This chapter provides an overview of current practice in tax administration in some comparable countries. It considers general trends and the new ethos underpinning the transformation in tax services in response to technological change. The chapter serves as a background for the comparison and evaluation of the Australian Taxation Office (ATO)’s services and functions which is a subject of this report.
The inquiry terms of reference invited examination of tax administration processes and services within comparable countries in areas of communication and information technology, and in compliance activity. The broader context for this was to consider how voluntary compliance could be motivated through the use of behavioural insights, information technology, automated and natural systems, and ‘nudges’. An additional focus was on emerging enforcement challenges, in particular for mechanisms to reduce and disrupt the cash economy.
During the inquiry, there was discussion of the implementation of digital automated systems and processes in Sweden, the United Kingdom and New Zealand in particular. Consideration was given as to how digitisation is transforming taxpayer engagement, supporting innovation in tax administration and regulatory reform.
Compliance and enforcement responses to the cash and shadow economies in different jurisdictions were raised in the latter context. A brief overview of these, along with the challenges associated with the emergent ‘gig’ and sharing economies, conclude the chapter. The cash economy is discussed in more detail in Chapter 5.
Information in this chapter is supplemented by analysis in the Organisation for Economic Co-operation and Development (OECD)’s Tax Administration 2017 report, which provides internationally comparative data on trends in 55 advanced and emerging economies.
Tax administration processes and services
In narrow terms, tax administration refers to the rules and processes for collecting and disbursing revenue and payments administered by a nations’ revenue authority.
The OECD’s 2017 comparative review found significant change had taken place in tax administration over the survey period, being driven by:
(i) the use of new technologies, tools and data to improve the effectiveness and delivery of contemporary services;
(ii) the desire to reduce the cost of tax operations and burdens on taxpayers;
(iii) the taking on of new responsibilities; and
(iv) the implementation of the far-reaching and major changes to the international tax rules, including the outcomes under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.
The Chair of the OECD’s Forum on Tax Administration Edward Troup advised in his preface to the report:
Tax administrations are embarking on a period of unprecedented change. The emergence of new technologies, analytical tools and a vast increase in the scope and scale of digital data offer significant opportunities to enhance tax administration and reduce burdens. But there are also challenges to realising these benefits. These include pressures on budgets and human resources, the capacity of tax administrations to respond swiftly to rapid changes in business models and the choice of cost-effective technical solutions.
Evidence to the Committee suggests that the combination of technological change, globalisation and budgetary pressure has already transformed global tax administration practice. Mr Richard Highfield, a former Australian Taxation Second Commissioner and current Adjunct Professor at the University of New South Wales School of Business, observed:
Modern tax systems and their administration are built on the principle of “voluntary compliance”—taxpayers are expected to comply voluntarily with their tax obligations with only limited intervention by tax officials. In practice, voluntary compliance is achieved through what are termed “self-assessment” procedures. Under self-assessment, taxpayers are expected to calculate their own liabilities, submit their own returns and payments, and provide further information when requested.
The expectation that taxpayers should ‘self-assess’ their tax status has ushered in a need for revenue agencies to simplify processes and educate the community about their tax obligations, as well as that revenue agencies improve risk analysis and monitoring processes. Mr Highfield commented:
To encourage high levels of voluntary compliance, the conventional wisdom is that tax bodies should provide an extensive array of education and assistance-related products and services to help taxpayers meet their obligations with minimal burden and costs. Tax bodies also conduct risk-based programs of verification and enforcement to detect and deter non-compliance. The tax laws also provide for the imposition of sanctions (e.g. penalties and interest) to encourage voluntary compliance and to punish those who are found to have not complied.
The wider tax eco-system
In response to the new taxation environment, taxation agencies are now looking more holistically at the problem of tax engagement. This includes engagement with domestic and global partners to address emerging compliance challenges.
ATO Deputy Commissioner, Digital Delivery, Mr John Dardo referred to the concept of a ‘tax eco-system’ in discussion of domestic tax security—incorporating tax agents, BAS (Business Activity Statements), software developers and super funds. The OECD 2017 report also used this term, confirming that tax administration now goes beyond management of ‘effective and efficient internal systems’ to ‘the stewarding of the wider tax eco
‑system’, which includes the private and public sector, and international partners. The report explained:
In concrete terms this means [tax administrators] are looking at how they can deploy new technologies and new delivery approaches to improve their effectiveness as well as the efficiency of their operations. In addition they are engaging with third party providers of data and services in new business arrangements that extend the traditional view of the tax eco-system, including through monitoring and standard setting. To compound the challenges, these changes are taking place at the same time that administrations are implementing major changes to the international tax rules, responding to the tax issues surrounding new economic systems (including the digital and sharing economies) and taking measure to further reduce the tax gap.
Stewardship of this extended tax eco-system also means modern tax administrators have responsibilities beyond traditional enforcement activities in a new governance model which involves: ‘lowering costs, enhancing voluntary compliance and reducing the burdens arising from paying taxes, thus helping to promote growth and investment’.
A figure showing the model for tax administration under this broader mandate follows.
