OECD Releases Its Annual Tax Administration Report

On August 11, 2015, the Organisation for Economic Co-operation and Development (OECD) released its annual report addressing global tax administration. The OECD’s stated mission is to “promote policies that will improve the economic and social well-being of people around the world.” The OECD describes its annual report as follows:

Tax Administration 2015, produced under the auspices of the Forum on Tax Administration, is a unique and comprehensive survey of tax administration systems, practices and performance across 56 advanced and emerging economies (including all OECD, EU, and G20 members). Its starting point is the premise that revenue bodies can be better informed and work more effectively together given a broad understanding of the administrative context in which each operates. However, its information content is also likely to be of interest to many external parties (e.g. academics, external audit agencies, regional tax bodies, and international bodies providing technical assistance).

The series identifies some of the fundamental elements of national tax system administration and uses data, analyses and country examples to identify key trends, comparative levels of performance, recent and planned developments, and good practices.

This edition updates performance-related and descriptive material contained in prior editions with new data up to end-fiscal year 2013, and supplements this information on some new topics (e.g. aspects of compliance management and strategic priorities for increased use of on-line services). It also includes coverage of four additional countries (i.e. Costa Rica, Croatia, Morocco, and Thailand).

Of particular interest in this report is the OECD’s finding regarding voluntary disclosure programs for non-compliant taxpayers. With the increased focus on offshore tax evasion by many countries, and the implementation of policies regarding the exchange of tax information among nations (including FATCA in the U.S., which is effective now, and the OECD’s Common Reporting Standard, which is just over the horizon), it is expected that taxpayers in many countries will be making greater use of voluntary disclosure programs. In the U.S., for example, the IRS Offshore Voluntary Disclosure Program for taxpayers with offshore bank accounts is the most successful voluntary disclosure program ever offered by the U.S. tax authority.

A press release announcing publication of Tax Administration 2015, and its key findings, is set forth below.

Tax administrations continue to face the challenges of improving their performance while reducing costs, decreasing compliance burdens for taxpayers tackling non-compliance. Improving taxpayer services, while making non-compliance harder, is helping revenue bodies increase their efficiency and allowing governments to finance important programmes that will further benefit their citizens.

Tax Administration 2015 is the sixth edition of the OECD’s comparative information series on tax administration. The report, which surveys 56 advanced and emerging economies (including all OECD, EU, and G20 countries), includes for the first time information: Costa Rica, Croatia, Morocco and Thailand. The series identifies fundamental elements of modern tax administration systems and uses data, analyses and examples to identify key performance trends, recent innovations, and examples of good practice.

Among the many findings and observations, the report in particular highlights:

— Significant organisational change – 40% of revenue bodies reported that they are currently managing the addition of new business activities, amalgamation with other government service providers, and consolidation of work and their office network, at a time when 60% saw reductions in staffing, with significant reductions in Australia, the United Kingdom and the United States.

— Strong investment in digital services– driven by customer expectation and productivity demands revenue administrations have invested significantly in digital on-the-go services. Average IT expenditure as a percentage of the total budget remained constant at 9.5%. Notable exceptions were Austria, Finland, Singapore and Norway where approximately 25% of the total budget is spent on IT.

— Better connected e-services, and future opportunity– while 95% of all revenue bodies offer the opportunity to file returns electronically, and over two thirds achieve usage over 75%, more could be done to move other aspects of the end-to-end process, including assessment, amendment and payment into a more integrated digital service.

— Improving outstanding tax debt position – Total tax debt for OECD member countries rose marginally in 2011 to 2013, from around 22% to just over 24% of net annual revenue collections. This ratio is however significantly impacted by two abnormal “outliers” which when removed change the results for OECD countries to show a decrease from 12.7% in 2011 to 11.1% of annual net revenue collections in 2013.  Notably seven revenue bodies: Estonia, Ireland, Japan, Korea, Norway, Sweden and Switzerland have a collection to debt ratio of less than 5%. Improvements in collection performance can generally be attributed to:

-Strong management information systems;

-Well-developed analytics tools to guide use of extensive enforcement powers;

-Extensive use of tax withholding at source arrangements;

-Wide use of electronic payment methods; and

-Significant investment in information technology

— Improving management of large taxpayers – over 85% of revenue bodies have adopted the structured ‘co-operative compliance model’ recommended by the OECD, for managing their largest taxpayers. One-third use similar arrangements to manage the tax affairs of High Net Worth Individuals.

