meetings with experts, public interest groups, and trade groups to identify  their views about these systems. To describe whether and how the IRS  identifies and adopts tax administration practices used elsewhere, we  reviewed related documents and interviewed IRS officials. We discussed  the information in this statement with officials of IRS and six foreign tax  administrators and incorporated their comments as appropriate.
We conducted our work from October 2009 to March 2011 in accordance  with all sections of GAO’s Quality Assurance Framework that are relevant  to our objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations in our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for any findings and conclusions in this  statement.
Although the descriptive information presented in this testimony may  provide useful insights for Congress and others on alternatives to current  U.S. tax policies and practices, comparisons across tax administration  systems or even within systems must include a separate analytic step to  identify the factors that might affect the transferability of the practices,  such as differences in law, to the U.S. Based on such an analysis, countries  determine whether others’ practices could be adopted. For example,  nations have differing cultures. Generally, attitudes toward government  can affect voluntary tax compliance. When taxpayers are more willing to  accurately comply with tax rules, less enforcement action by the  administrators is needed. Measurements of taxpayers’ attitudes are not  well defined or uniform; nor are measurements of voluntary compliance.
subsections: section_title: Examples of Selected Tax Administration Practices to Address Known Tax Administration Issues
paragraphs: The following examples illustrate how New Zealand, Finland, EU, UK,  Australia, and Hong Kong have addressed well known tax administration  issues.
subsections: section_title: New Zealand Does Joint Evaluations of Tax Expenditures and Discretionary Spending Programs to Analyze Their Effects and Improve Program Delivery
paragraphs: New Zealand, like the U.S., addresses various national objectives through  a combination of tax expenditures and discretionary spending programs.  Tax expenditures are the amount of revenue that a government forgoes to  provide some type of tax relief for taxpayers in special circumstances,  such as the Earned Income Tax Credit in the United States.  In New  Zealand tax expenditures are known as tax credits.
New Zealand has overcome obstacles to evaluating these related programs  at the same time to better judge whether they are working effectively.  Rather than separately evaluating certain government services, New  Zealand completes integrated evaluations of tax expenditures and  discretionary spending programs to analyze their combined effects. Using  this approach, New Zealand can determine, in part, whether tax  expenditures and discretionary spending programs work together to  accomplish government goals.
One example is the Working For Families (WFF) Tax Credits program,  which is an entitlement for families with dependent children to promote  employment. Prior to the introduction of WFF in 2004, New Zealand’s  Parliament discovered that many low-income families were not better off  from holding a low-paying job, and those who needed to pay for childcare  to work were generally worse off in low-paid work compared to receiving  government benefits absent having a job. This prompted Parliament to  change its in-work incentives and financial support including tax  expenditures.
The Working for Families Tax Credits program differs from tax credit  programs in the United States in that it is an umbrella program that spans  certain tax credits administered by the Inland Revenue Department (IRD)  as well as discretionary spending programs administered by the Ministry  of Social Development (MSD). IRD collects most of the revenue and  administers the tax expenditures for the government. Being responsible  for collecting sensitive taxpayer information, IRD must maintain tax  privacy and protect the integrity of the New Zealand tax system. MSD  administers the WFF’s program funds and is responsible for collecting  data that includes monthly income received by its beneficiaries. This  required that IRD and MSD keep separate datasets, making it difficult to  assess the cumulative effect of the WFF program.
To understand the cumulative effect of changes made to the WFF program  and ensure that eligible participants were using it, New Zealand created a  joint research program between IRD and MSD from October 2004 to April  2010. The joint research program created linked datasets between IRD and  MSD. Access to sensitive taxpayer information was restricted to IRD  employees on the joint research program and to authorized MSD  employees only after they were sworn in as IRD employees.
The research provided information on key outcomes that could only be  tracked through the linked datasets. The research found that the WFF  program aided the transition from relying on government benefits to  employment, as intended. It also found that a disproportionate number of  those not participating in the program were from an indigenous  population, which faced barriers to taking advantage of the WFF. Barriers  included the perceived stigma from receiving government aid, the  transaction costs of too many rules and regulations, and the small amounts  of aid for some participants. Changes made by Parliament to WFF based  on these findings provided an additional NZ$1.6 billion (US$1.2 billion) per  year in increased financial entitlements and in-work support to low- to  middle-income families.