Figure 2.1: The tax administration eco-system
Source: OECD, Tax Administration 2017, p. 28.
The digital revolution in tax services
The progressive digitisation of taxation services is a feature of the integrated tax eco-system set out above, and hence a policy and investment priority for most advanced nations.
Rather than being internally generated by governments, the phenomenon is couched as a necessary response by tax administrators to the penetration of digital services and systems across the modern taxpayer base. The OECD observes:
An increasingly digital, mobile and global taxpayer base is requiring tax administrations to respond to issues that were once only the domain of its largest businesses. These changes are prompting administrations to consider how they can best support this growing group of taxpayers. In particular they are looking at how they can provide easier approaches to compliance, including embedding tax requirements in the processes and applications that taxpayers use on a day to day basis, providing greater tax certainty and reducing costs.
As noted previously, the discussion of the digital transformation of tax services is linked with the associated need to promote ‘voluntary compliance’. Hence the importance of seamless engagement with customer preferred ‘natural systems’, those used in the community to run businesses, manage bank accounts, or to interact with government services such as education, health and welfare.
The ATO’s digital strategy responds to this need committing to:
Streamline and embed our services into the systems our clients use everyday
Facilitate seamless transactions between individuals, government, and businesses by embedding our services within the systems our clients use day-to-day (eg software, banking, point of sale)
Streamline and automate reporting obligations, integrating the collection of data and making it easier for clients to complete reporting obligations (eg payroll events)
Explore opportunities to leverage from new and emerging technologies
Work with third parties to improve access, frequency and integrity of data sources.
An additional benefit of the automation of tax, government and financial systems is the potential to more efficiently collate and crosscheck information received. The OECD suggests that lower storage costs coupled with advances in data analytics technologies have allowed tax administrators to not only source more third-party data, including though development of new methods and products, but has also enabled better management of tax risks.
Automated pre-filling of tax information, payment registration and e-invoicing systems, along with the introduction of perceptive assessment tools which select and predict taxpayer responses, have been variously adopted by comparable tax revenue agencies. Sweden has led the transition to real-time sales and tax inputs by mandating use of certified point of sale systems, and by popularising the use of mobile apps to promote community acceptance that tax compliance is the norm.
These mechanisms are also seen to offer opportunities to make more fundamental reforms to the structure and operation of tax systems. Pre-filling, for example, can suspend the need for taxpayers to make periodic lodgement of tax material, allowing for tick box or no return systems for a majority of taxpayers, as in New Zealand. A more immediate real-time tax registration process, using point of sale technologies, can allow taxpayers to look at tax owed in advance rather than find out how things stand later after a return or Business Activity Statement has been processed.
The following section provides a snapshot of engagement technologies in comparable nations.
Self-service and pre-filling of tax information
In its overview of trends in tax administration, the 2017 OECD tax administration report observed that although the shift to digital services over the last two decades was at first slow, now most tax administrators offer taxpayers web-based services providing the ability to register, file and pay online. Two thirds of tax administrations also offered taxpayers an integrated online account.
However, the 2017 study also revealed that, despite these advances, online lodgement for individuals has lagged behind. While electronic lodgement was high for business (four out of five for corporate and Value Added Tax—VAT) only two out of three individual taxpayers lodged online.
Tax administrators anticipate that achieving higher usage of electronic lodgement and payment systems will both reduce costs and improve services to taxpayers. One of the more significant innovations in this regard over the last two decades has been provision of pre-filled tax information for individual tax payers.
The ATO’s submission to the current inquiry sets out recent outcomes resulting from improved delivery of pre-filled information:
Since the introduction of myTax it is estimated that it has delivered a reduction in the cost of compliance for individual taxpayers of approximately $285 million per year.
As at April 2017, over 3.2 million 2015–2016 individual income tax returns have been lodged using myTax. It is available on any device, at any time convenient to the taxpayer.
The return on investment for the Australian Tax Office arises from the fact that taxpayers are more likely to voluntarily comply with their obligations when doing so is quick and easy. Taxpayers using myTax also have access to a pre-filling service that makes it easy to ensure they have not omitted income such as salary and wages or dividends and interest.
The Inspector-General of Taxation referred to the results of the 2015 OECD tax review which found that almost half of the revenue bodies surveyed at the time made use of pre-filling. Scandinavian countries provided full pre-filling, with many taxpayers needing only to accept the information rather than lodge their own returns. The submission noted:
Denmark was the first Scandinavian country to introduce pre-filled tax returns in the 1990s, followed by Sweden and Norway. In Sweden, taxpayers can accept a pre-filled return by internet, phone, SMS or paper. Since 2009, Norway has adopted a silent acceptance approach whereby if taxpayers do not respond to the pre-filled income tax return, it is treated as final and binding. Similarly, in Denmark a ‘no response’ is deemed to be acceptance of the return. The OECD has reported that, the Scandinavian countries experienced a 50 to 75 percent rate of returns not requiring adjustment by taxpayers.
