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2,400 | which makes compliance relatively easy. They also commented that the Tax Card and preprepared annual return system work well and are easy to use. As a result, few individuals use a tax advisor to help prepare and file the annual income tax return. We were told that individuals using a tax advisor have complex tax issues, such as from owning a businesses or having complex investments. Electronic tax administration has advantages for the government and Finnish taxpayers. According to tax officials, cost savin |
2,401 | gs result from spending less time to prepare and process tax returns. These officials said that electronic tax administration has helped to reduce their full-time- equivalent positions over 11 percent from 2003 to 2009. Further, the tax withholding system results in a small amount of individual income tax withheld that needs to be refunded after final returns are filed. For tax year 2007, 8 percent of the tax withheld was refunded to taxpayers as compared to 26 percent refunded in the United States. Finland |
2,402 | ’s culture of cooperation and the resulting cooperative arrangements between government, banks, businesses, and taxpayers have led to acceptance of the new Tax Card Online service. According to public interest and trade groups in Finland, the Finnish society has a great deal of confidence in the banking system and its secure access. This confidence influenced the decision to place the Tax Card online service on bank Web sites. With taxpayers having regular access to a banking Web site, the banks offer a cha |
2,403 | nnel for delivering government services, according to government officials. Public interest and trade groups agreed, noting that the banking industry’s willingness to support the Tax Card enhanced its development. Representatives of a Finnish banking trade group said that placing the Tax Card system on their Web sites helped banks. That is, the more time customers spend on banks’ Web sites, the more opportunities the banks had to offer other services, helping to offset the cost of implementing the system. A |
2,404 | ccording to Finnish trade and public interest groups, Finland’s cooperative culture also supports the preprepared individual income tax return system. For this system to work properly, business and other organizations must file accurate information returns within 1 month after the end of the tax year. This short period for filing information returns creates some burden. The burden includes costs to purchase and install special software for collecting the information as well as preparing and filing the retur |
2,405 | ns. According to a professional accounting organization in Finland, buying the yearly software updates can be expensive. Any update has to be available well before the start of the tax year so that transactions can be correctly recorded at the start of the year and not revised at the end of the year. In contrast to Finland’s self-described “simple” system, the U.S. tax system is complex and changing annually. Regarding withholding estimation, Finland’s Tax Card system provides taxpayers an online return sys |
2,406 | tem for regularly updating the tax amount withheld. For employees in the United States, the IRS’s Web site offers a withholding calculator to help employees determine whether to contact their employer about revising their tax withholding. Finland’s system prepares a notice to the employer that can be sent through the mail or delivered in person, whereas in the United States the taxpayers must file a form with the employer on the amount to be withheld based on the taxpayers’ estimation. In the United States, |
2,407 | individual income tax returns are completed by taxpayers—not IRS—using information returns mailed to their homes and their own records. Taxpayers are to file an accurate income tax return by its due date. Unlike in Finland, U.S. individual taxpayers heavily rely on tax advisors and tax software to prepare their annual return. In the United States, about 90 percent of individual income tax returns are prepared by paid preparers or by the taxpayer using commercial software. In June 2003, the European Union ( |
2,408 | EU) adopted the Savings Taxation Directive to encourage tax compliance by exchanging information and in some cases using withholding. The directive is a multilateral agreement that establishes uniform procedures and definitions for exchanging information and facilitating the resolution of common technical problems. Under the directive, the 27 EU members and 10 dependent and associated territories agreed to participate in the directive. With this information, tax authorities in the citizen’s nation are able |
2,409 | to verify whether the citizen properly reported and paid tax on the interest income. Each of the 27 member nations has a separate tax system, and varies in the tax rates imposed on personal income, as shown in table 3. The highest personal income tax rates range from 10 percent in Bulgaria to over 56 percent in Sweden. This range of tax rates is an important reason for the need for the exchange of information on income. Residents in higher-tax countries could be motivated to move capital outside of the coun |
2,410 | try of residence to potentially avoid reporting income earned on investments of the capital. The directive provided a basic framework for information exchanges, defining essential terms such as beneficial owner of the asset paying interest, identity and residence of the owner, paying agents, interest payments, and information to be reported, and establishing automatic information exchange among members. The directive also states that five other nonmember nations agreed to information exchange upon request f |