While economic differences exist between the New Zealand and U.S. tax  systems, both systems use tax expenditures (i.e., tax credits in New  Zealand). Unlike the United States, New Zealand has developed a method  to evaluate the effectiveness of tax expenditures and discretionary  spending programs through joint research that created interagency linked  datasets. New Zealand did so while protecting confidential tax data from  unauthorized disclosure.
In 2005, we reported that the U.S. had substantial tax expenditures but  lacked clarity on the roles of the Office of Management and Budget  (OMB), Department of the Treasury, IRS, and federal agencies with  discretionary spending programs responsibilities to evaluate the tax  expenditures.  Consequently, the U.S. lacked information on how effective  tax expenditures were in achieving their intended objectives, how cost- effective benefits were achieved, and whether tax expenditures or  discretionary spending programs worked well together to accomplish  federal objectives.  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: Finland Uses the Internet to Enable Taxpayers to Adjust Individual Tax Withholding Rates and Revise Pre Prepared Tax Returns to Improve Service at Lower Costs
paragraphs: Finland better ensures accurate withholding of taxes from taxpayers’  income, lowers its costs, and reduces taxpayers’ filing burdens through  Internet-based electronic services. In 2006, Finland established a system,  called the Tax Card, to help taxpayers estimate a withholding rate for the  individual income tax The Tax Card, based in the Internet, covers  Finland’s national tax, municipality tax, social security tax, and church  tax. The Tax Card is accessed through secured systems in the taxpayer’s  Web bank or an access card issued by Finland’s government. The Tax Card  system enables taxpayers to update their withholding rate as many times  as needed throughout the year, adjusting for events that increase or  decrease their income tax liability. When completed, the employer is  notified of the changed withholding tax rate through the mail or by the  employee providing a copy to the employer. According to the Tax  Administration, about a third of all taxpayers using the Tax Card, about 1.4  to 1.6 million people, change their withholding percentages at least  annually. Finland generally refunds a small amount of the withheld funds  to taxpayers (e.g., it refunded about 8 percent of the withheld money in  2007).
Finland also has been preparing income tax returns for individuals over  the last 5 years. The Tax Administration prepares the return for the tax  year ending on December 31st based on third-party information returns,  such as reporting by employers on wages paid or by banks on interest paid  to taxpayers. During April, the Tax Administration mails the pre-prepared  return for the taxpayer’s review. Taxpayers can revise the paper form and  return it to the Tax Administration in the mail or revise the return  electronically online. According to Tax Administration officials, about 3.5  million people do not ask to change their tax return and about 1.5 million  will request a tax change.
Electronic tax administration is part of a government-wide policy to use  electronic services to lower the cost of government and encourage growth  in the private sector. According to Tax Administration staff, increasing  electronic services to taxpayers helps to lower costs. Overall, the growth  of electronic services, according to Finnish officials, has helped to reduce  Tax Administration staff by over 11 percent from 2003 to 2009 while  improving taxpayer service.
According to officials of the Finnish government as well as public interest  and trade groups, the Tax Card and pre-prepared return systems were  established under a strong culture of national cooperation. For the pre- prepared return system to work properly, Finland’s business and other  organizations who prepare information returns had to accept the burden  to comply in filing accurate returns promptly following the end of the tax  year.
Finland’s tax system is positively viewed by taxpayers and industry groups  according to our discussions with several industry and taxpayer groups.  They stated that Finland has a simple, stable tax system which makes  compliance easier to achieve. As a result, few individuals use a tax advisor  to help prepare and file their annual income tax return.