The most recent OECD tax administration study highlighted further developments. Nine jurisdictions—Estonia, Finland, Iceland, Lithuania, Norway, Peru, Portugal, South Africa and Sweden, now provide almost full coverage of pre-filled information for personal tax payers. The pre-fill regime adopted by 11 jurisdictions further extended the services to provide a ‘deemed acceptance’ after a predetermined expiry period.
The OECD review anticipated that improved data flows from third party data providers, along with changes to the design of tax administration systems, could allow more tax administrators ‘to verify returns immediately, or to pre-fill tax returns or, eventually, to dispense with them altogether’.
In his submission, Mr Highfield advised the Committee of recent developments in this direction in the United Kingdom:
Over the last two years, Her Majesty’s Revenue and Customs has implemented a process whereby employee taxpayers who are not required to prepare and file a tax return now receive a personal tax summary from HMRC during the following year. The statement draws on third party information acquired by HMRC and seeks to formalise taxpayers’ engagement with the tax system and to improve the transparency of the UK personal tax system.
The Committee noted that the jurisdictions referred to in this section have significantly less complex tax systems, better lending themselves to the cited innovations. The significance of tax complexity in the Australian context is discussed further in the body of this report.
As shown on Figure 2. 1 in this chapter, the modern tax administration eco-system comprises many partners in the public and private sectors, as well as the taxpayers themselves. This, as the OECD has observed, has prompted tax administrators ‘to design integrated services that extend beyond the tax system itself’.
Australia’s Single Touch Payroll and SuperStream services are examples of systems which deliver these ‘end-to-end solutions’—those that integrate with the ‘natural systems’, such as payroll and accounting products, used by taxpayers. The ATO submission advised of the efficiencies that these products afford the agency and businesses:
One of the significant improvements for businesses who are employers is SuperStream, which has streamlined the process of paying superannuation contributions for employees allowing them to use a single channel to pay multiple funds. It is expected to deliver savings to employers of approximately $350 million per annum. Single Touch Payroll will further streamline and automate reporting obligations for employers through their regular payroll events.
Xero Australia is a major software development partner working with the ATO on its Standard Business Reporting, online tax lodgement, SuperStream and e-invoicing services. Mr Matthew Prouse, Xero’s Partner Solutions Manager, described how his firm delivers compatible products to connect with these systems:
From a technology perspective, there is an ecosystem being built around the core accounting platforms. Xero is a global accounting platform. We provide effectively a horizontal accounting engine that integrates through to the ATO if you are a tax agent. On top of that, there is a thriving ecosystem of industry specific vertical applications. We have over 600 that integrate to our platform that were developed by over 40 000 people. There are 40 000 developers building software on top of the Xero software stack, and some of those are quite industry specific. There are third party apps developed here in Australia that do the accounting on top of Xero for agriculture, farming or wine production. There are a variety of these sorts of vertical applications. In some cases, they are bringing in not just the tax compliance calculations but some other regulatory work as well—the reporting for child care, for example, or the health care industry. There is some statutory reporting that needs to be captured and contained in software digitally as well.
E-invoicing is a registration system for electronically sending, receiving and storing invoices between suppliers and buyers, either business to business or business to government. Australia’s e-invoicing system is still in development, but other jurisdictions have already mandated use of e-invoicing services. The OECD considers that the approach has potential to further modernise tax systems, supporting real-time tax assessment and enhancing compliance. For example:
Brazil is among a number of countries that have mandated e-invoicing…This has helped establish a national digital bookkeeping system, “SPED”, which enables direct reporting of annual income taxes and other tax information. The Brazilian tax administration can now review, assess and act on some information almost instantly, including issuing penalties in near real-time. As a result, the number of audits, their assessed value and total tax collected has significantly increased. There is also greater overall reported participation in the tax system.
Application Programming Interfaces (APIs) provide the means by which e-invoicing and the different types of electronic systems and products communicate securely. Deputy Commissioner John Dardo suggested that the ATO’s investment in APIs made Australia a leader in this area:
What I would say to you is that APIs are a metric of that digitisation. We have met with the OECD leading edge revenue agencies in a number of international forums now. We have been asked by the OECD to lead some work around how APIs are managed and regulated. As far as we know, we have not found a single country that has as many APIs as we do with as broad a range and with the sensitivity we do. In fact, if you had asked me three months ago, I think I would have said that the cumulative figure of all the APIs around all other revenue agencies was still less than what we had. So we are that far ahead.
Point of sale systems and mobile payment apps
While the trend towards electronic payments and ‘tap-and-go’ contactless cards in Australia is strong, some jurisdictions overseas are more advanced in implementing fintech developments which support the shift away from cash.
As noted previously, Sweden has mandated for implementation of certified cash registers—’the black-box’—to provide real-time information to the Swedish Taxation Authority (STA) on sales transactions. The OECD comparative report advised of the measure’s effectiveness in reducing the cash economy, and increasing revenue collection in Sweden:
Since the 1990s, several jurisdictions have implemented mandatory electronic cash registers for retail businesses, many achieving considerable revenue increases as a result. Sweden introduced the mandatory use of certified cash registers for traders in January 2010, and supports implementation by carrying out unannounced inspections, undercover purchases and customer verifications. The Swedish Tax Agency estimates that as of 2013, this approach helped increase VAT and income tax revenues by EUR 300 million per year.