— Tax gap measurement on the increase – 43% of revenue bodies report they undertake or are researching estimates of the aggregate tax gap for some or all of the major taxes administered.

— Greater use of disclosure policies to improve tax compliance and bolster tax revenues — despite two-thirds of OECD member countries reporting that their tax law permits voluntary disclosures only 40% have a policy to encourage taxpayers to use these. Further only 11 member countries were able to report the results achieved from their voluntary disclosure programme. With the imminent implementation of automatic exchange of financial account information, it is expected that there will be greater interest in these programmes. See the recent report Update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance.

— Electronic matching of VAT invoices continues to expand – with growing concerns about the VAT non-compliance, a relatively large number of revenue bodies, including many in Europe and Latin America, are successfully  using systems to process bulk VAT invoice data for compliance risk management and fraud detection.

FATCA Update: Confidentiality of Information Transmitted to IRS; Announcement of “More Favorable” IGA Terms; and More IGAs

The month of July has seen several significant developments regarding implementation of the Foreign Account Tax Compliance Act (FATCA), which has been fully effective since July 1, 2014.  First, the IRS Office of Chief Counsel issued an advice memorandum regarding the applicability of the tax returns and return information confidentiality provisions of IRC 6103 and 6105.  Second, Treasury announced that sent letters to 40 countries which executed early versions of Intergovernmental Agreements (IGAs) that, based upon the “more favorable terms” provision in their IGAs, they could take advantage of more favorable provisions contained in more recent IGAs.  Finally, Treasury announced several new IGAs with partner jurisdictions.

IDES and Confidentiality

The Internal Revenue Service maintains a computerized system for secure, encrypted transmission of taxpayer financial account information called the International Data Exchange Service (IDES).  IDES was designed by the IRS and developed and implemented by a third-party vendor in order to facilitate the required transmission of financial account information pursuant to FATCA.  IDES will be used by the IRS and foreign tax administrations to exchange financial account information, as well as by the IRS to receive submissions directly from foreign financial institutions.  The IDES web site may be accessed here.

Pursuant to section 6103(a) of the Internal Revenue Code, tax returns and return information must be maintained as confidential by the IRS and may only be disclosed as provided by the code.  Information provided to the IRS by a foreign government is also subject to confidentiality pursuant to IRC 6105.  In addition, each of the tax treaties, and IGAs, to which the United States is a party include confidentiality provisions that require all information exchanged to be kept confidential in accordance with the provisions of such treaty or agreement, as well as provisions generally limiting the use of the information only for purposes of tax administration.

The Office of Chief Counsel advice memorandum contains an extensive analysis of when, precisely, the confidentiality protections of IRC 6103 and 6105 apply to tax information transmitted through IDES.  In the case of outbound information (that is, tax information transmitted by the IRS to a foreign tax authority), the memorandum concludes that such information, which is necessarily in the possession of the IRS, is protected by confidentiality throughout the IDES process.  Once the foreign tax authority receives the information, it will be obligated to maintain confidentiality under the terms of the applicable tax treaty or IGA.

The confidentiality of inbound information is less clear, as the advice memorandum acknowledges.  The Office of Chief Counsel concludes, ultimately, that confidentiality protection arises the moment the information is successfully uploaded to IDES by the transmitting party (whether a foreign tax authority or a foreign financial information).  The memorandum notes that information transmitted through IDES will be provided on FATCA Form 8966, which would likely constitute an “information return” within the meaning of IRC 6103(b)(1).

In a related development, the IRS updated its Frequently Asked Questions regarding technical aspects of IDES at the end of July to address certain recurring questions by IDES uses.