In contrast to Finland’s self-described “simple and stable” system, the U.S.  tax system is complex and constantly changing. Regarding withholding  estimation, Finland’s Tax Card system provides taxpayers an online return  system for regularly updating the tax amount withheld. For employees in  the U.S., the IRS’s Website offers a withholding calculator to help  employees determine whether to contact their employer about revising  their tax withholding. Finland’s system prepares a notice to the employer  which can be sent through the mail or delivered in person, whereas in the  U.S. the taxpayer must file a form with the employer on the amount to be  withheld based on the estimation system’s results.
In the U.S., individual income tax returns are completed by taxpayers—not  the IRS—using information returns mailed to their homes and their own  records.  Taxpayers are to accurately prepare and file an income tax  return by its due date. In Finland, very few taxpayers use a tax advisor to  prepare their annual individual income tax return. Unlike in Finland, U.S.  individual taxpayers heavily rely on tax advisors and tax software to  prepare their annual return. In the U.S. about 90 percent of individual  income tax returns are prepared by paid preparers or by the taxpayer  using commercial software.
section_title: The EU’s Multilateral Treaty Information Exchange on Interest Payments Is Envisioned to Spur Compliance
paragraphs: The European Union seeks to improve tax compliance through a  multilateral agreement on the exchange of information on interest earned  by each nation’s individual taxpayers. This agreement addresses common  issues with the accuracy and usefulness of information exchanged among  nations that have differing technical, language, and formatting approaches  for recording and transmitting such information. Under the directive,  adopted in June 2003, the 27 EU members and 10 other participants agreed  to share information about income from interest payments made to  individuals who are citizens in another member nation. With this  information, the tax authorities are able to verify whether their citizens  properly reported and paid tax on the interest income. The directive  provides the basic framework for the information exchange, defining  essential terms and establishing automatic information exchange among  members.
As part of the directive, 3 EU member nations as well as the 5 European  nonmember nations agreed to apply equivalent measures (i.e., withholding  tax with revenue sharing described below) during a transition period  through 2011, rather than automatically exchanging information.  Under  this provision, a 15 percent withholding tax gradually increases to 35  percent by July 1, 2011. The withholding provision included a revenue- sharing provision, which authorizes the withholding nation to retain 25  percent of the tax collected and transfer the other 75 percent to the nation  of the account owner. The directive also requires the account owner’s  home nation to ensure that withholding does not result in double taxation  by granting a tax credit equal to the amount of tax paid to the nation in  which the account is located.
A September 2008 report to the EU Council described the status of the  directive’s implementation. During the first 18 months of information  exchange and withholding, data limitations such as incomplete  information on the data exchanged and tax withheld created major  difficulties for evaluating the directive’s effectiveness. Further, no  benchmark was available to measure the effect of the changes.
According to EU officials, the most common administrative issues,  especially during the first years of implementation of the directive, have  been the identification of the owner reported in the computerized format.  It is generally recognized that a Taxpayer Identification Number (TIN)  provides the best means of identifying the owner. However, the current  directive does not require paying agents to record a TIN. Using names has  caused problems when other EU member states tried to access the data.  For example, a name that is misspelled cannot be matched. In addition,  how some member states format their mailing address may have led to  data-access problems. EU officials told us that the monitoring role by the  EU Commission, the data-corrections process, and frequent contacts to  resolve specific issues have contributed to effective use of the data  received by EU member states.
Other problems with implementing the directive include identifying  whether investors moved their assets into categories not covered by the  directive (e.g., shifting to equity investments), and concerns that tax  withholding provisions may not be effective because withholding rates  were low until 2011 when the rate became 35 percent. The EU also  identified problems with the definition of terms, making uniform  application of the directive difficult. Generally these terms identify which  payments are covered by the directive, who must report under the  directive, and who owns the interest for tax purposes.
Nevertheless, EU officials stated that the quality of data has improved over  the years. The EU officials have worked with EU member nations to  resolve specific data issues which have contributed to the effective use of  the information exchanged under the directive.