Other economies that have recently adopted the measure include Russia and Italy. In 2017, Russia’s Federal Tax Service (FTS) commenced transition to a mandatory system allowing for immediate uploading of sales data to the FTS, with a scannable code allowing taxpayers to compare the information with FTS data. Italy’s Revenue Agency meanwhile initiated the optional use of electronic cash registers for VAT operators which stores data electronically and transmits it to the Revenue Agency on a daily basis.
While use of mobile apps to make payments in store is still relatively new in Australia, Mr Simon Edwards, Director, Government Relations, PayPal Australia told the Committee that Sweden’s transition to a predominately cashless society has also provided an enormous stimulus to private sector fintech innovation and the take up of payment apps:
I draw it back to Sweden. Sweden has become probably the Western world’s pin-up child of the cashless society. It dropped its use of cash down to very small numbers. In that process, the FinTec application development industry in Sweden has taken off. There are hundreds and hundreds of apps that you can use in Sweden that deal with this whole issue of paying in a non-cash environment.
These apps have also been credited with buoying the shift away from cash in Scandinavian countries, as they provide real-time clearance like cash transactions. Mr Highfield provided information on the following products:
Swish mobile app—developed jointly with major Swedish banks Nordea, Handelbanken, SEB, Danske Bank and Swedbank, Swish is now used by 50 per cent of the Swedish population to make 900 million payments a month.
iZettle mobile app—developed to allow small traders and small businesses to take card payments using an app and card reader plugged into the phone, which increased sales, reported up by 30 per cent.
Denmark’s Mobilepay—had a similar take up to Swish in Sweden, with more than half the population making 90 million transactions last year.
Data analytics in risk management
Increasingly sophisticated data-matching capability and advanced data analytics are being deployed by tax administrators to better target compliance activities and management of risk. The OECD reports:
Tax administrations now use analytic techniques to inform a wide range of actions, including optimising debt-management processes, improving filing rates and quality, delivering better taxpayer service, and understanding the wider impact of policy changes. Moreover, many of these applications now support real-time (or near real-time) operational processes.
The OECD 2017 survey asked tax administrations to identify the relative priority attached to a number of risk categories in their current compliance strategies. The highest priority areas for data analysis nominated by agencies were: VAT fraud; aggressive tax avoidance schemes; the shadow economy and transactions involving zero or near zero tax jurisdictions. E-commerce, identity-fraud and high net wealth individuals (HNWIs) were medium to high priorities’.
Input from the Office of Revenue Commissioners Ireland advised that advanced analytics techniques are being used to ‘uncover insights from data to inform decisions and to test policies and interventions.’ These projects proceed on two grounds:
Predictive analytics—which anticipates likely problems by looking for patterns in historical data; and
Prescriptive analytics—which aims to uncover causal relationships, such as whether particular actions are caused by, or just coincide, with a change in taxpayer behaviour.
Several OECD member countries, such as Ireland, Malaysia, the Netherlands, New Zealand and Singapore, reported utilising advanced analytics to carry out social network analysis to help detect certain types of VAT fraud.
Other jurisdictions focussed on identifying and reducing cash economy activity. Australia and New Zealand, for example, have both utilised advanced analytics techniques to develop strategies to target high risk sectors for cash economy or tax-evasion behaviours.
The OECD report highlighted the role of the ATO’s Nearest Neighbour model and Workplace deduction tool to showcase the utility of advanced analytics techniques in reducing fraud risks associated with work-related expenses claims:
In Australia, to support its work in managing claims for work-related expenses, the Australian Tax Office (ATO) has developed an analytical model that risk assesses taxpayer claims. In 2014–15, 8.4 million taxpayers claimed work-related expenses to the value of AUD 21.3 billion. The model, Nearest Neighbour, enables the ATO to compare a taxpayer’s work-related deduction claims against those in similar jobs and earning similar amounts of income to determine how far they differ from the norm. In essence, this provides a personalised risk profile that enables the ATO to identify higher than expected claims. While a larger claim might be legitimate, it may result in the ATO clarifying the claims with the taxpayer and their employer.
In 2016, the ATO extended the use of Nearest Neighbour to operate in real-time. In myTax (the lodgement system for self-preparers), if work-related expense claims seem higher than expected, taxpayers are prompted to check their claims before submitting their returns. The ATO will introduce similar online analytics for tax agent clients for Tax Time 2017. Prompts for tax agents will alert them if a client falls outside “normal” claim parameters and may require their further attention. The Nearest Neighbour analysis is transforming the way the ATO manages compliance, enabling greater emphasis on prevention and self-correction to encourage willing participation.
Behavioural economics methods
Behavioural economics insight strategies use informed analysis of data, including small sample data (randomised controlled trials), to predict likely behaviours of taxpayers given particular prompts, be it in the message, communication style or method, systems design, or through other inducements or penalties.