Notification of “More Favorable Terms” to Certain IGA Jurisdictions

Article 7 of the Model 1 IGA provides that the United States shall notify partner jurisdictions of any more favorable terms under Article 4 or Annex I of the IGA afforded to another partner jurisdiction.  The purpose of such provision is to ensure that countries signing early IGAs may take advantage of later modifications to the Model 1 IGA that are more favorable.  Pursuant to this particular article, Treasury has announced that it sent a “more favorable terms” letter in July to the following countries:

  • Australia
  • Barbados
  • Belarus
  • Belgium
  • Brazil
  • Canada
  • Cayman Islands
  • Costa Rica
  • Czech Republic
  • Denmark
  • Estonia
  • Finland
  • France
  • Germany
  • Gibraltar
  • Guernsey
  • Honduras
  • Hungary
  • Ireland
  • Isle of Man
  • Italy
  • Jamaica
  • Jersey
  • Latvia
  • Liechtenstein
  • Lithuania
  • Luxembourg
  • Malta
  • Mauritius
  • Mexico
  • Netherlands
  • New Zealand
  • Norway
  • Poland
  • Qatar
  • Slovenia
  • Spain
  • South Africa
  • Sweden
  • United Kingdom

As described in the letter sent to each of these countries, the United States considers the following provisions, contained in the IGA entered into with the British Virgin Islands, to be “more favorable terms” and thereafter available to be utilized by the jurisdictions receiving such letter:

  • Paragraph G of Section VI of Annex I, which addresses alternative procedures for new accounts opened prior to entry into force of the IGA; and
  • Paragraph H of Section VI of Annex I, which addresses alternative procedures for new entity accounts opened on or after July 1, 2014, and before January 1, 2015.

Announcement of Additional IGAs

During the month of July, Treasury announced that it had formally executed IGAs with the following jurisdictions:  Georgia, India, Philippines, and Turkey.  All of these agreements are Model 1 IGAs.

FATCA Update: Treasury Clarifies Obligations of Participating FFIs to Report Pre-Existing Accounts

Earlier today, Treasury and the IRS issued yet another correcting amendment to the previously-issued regulations implementing the Foreign Account Tax Compliance Act (FATCA).  FATCA become effective on July 1, 2014, and generally requires participating foreign financial institutions (FFIs) to begin reporting information regarding their U.S. account holders to the U.S. by March 31, 2015.  Since FATCA was passed by Congress and signed by the President in 2010, Treasury and the IRS have issued a massive amount of proposed, temporary, and final regulations to implement FATCA’s mandate.

According to the preamble to today’s correcting amendment, the change “affects FFIs that have entered into an agreement with the IRS to obtain status as a participating FFI and to, among other things, report certain information with respect to U.S. accounts that they maintain.”  The preamble further sets forth why the correction was needed:

As published, the temporary regulations contain an error that is misleading with respect to the reporting requirements of participating FFIs (as defined in §1.1471-1(b)(91)) maintaining U.S. accounts during the 2014 calendar year. This correcting amendment modifies the last date in the first sentence in §1.1471-4T(d)(7)(iv)(B) to correct the relevant provision to meet its intended purpose.

Specifically, the amendment corrects Treas. Reg. 1.1471-4T(d)(7)(iv)(B), as follows:

(B) Special determination date and timing for reporting with respect to the 2014 calendar year.  With respect to the 2014 calendar year, a participating FFI must report under paragraph (d)(3) or (5) of this section on all accounts that are identified and documented under paragraph (c) of this section as U.S. accounts or accounts held by owner-documented FFIs as of December 31, 2014, (or as of the date an account is closed if the account is closed prior to December 31, 2014) if such account was outstanding on or after the effective date of the participating FFI’s FFI agreement. * * *

Prior to today’s correcting amendment, participating FFIs were only permitted to treat accounts as “pre-existing” if they were opened prior to July 1, 2014.  The amendment now allows participating FFIs to treat accounts as pre-existing if they were opened before the institution signed its FFI Agreement with the IRS.  The change allows FFIs to have greater leeway in characterizing accounts as “pre-existing,” particularly for those institutions which registered as participating FFIs and entered into FFI Agreements after July 1, 2014.