Comparing the EU and U.S. practices on exchanging tax information with  other countries, the U.S. agreements and the directive both allow for  automatic information exchange.  The U.S. is part of the Convention on  Multilateral Administrative Assistance in Tax Matters, which includes  exchange of information agreement provisions and has been ratified by 15  nations and the U.S.  However, the U.S. is prevented by IRC 6105 from  releasing data about the extent of information exchanged with treaty  partners or the type of information exchange used.
section_title: The 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 who make payments to a  taxpayer such as for bank account interest. A key element of this system is  the UK’s Pay As You Earn (PAYE) system. Under the PAYE system HMRC  calculates an amount of withholding from wages to meet a taxpayer’s  liability for the current tax year.
According to HMRC officials, the individual tax system in the UK is simple  for most taxpayers who are subject to PAYE. PAYE makes it unnecessary  for wage earners to file a yearly tax return, unless special circumstances  apply. For example, wage earners do not need to file a return unless  income from interest, dividends, or capital gains exceeds certain  thresholds or if deductions need to be reported. Therefore, a tax return  may not be required because most individuals do not earn enough of these  income types to trigger self-reporting. For example, the first £10,100  (US$16,239) of capital gains income is exempt from being reported on tax  returns.  Even so, payers of interest or dividend income withhold tax  before payments are made.
PAYE also facilitates the payment of tax liabilities by periodic withholding  at source for wages under the PAYE system. The withheld amount may be  adjusted by HMRC to collect any unpaid taxes from previous years or  refund overpayments. HMRC annually notifies the taxpayer and employer  of the amount to withhold.
Taxpayers can provide HMRC with additional information that can be  used to adjust their withholding. If taxpayers provide the information on  their other income such as self-employment earnings, rental income, or  investment income, HMRC can adjust the PAYE withholding. Individuals  not under the PAYE system are required to file a tax return after the end of  the tax year based on their records.
In addition, HMRC uses information reporting and tax withholding as part  of its two step process to assess the compliance risks on filed returns. In  the first step, individual tax returns are reviewed for inherent compliance  risks because of the taxpayers’ income level and complexity of the tax  return. For example, wealthy taxpayers with complex business income are  considered to have a higher compliance risk than a wage earner. In the  second step, information compiled from various sources—including  information returns and public sources—is analyzed to identify returns  with a high compliance risk. According to HMRC officials, these  assessments have allowed HMRC to look at national and regional trends.  HMRC is also attempting to uncover emerging compliance problems by  combining and analyzing data from the above sources as well as others.
The UK and U.S. both have individual income tax returns and use  information reporting and tax withholding to help ensure the correct tax is  reported and paid. However, differences exist between the countries’  systems.
The U.S. has six tax rates that differ among five filing statuses for  individuals (i.e., single, married, married filing separately, surviving  spouse, or head of household) and covering all types of taxable  income. In general, the UK system has three tax rates, one tax status  (individuals), and a different tax return depending on the taxable  income (e.g., self-employed or employed individuals).
U.S. income tax withholding applies to wages paid but not interest and  dividend income as it does in the UK.
U.S. wage earners, rather than the IRS, are responsible for informing  employers of how much income tax to withhold, if any, and must  annually self assess and file their tax returns unlike most UK wage  earners.
Another major difference is that the U.S. automatically matches data from  information returns and the withholding system to data from the income  tax return to identify individuals who underreported income or failed to  file required returns. Matching is done using a unique identifier TIN.  HMRC officials told us that they have no automated document-matching  process and the UK does not use TINs as a universal identifier, which is  needed for wide-scale document matching. HMRC officials said that they  may do limited manual document matching in risk assessments and  compliance checks. For example, HMRC manually matches some taxpayer  data—such as name, address, date of birth—from bank records to  corresponding data on tax returns. The closest form of unique identifier  that HMRC uses with some limitations is the national insurance number.  HMRC officials said they are barred from using the national insurance  number for widespread document matching, which leaves HMRC with  some unmatchable information returns.