The Chartered Accountants Australia and New Zealand (CAANZ) advised of New Zealand’s recent expansion of its withholding tax regime for contractors, with the NZ Inland Revenue’s report to the OECD highlighting the coinciding marketing campaign directed at tradespeople with the tag‑line: ‘It’s just the odd under-the-table job here and there.’
The ATO has referred to work in Canada, New Zealand, Singapore, the United Kingdom and the United States of America (USA) being used to develop behavioural economics practice. The submission advises:
Behavioural insights help us understand why, when and how people make decisions. From a tax administration perspective, our philosophy in applying behavioural insights is to make it as easy as possible for the community to make the right tax and superannuation decisions in ways that minimise effort and cost.
Professor Michael Hiscox, the Director of the Behavioural Economics Team of the Australian Government (BETA), referred to the use of pre-filling in Sweden and Estonia as behavioural economics tools:
From a behavioural point of view, it is interesting. Some of the experience internationally and, actually, in the private sector is that technology enables better service and even easier service delivery to people. We could do it through the tax system by prepopulating more of your tax form for you, which is something that countries like Sweden and Estonia do. In Sweden, it is as simple as basically replying to an SMS to confirm that they have prepopulated everything correctly, and then you submit your taxes.
The OECD report cited Belgium’s use of randomised trials to test different approaches to improve tax compliance. The project, run with Oxford University and the London School of Economics, had a trial population of 250 000 debt cases. The trails involved issuing debt letters, with different phrasing, presentation and penalty or public good messages.
Other techniques to encourage taxpayers to pay more promptly involved use of outbound phone campaigns in Canada, the United Kingdom and Norway, and reminder calls in Belgium. The ATO referred to its work using text messages to prompt debt compliance and change behaviours over the 2015–2016 tax year. During the period, the Office issued 540 000 text message reminders to clients to pay on time. At tax time in 2015, the ATO deployed personalised and targeted messaging to influence the shift from etax to myTax, and from paper lodgements to online lodgements.
As noted above, several OECD member countries are using advanced analytics to carry out social network analysis to help detect certain types of VAT fraud. Advanced data analysis can also assist agencies identify high risk sectors for cash economy activity, and those most prone to debt, with randomised controlled trails then used to test the most effective ways of improving compliance among targeted groups.
Evidence also referred to the United Kingdom’s use of extensive educational campaigns to improve taxpayer compliance, including by shifting attitudes to cash activity. The New Zealand Inland Revenue’s report to the OECD highlighted the marketing campaign directed at tradespeople who may receive, but not declare all cash payments.
The ATO reported that improvements in its data and analytics capabilities had enabled tailoring of its approaches to manage cash and hidden economy risk. Behavioural strategies ranging from support, help and education through to enforcement and prosecution actions had been developed to target high risk sectors—cafés and restaurants, hair and beauty, building and construction, and online sellers.
Other methods deployed overseas involved rewarding good behaviours. BETA advised that a number of jurisdictions in Europe including Slovakia, Italy, Portugal, Greece, Austria and Romania had either experimented with, or are planning to introduce, lotteries tied to sales receipts at the point of sale. The BETA submission reported that Portugal’s lottery scheme saw an increase in tax receipts of 40 per cent, with revenue growing from 2.5 per cent to 9.5 per cent in 2013 compared with the previous year.
The ATO’s use of behavioural insights in tax administration will be discussed further in Chapter 4, which explores the approach’s potential to foster willing participation.
Tax simplification and technology
Taxpayer obligations in Australia can be distilled down to registration, lodgement, reporting and payment which applies regardless of entity type—an individual, large company or small or medium enterprise. The ATO advises:
All taxpayers are required to apply for a Tax File Number (TFN) and the majority need to lodge an annual tax return. Businesses must also register for an Australian Business Number (ABN) and lodge regular Business Activity Statements (BAS). The more complex or large-scale your affairs, the more likely there are to be additional reporting or payment requirements.
Australia is among most other advanced economies in relying on tax withholding at source arrangements to collect individual income tax on employment income. This system, in which employers and financial institutions are obligated to withhold an amount of tax from income payments to taxpayers, has been described by the OECD as the ‘cornerstone of an effective tax system’.
Tax regimes may operate as cumulative and non-cumulative withholding systems. Australia, Canada and the United States are examples of countries with a non-cumulative form of withholding tax, in which an annual tax return is submitted to determine the taxpayer’s final tax liability and any tax funds refundable or payable. Ireland, New Zealand and the United Kingdom use cumulative systems whereby the majority of taxpayers do not have to lodge a return.
As discussed above, the pre-filling of third party tax information and the digitisation of assessment and lodgement processes has streamlined tax administration and the taxpayer experience in both types of system.
Over the last decade this ‘customer oriented business approach’, combined with advanced analytics and the use of big data, has in the OECD’s view enabled a ‘general rethinking of how tax compliance can best be assured at lowest cost and least burden including through the use of third parties’. This in turn has enabled some nations, such as Finland and New Zealand, to conduct a wider transformation of their entire tax operation.