2,411 | or information defined under the Savings Taxation Directive. During a transition period from 2005 through 2011, Belgium, Luxembourg, and Austria as well as the five nonmember nations, and six associated territories, agreed to a withholding tax. Under these agreements, a withholding tax was to be remitted at the rate of 15 percent during the first 3 years, 20 percent for the next 3 years, and 35 percent thereafter. The directive authorizes the withholding nations to retain 25 percent of the tax collected and |
2,412 | transfer 75 percent of the revenue to the account owner’s home nation. The withholding nations may develop procedures so that the owners can request that no tax be withheld. These procedures generally require that the owner provide identification information to the paying agent or to the account owner’s home nation. The directive also requires the account owner’s home nation to ensure that the withholding does not result in double taxation. The home nation is to grant a tax credit equal to the amount of ta |
2,413 | x paid to the nation in which the account is located. If the tax paid exceeds the amount due to the home nation, the home nation is to refund to the account owner the excess amount that was withheld. The role of the EU Commission is to coordinate among the participants in the directive. The commission sets up and maintains contact points for communications among members. All information to be exchanged must be submitted no later than June 13 each year to the commission and follow the standardized Organisati |
2,414 | on for Economic Co-operation and Development (OECD) format. The information exchange is completely electronic and automatic. All information is sent and received through a secure network that only member countries can access. As of 2010, all member countries are using this standard format except for Switzerland which is working with the EU on plans for information exchange. The commission is to keep the format updated and periodically review compliance by member countries. The commission is to gather statis |
2,415 | tics to measure overall performance and success of the directive. Member countries have agreed to provide the commission with the statistics necessary to gauge performance. Every 2 years the commission hosts a conference to receive feedback from member nations on its performance and to gauge the directive’s success. Additionally, every 3 years the commission reports to the European Parliament and Commission of the European Communities. The first report on the operation of the directive was issued in Septemb |
2,416 | er 2008. The EU adopted the Savings Taxation Directive to encourage tax compliance by exchanging information and using withholding. Using a multilateral agreement provided a way to uniformly establish procedures and definitions for exchanging information as well as for resolving any common technical problems to information exchange across the entire EU. The September 2008 report to the EU described the status of the directive. The report found that 25 members started applying the rules as required in July 2 |
2,417 | 005. In 2006, the first full year in which data were available, 17 members provided information to the exchange. Bulgaria and Romania began implementation in January 2007. The report concluded that the largest economies and financial centers reported the highest amounts of interest paid to other EU citizens. For 2006, Germany, France, Ireland, and the Netherlands accounted for over 98 percent of the dollar value of interest paid by all EU nations to citizens of other EU countries. The report concluded that |
2,418 | data limitations created major difficulties for evaluating the effectiveness of the directive. The EU did not have information on withholding results or time-series information from before the directive began. Without this information, the EU had no benchmark to measure the effect of the changes. According to EU officials, the most common administrative difficulties have been information-technology system problems. Some members have not had the data formatted correctly, which caused problems when other memb |
2,419 | er nations tried to access the data. For example, how member countries format their mailing address has led to data access problems. To overcome this problem, most member countries insert the taxpayer’s mailing address in the free text field, but this makes the data difficult to efficiently analyze by other nations. Another example has been accessing data from languages that have special diacritical marks or characters. When information exchanged included these special characters, an error was created durin |
2,420 | g the data importation process. The directive has suffered from other implementation problems, as follows. Investor behavior. EU staff said the commission tried to measure changes in the different types of investments before and after implementation of the directive. The commission had difficulty in identifying the overall effect the directive has had on individual investment choices because the data used are generally limited to interest-bearing investments. On the basis of decreases in some investor’s tot |
2,421 | al interest savings, the report noted that investors appeared to change their investments before implementation to investments that were not covered by the directive. Withholding. The effectiveness of the withholding system under the Saving Tax Directive is unclear. The report found that the 14 countries and dependent and associated territories applying the withholding provisions in 2006 shared €559.12 million (US$738 million) withheld on income earned in their nation with the account owner’s home nation. S |
2,422 | ome articles have commented that given the low withholding rates in the early years, taxpayers with higher tax rates in their home nation may have chosen not to report the income. Definitions. The EU identified problems with the definition of terms, making uniform application of the directive difficult. First, the commission’s report raised questions about consistency of coverage of payments made from life insurance contracts where investments were made in securities or funds. Second, confusion existed over |