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: High wealth individuals often have complex business relationships  involving many entities they may directly control or indirectly influence  and these relationships may be used to reduce taxes illegally or in a  manner that policymakers may not have intended. Australia has developed  a compliance program that requires these taxpayers to provide  information on these relationships and that provides such taxpayers  additional guidance on proper tax reporting. The Australian High Net  Wealth Individuals (HNWI) program focuses on the characteristics of  wealthy taxpayers that affect their tax compliance. According to the  Australian Tax Office (ATO), in the mid-1990s, ATO was perceived as  enforcing strict sanctions on the average taxpayers but not the wealthy. By  2008, ATO found that high-wealth taxpayers, those with a net worth of  more than A$30 million (US$20.9 million), had substantial income from  complex arrangements, 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 FY 2008 ATO data, the HNWI program has produced  financial benefits. Since the establishment of the program in 1996, ATO  has collected A$1.9 billion (US$1.67 billion) in additional revenue and  reduced revenue losses by A$1.75 billion (US$1.5 billion) through  compliance activities focused on highly wealthy individuals and their  associated entities.  ATO’s program focus on high wealth individuals and  their related entities has been adopted by other tax administrators. By  2009, nine other countries, including the U.S., had formed groups to focus  resources on high wealth individuals.
Like the ATO, the IRS is taking a close look at high income and high  wealth individuals and their related entities. As announced by the  Commissioner of Internal Revenue in 2009, the IRS formed the Global  High Wealth (GHW) industry to take a holistic approach to high-wealth  individuals. The IRS consulted with the ATO as GHW got up and running  to discuss the ATO’s approach to the high wealth population, as well as its  operational best practices. As of February 2011, GHW field groups had a  number of high wealth individuals and several of their related entities  under examination.
One difference is that Australia has a separate income tax return for high- wealth taxpayers to report information on assets owned or controlled by  HNWIs. In contrast, the U.S. has no separate tax return for high-wealth  individuals and generally does not seek asset information from individuals.  According to IRS officials, the IRS traditionally scores the risk of  individual tax returns based on individual reporting characteristics rather  than a network of related entities.  However, the IRS has been examining  how to do risk assessments of networks through its GHW program since  2009. Another difference is that the ATO requires HNWIs to report their  business networks and the IRS currently does not.
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 and tax administrators and  taxpayers appear to find a semiannual payment approach effective. Hong  Kong’s Salaries Tax is a tax on wages and salaries with a small number of  deductions (e.g., charitable donations and mortgage interest). The Salaries  Tax is paid by about 40 percent of the estimated 3.4 million wage earners  in Hong Kong, while the other 60 percent are exempt from Salaries Tax.
To collect the Salaries Tax, Hong Kong does not use periodic (e.g.,  biweekly or monthly) tax withholding by employers. Rather, Hong Kong  collects it through two payments by taxpayers for a tax year. Since the tax  year runs for April 1st through March 31st, a substantial portion of income  for the tax year is earned by January (i.e., income for April to December),  the taxpayer is to pay 75 percent of the tax for that tax year in January (as  well as pay any unpaid tax from the previous year). The remaining 25  percent of the estimated tax is to be paid 3 months later in April.
By early May, Inland Revenue Department (IRD)—the tax administator— annually prepares individual tax returns for taxpayers based on  information returns filed by employers. Taxpayers review the prepared  return and make any revisions such as including deductions (e.g.,  charitable contributions), and file with IRD. IRD then will review the  returns and determine if any additional tax is due. If the final Salaries Tax  assessment turns out to be higher than the estimated tax previously  assessed, IRD is to notify the taxpayer who is to pay the additional tax  concurrently with the January payment of estimated tax for the next tax  year.
Hong Kong’s tax system is positively viewed by tax experts, practitioners,  and a public opinion expert based on our discussions with these groups.  They generally believe that low tax rates, a simple system, and cultural  values contribute to Hong Kong’s collection of the Salaries Tax through  the two payments rather than periodic withholding. Tax rates are fairly  low, starting at 2 percent of the adjusted salary earned and not exceeding  15 percent. Further, tax experts told us that the Salaries Tax system is  simple. Few taxpayers use a tax preparer because the tax form is very  straightforward and the tax system is described as “stable.” Further, an  expert on public opinion in Hong Kong told us that taxpayers fear a loss of  face if recognized as not complying with tax law. This cultural attitude  helps promote compliance.