CAANZ’s Mr Peter Vial, New Zealand Country Head and Tax Leader, advised that New Zealand’s wholesale system redesign, initiated in the late 1980s and 90s, had enabled reductions in tax rates, the introduction of a comprehensive GST, increases in social assistance, and reduction of workplace expenses and other entitlements. Today, only a third of the three and half million taxable New Zealanders lodge annual income tax returns.
Mr Vial further advised that technical advances in pre-filling, combined with planned law reform to support real-time information sharing, could further reduce the number of people needing to lodge a tax form:
These proposals, if implemented, will allow Inland Revenue to issue refunds or confirm tax to pay based on the information it holds from banks, from employers and from New Zealand companies that are paid the taxpayer dividend…Those proposals follow some draft legislation that is before our parliament at the moment that provides for Inland Revenue to receive income information from employers and banks more quickly and more frequently so that earlier and more regular information from the banks and employers will allow the social assistance entitlements to be adjusted up or down in something more like real-time, and more people will therefore be out of the tax return process.
However, the Inspector-General of Taxation cautioned that the potential to conduct wholesale tax reform depends on the ‘different socio-economic and legal frameworks in each system’, for example, ‘in many countries where tax returns are fully completed by the revenue authority, there may not be as comprehensive a regime for claiming deductions for work-related expenses as there is in Australia.’
Professor Hiscox, Head of BETA, took a similar view on the potential to shift to full system automation:
I was very recently talking with the ATO about the comparisons between the Swedish system and the Australian system…we have complexities in our system that make it a little bit harder to do that here than in a place like Sweden—how we treat work related expenses and things like that. So making things easier or simplification interventions like pre-filling are a little bit more challenging in our context.‘
Global co-operation and harmonisation on tax matters is occurring in a number of spheres. This section briefly considers the implications for tax administration of recent information sharing agreements and tax legislation reforms.
In particular, the OECD tax administration report identifies moves to address large business tax avoidance under implementation of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project as a factor in driving significant change in tax administration. The ATO website reports that conservative OECD estimates indicate that annual revenue loss due to BEPS is between $100 to $240 billion USD Base, explaining that:
Base erosion and profit shifting (BEPS) refers to the tax planning strategies used by multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activity.
CPA Australia’s Mr Paul Drum referred to BEPS’s relevance in the context of the emergence of the digitisation of the global economy:
The G20 and the OECD have just been working through the base erosion profit-shifting [BEPS} agenda to revisit tax treaties, to look at the digital economy, country-by-country reporting and information-sharing between tax jurisdictions. Some of these are watershed moments in the history of countries and tax systems in international tax.
The OECD report highlighted BEPS as a major advance in co-operative compliance, noting:
…co-operative compliance approaches are built on the mutual interests and established processes of the parties they are able to readily respond to changes in legislation or regulation. This has seen them already being adapted to accommodate the requirements of initiatives like country-by-country reporting and other outcomes from the OECD/G20 Base Erosion and Profit Shifting (BEPS) project into the TCF of the taxpayer and into the risk assessment systems of tax administrations.
The OECD, however, also saw a risk for tax administrators under implementation of global information sharing agreements. In particular, it referred to the introduction of the Common Reporting Standard (CRS), which calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. The ATO has advised of Australia’s obligations under the CSR:
The Common Reporting Standard (CRS) is the single global standard for the collection, reporting and exchange of financial account information on foreign tax residents. Banks and other financial institutions will collect and report to us financial account information on non-residents using the standard. We will exchange this information with the participating foreign tax authorities of those non-residents. In parallel, we will receive financial account information on Australian residents from other countries’ tax authorities. This will help ensure Australian residents with financial accounts in other countries comply with our tax law and deter tax evasion.
The OECD highlighted its concerns about the potential digital burden for tax administrators sharing information under the CRS as they move to full automation and pre-filling:
Due to the fact that pre-filling of tax returns requires a high degree of certainty, in the early days of exchange under a new standard such as the CRS, tax administrations may exercise caution before using the data in pre-filling tax returns until they are sufficiently confident about the quality of the data and the matching of that data against individual taxpayers.
Accordingly, it recommended that jurisdictions give careful consideration to what is ‘sufficient data’ to provide an accurate assessment using pre-filling, cautioning:
Significant gaps can also lead to significant non-compliance. This can either be because the taxpayer does not believe that the tax administration has access to the data or the taxpayer just assumes that the amount assessed is accurate.
Use of tax professionals
Australia has one of the highest levels of reliance on tax practitioners of any OECD country. At hearings, the Tax Commissioner Mr Chris Jordan AO advised that Australia’s reliance on agents is second only to Italy.
The Tax Practitioners Board cited data from the Inspector-General of Taxation’s 2015 report on the ATO’s services and supports to tax agents, to confirm that:
[Australia’s use of tax agents at] current levels are among the highest in OECD countries, exceeding those of Canada (39 per cent), the United States of America (40 per cent), New Zealand (50 per cent) and the United Kingdom (67 per cent).