Unlike Hong Kong’s twice a year payments for the Salaries Tax, the U.S.  income tax on wages relies on periodic tax withholding in which tax is  paid as income is earned. IRS provides guidance (e.g., Publication 15) on  how and when employers should withhold income tax (e.g., every other  week) and deposit the withheld income taxes (e.g., monthly). Further, the  U.S. individual tax rates are higher and the system is more complex. These  tax rates begin at 10 percent and progress to 35 percent. Further, the U.S.  taxes many forms of income beyond salary income on the individual tax  return.
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. By doing so, IRS officials  say they regularly exchange ideas and learn about other practices. As the  IRS learns of these practices, it may adopt the practice based on the needs  of the U.S. tax system.
IRS is actively involved in two international tax organizations and one  jointly run program that addresses common tax administration issues.  First, the IRS participates with the Center for Inter-American Tax  Administration (CIAT), a forum made up of 38 member countries and  associate members, which exchange experiences with the aim of  improving tax administration. CIAT, formed in 1967, is to promote  integrity and transparency of tax administrators, promote compliance, and  fight tax fraud. The IRS participates with CIAT in designing and  developing tax administration products and with CIAT’s International Tax  Planning Control committee.  Second, the IRS participates with the  Organisation for Economic Co-operation and Development (OECD)  Forum on Tax Administration (FTA), which is chaired by the IRS  Commissioner during 2011. The FTA was created in July 2002 to promote  dialogue between tax administrations and identify good tax administration  practices. Since 2002, the forum has issued over 50 comparative analyses  on tax administration issues to assist member and selected nonmember  countries.
IRS and OECD officials exchange tax administration knowledge. For  example, the IRS is participating in the OECD’s first peer review of  information exchanged under tax treaties and tax information exchange  agreements. Under the peer-review process, senior tax officials from  several OECD countries examine each selected member’s legal and  regulatory framework and evaluate members’ implementation of OECD  tax standards. The peer-review report on IRS information exchange  practices is expected to be published in mid 2011.
As for the jointly run program, the Joint International Tax Shelter  Information Centre (JITSIC) attempts to supplement ongoing work in each  country to identify and curb abusive tax schemes by exchanging  information on these schemes. JITSIC was formed in 2004 and now  includes Australia, Canada, China, Japan, South Korea, United Kingdom  and the U.S. tax agencies. According to the IRS, JITSIC members have  identified and challenged the following highly artificial arrangements:    a cross-border scheme involving millions of dollars in improper  deductions and unreported income on tax returns from retirement  account withdrawals;    highly structured financing transactions created by financial  institutions that taxpayers used to generate inappropriate foreign tax  credit benefits;  and    made-to-order losses on futures and options transactions for  individuals in other JITSIC jurisdictions, leading to more than $100  million in evaded taxes.
To date, the IRS has implemented one foreign tax administration practice.  As presented earlier, Australia’s HNWI program examines sophisticated  legal structures that wealthy taxpayers may use to mask aggressive tax  strategies. In 2009, the OECD issued a report on the tax compliance  problems of wealthy individuals and concluded that “high net worth  individuals pose significant challenges to tax administrations” due to their  complex business dealings across different business entities, higher tax  rates, and higher likelihood of using aggressive tax planning or tax  evasion.  According to an IRS official, during IRS’s participation in the  OECD High Wealth Project in 2008, IRS staff began to realize the value of  this program to the U.S. tax system. As we stated, the IRS now has a  program focused on wealthy individuals and their networks.
Chairman Baucus, Ranking Member Hatch, and Members of the  Committee, this concludes my statement. I would be happy to answer any  questions you may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Michael  Brostek, Director, Strategic Issues, on (202) 512-9110 or  brostekm@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement. Individuals making key contributions to this testimony include  Thomas Short, Assistant Director; Leon Green; John Lack; Alma Laris;  Andrea Levine; Cynthia Saunders; and Sabrina Streagle.
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