The submission from the Inspector-General highlighted the results of a 2008 OECD comparative study to support its view that tax agents play a ‘crucial intermediary role’ between taxpayers and the revenue authorities:
The importance of the role tax advisers play in a tax system can be tested by answering a simple question: would compliance with tax laws improve if tax advisers did not exist? The Study Team found no country where the answer to that question is yes. Across the whole range of taxpayers, taxes and circumstances, the vast majority of tax advisers help their clients to avoid errors and deter them from engaging in unlawful or overly-aggressive activities.
The ATO submission provided a sectoral breakdown of tax agent usage by Australian taxpayers:
In Australia, most individuals and businesses (74 per cent of all entities) use a tax professional to help them comply with their obligations. 68 per cent of individuals not in business lodge their annual tax return through a tax agent, 95 per cent of small businesses use an agent for their annual return and a substantial number also use a BAS agent for their PAYG and GST obligations.
Mr Graeme Davis, Treasury’s Acting Division Head, Tax Framework Division, conjectured that tax complexity may be one cause for Australia’s very high reliance on tax agents compared with other nations. However, he emphasised that ‘there doesn’t seem to be a direct correlation’ between tax complexity and agent usage, citing the lower tax agent usage in the United States which is not known for having a simple tax system. Mr Davis also suggested that a more nuanced consideration of taxpayer reliance on agents in different jurisdictions may influence data for comparisons, saying:
One of the questions that is worth asking is: different tax systems work quite differently, and what do tax agencies do in different systems? They are not the same thing in each system. In our system, the tax agents are fulfilling a number of functions. So they are filling a function of helping people get their tax returns in…some people are making use of that—you have a longer time to get your return in… but for business they are also helping them run their businesses to some extent…they are using someone to help them with their accounting…So it may not show up that way in other jurisdictions. So one of the challenges is looking at that data and asking: is that actually comparable?
The Committee considered that while complex systems such as that in the United States are often cited to discount the impact of tax complexity in Australia on agent use, it is important to note that this complexity is mostly felt by companies and not individual taxpayers, while tax agent use remains high across the spectrum.
Tax agent use and tax complexity is discussed in more detail in Chapter 5.
The OECD uses the term ‘the non-observed’ economy to represent all economic activity that goes unreported (for a variety of reasons) in normal statistical data gathering processes used for estimating gross domestic product and other important aggregates of economic activity.
The Australian Bureau of Statistics (ABS) has adopted this definition, as well as the OECD’s breakdown of the constituents of the ‘non-observed economy’, for further analysis:
Underground production: Activities that are productive and legal but are deliberately concealed from public authorities to avoid payment of taxes or compliance with regulations.
Illegal production: Productive activities that generate goods and services forbidden by law or that are unlawful when carried out by unauthorised procedures.
Informal sector production: Productive activities conducted by unincorporated enterprises in the household sector or other units that are unregistered and/or less than a specified size in terms of employment, and that have some market production.
Production of households for own-final use: Productive activities that result in goods or services consumed or capitalised by the households that produced them.
Statistical underground: Defined as all productive activities that should be accounted for in basic data collection programs but are missed due to deficiencies in the statistical system.
Definitions of the cash economy can be inclusive or exclusive of these components. The Australian Government’s interim report on the black economy, for instance, acknowledged but excluded assessment of illegal and illicit activity, whereas the final report included crime, illegality and illicit product sales.
The OECD report refers to the distinction in discussing the shadow or underground economy, noting that it was the subject of a comprehensive information note prepared by the FTA in 2012 Reducing Opportunities for Tax Non-compliance in the Underground Economy (OECD, 2012b). This note explored the key components of successful compliance strategies, assessed the impact of digital payment technologies and reviewed the methodology for estimating the size of the underground economy. The OECD also refers to the recently released report Technology Tools to Tackle Tax Evasion and Tax Fraud (OECD, 2017), which drew on the experience of 21 jurisdictions to highlight their key successes in using technology to help tackle tax evasion.
As discussed previously, advanced data analysis is being conducted in a number of jurisdictions to better identify areas of high risk for cash economy activity and revenues evasion, including where this intersects with criminal activity. Jurisdictions have also adopted a range of methodologies to assess the size of the tax gap associated with cash activity, with some attempting an estimate of losses associated with tax related illicit activity, such as through money laundering.
The Australian Transaction Reports and Analysis Centre (AUSTRAC) is Australia’s financial intelligence agency and the central data source for monitoring of tax evasion. Mr David Hawkins of AUSTRAC’s Strategic Intelligence and Policy section advised of the 100 million ‘incoming and outgoing wire transfers’ received by his agency in 2016 for this purpose. He also highlighted AUSTRAC’s sharing of information online with all its partner agencies, in contrast to similar agencies in many other countries.
The Inspector-General of Taxation’s submission listed a range of approaches to reduce cash activity adopted by other revenue authorities reporting to the OECD:
Comprehensive industry benchmarking, coupled with leveraging via tax professionals, media engagement and automated targeting of large numbers of taxpayers (Australia).
Industry-based withholding/third party reporting regimes (Ireland and Canada).
Increased controls over cash transactions (Netherlands, Spain, and Sweden).
Increased record-keeping controls for employees in high-risk industry sectors (e.g. restaurants and hairdressing) (Sweden’s staff ledgers).
Initiatives aimed at reducing the use of cash transactions (Norway and Turkey).
The use of monetary incentives to encourage proper record-keeping and deter unrecorded cash payments (Canada’s and Norway’s home renovation tax credit, Korea’s lottery and incentive for obtaining receipts).
Increased revenue body use of suspicious transactions reports collected by a separate government agency (Australia and France).
Educating new/potential taxpayers (Austria’s schools initiative, Canada’s trade school initiative).
Appendix D provides a tabular presentation of methods implemented (or planned to be implemented) by tax administrators and law-makers overseas. The cash economy, and the associated tax gap, is discussed in Chapter 5.
The changing workforce
Another factor informing approaches to cash activity and non-compliance are the tax and compliance implications of the emerging sharing or gig economy. The OECD warns:
The global sharing economy, which puts suppliers and customers in direct contact through web or mobile based applications, presents an emerging tax risk. Because of the private nature of payments, and the often global basis for payments, it can be challenging to ensure tax compliance. To overcome this, tax administrations are increasingly reaching out to other government agencies and other tax administrations to ensure comprehensive exchanges of information relating to transactions between individuals based in different jurisdictions. In Australia, for example, the Australian Tax Office (ATO) has access to information on financial flows maintained by the Australian Transaction Reports and Analysis Centre. This helps the ATO identify unregistered businesses operating in the sharing economy (OECD, 2017).
The submission from the Institute of Public Accountants (IPA) reported that in Australia contracting has increased to 10 per cent of the workforce. Drivers of this are the growth in the sharing economy through online IT and mobile use, and incentives provided to employers and contractors under the tax system. These include greater employment deductibility, lower taxes and the potential for income splitting. IPA concluded that ‘the growing number of self‑employed businesses acting as contractors poses to the ATO a greater risk of losing tax revenue when compared to collecting PAYG from employed individuals’.
The recent UK review Good Work, The Taylor Review of Modern Working Practices, July 2017, noted:
The labour market is changing, self-employment is rising, innovative forms of working are causing us to question established norms and how our current legislative framework fits with these developments. These changes have impacts for ordinary people, who may be less certain about their rights, or who might feel that the system doesn’t accommodate the reality of their working relationships. It also has impacts for the state, which sees the fiscal impact of rising self-employment and incorporation.
The report considered that a clearer distinction between an ‘employee’ and a ‘dependent contractor’ was needed, suggesting:
The status of ‘dependent contractor’ should have a clearer definition which better reflects the reality of modern working arrangements, properly capturing those more casual employment relationships that are on the increase today—an individual who is not an employee, but neither are they genuinely self-employed.
The review recommended that, in developing the new ‘dependent contractor’ test, renewed effort should be made to align:
the employment status framework with the tax status framework to ensure that differences between the two systems are reduced to an absolute minimum, and
Government should develop and create a free to use online tool that provides individuals with an indication of their employment status, similar to the Employment Status Indicator tool for tax purposes.
Tax administrations are undergoing a process of sustained review and reform under the imperatives of globalisation, technological change and budgetary pressures.
The OECD has stated that the increased usage by taxpayers of digital products and services demands that tax agencies respond by digitising and simplifying tax administration systems. Ostensibly this is a rational response to the accelerated demands of daily life and business in a globalised economy. However, these measures also provide revenue agencies and governments with opportunities to reduce investment in people—experienced and expert staff, auditors, and other services, while encouraging voluntary engagement by taxpayers.
As part of the evolution of this ‘tax eco-system’—or ‘natural’ network of engagement between individual tax payers, government agencies and businesses—there are incentives to support the community’s tax and financial literacy, both online and in person, and to develop compatible interfaces with private sector products. The next phase is the proliferation of payment apps and point of sale mechanisms to achieve real-time sales monitoring and tax registration. These things equally assist tax payers under the same rationale—making compliance easier, and are being adopted by comparable revenue agencies around the world.
Significantly, the development of advanced data analysis, identity verification and information sharing techniques provides revenue agencies and their partners with powerful new tools for tax monitoring and catching criminal non-compliance and deliberate under-reporting. Technical innovation therefore also supports a higher degree of surveillance of individuals and businesses, and through information sharing globally, the potential, as the OECD has observed, to reduce the capacity to vet the accuracy of incoming pre-filled information and overwhelm tax administrators.
The ATO, in most areas, is on par with other nations in working , sharing goals to modernise tax administration services and develop technical solutions to new challenges. Areas of strength include the ATO’s work with the OECD on Application Programming Interfaces (APIs), by which e-invoicing and other electronic systems and products communicate securely. Less advanced are applications for real-time payment apps and immediate tax registration, which the Australian Government has not prioritised, nor any move made at this point towards a majority non-lodgement system as deployed in some comparable nations. Australia’s high reliance on tax agents, as key partners in the tax system, is another area for consideration.
This chapter has provided a standard of international best practice for comparison of ATO service delivery in key areas, which is examined in more detail in the following chapters of this report.