2,423 | whether some paying agents were covered by EU rules on investment managers or by the definition established under the directive for noncovered paying agents. Third, identifying the account owners was another problem. In general, the EU report suggests that improved monitoring and follow-up by the home nation can help locate paying agents in third counties and ensure accurate information on the citizen who owns the account. The EU is considering several solutions such as enforcing existing customer due dili |
2,424 | gence rules that are to be used by domestic paying agents, who would transmit interest payments to the owners. These rules require that the paying agents must know who they are paying and should not facilitate transactions to mask the owner(s) and avoid taxes or other legal requirements. Nevertheless, EU officials stated that the quality of data has improved over the years. The EU officials have worked with EU member nations to resolve specific data issues, which has contributed to the effective use of the |
2,425 | information exchanged under the directive. Generally, unlike the EU multilateral directive, the United States establishes bilateral information-sharing agreements. Those agreements allow for automatic information exchange, but definitions of terms, technical standards, and other matters are not worked out and adopted multilaterally. Resolution of some of those issues may be facilitated by the United States’ participation in the Convention on Multilateral Administrative Assistance in Tax Matters, which inclu |
2,426 | des exchange of information agreement provisions and has been ratified by 15 nations and the United States. The United Kingdom’s (UK) main sources of tax revenue are income tax, national insurance contributions, value added tax, and corporate tax. Her Majesty’s Revenue and Customs (HMRC) also administers taxes assessed for capital gains, inheritance, various stamp duties, insurance premium tax, petroleum revenue, and excise duties. The income tax system— where the tax year runs from April 6 through April 5 |
2,427 | —taxes individuals on their income from various sources, for example, employment earnings, self-employment earnings, and property income. Taxable individuals under 65 years of age receive a tax-free personal allowance (£6,475, or US$10,410 for the 2010-11 tax year). If their total income is below the allowance amount, no tax is payable. The three main individual income tax rates for income above the personal allowance are 20 percent (£0-£37,400 or up to US$60,132), 40 percent (£37,401-£150,000 or up to US$2 |
2,428 | 41,170), and 50 percent (over £150,000 or over US$241,170). HMRC uses 3 payment systems to collect income tax from individual taxpayers, depending on the type of income and whether the individual is employed, self-employed, or retired. Pay As You Earn (PAYE) is used to withhold tax on wages and salaries paid to individuals by employers. Employers are required to notify HMRC every time an employee starts or stops working for them. Then, HMRC determines a tax withholding code for each individual and employers |
2,429 | use the tax codes, in conjunction with tax tables, to calculate the amount of tax to be deducted. Self-assessment tax returns are used by some employees with higher rates of income or complicated tax affairs and by self-employed individuals with different kinds of business income. At-source collection is when the tax, such as on interest and dividend income, is withheld at source when the income is paid. For example, tax is deducted from bank interest as it is credited to an individual. According to HMRC o |
2,430 | fficials, the majority (68 percent) of taxpayers pay their tax solely through the PAYE system without having to submit a return to HMRC. Other actions have helped remove a large number of taxpayers from submitting a return. For example, the UK requires that tax on some income paid to individuals (such as bank interest) be withheld at a 20 percent rate and remitted to HMRC by the payer, and capital gains income up to the first £10,100 (US$16,239) is exempted from tax. The UK also is working towards burden re |
2,431 | duction for the average taxpayer by simplifying the tax return. For example, according to HMRC officials, information that is not necessary has been removed from the return to reduce the return filing burden, and those taxpayers who are required to file a return find it straight-forward. HMRC uses data from information reporting and withholding under the PAYE system to simplify the reporting of tax liability on income tax returns for individuals. PAYE adjusts income tax withheld so that the individual’s tax |
2,432 | liability is generally met by the end of the tax year. Information reporting helps HMRC and the individual taxpayer determine the total income tax liability, according to HMRC officials. Information returns are to report tax-related transactions by the taxpayer. They are to be supplied by banks and local governments to the taxpayer and HMRC at the end of the tax year. For example, banks are to provide interest payment information. Over 400 local government organizations are to report information on payment |
2,433 | s made to small businesses. Local government as both an employer and contractor must report information on payments made to others. The information provided by employers enables HMRC to update the employee’s tax record and issue a tax code to the new employer to start the withholding against employee earnings. HMRC calculates the PAYE code using information about the previous year’s income or other employment in the current tax year. Employers are to match the PAYE code to a tax table, which shows how much |
2,434 | tax to withhold each pay period. The employer has to remit the withheld tax to HMRC on a monthly or quarterly basis to fulfill the taxpayer’s tax liability. HMRC annually reviews taxpayer records and issues updated PAYE codes before the start of the tax year for employers to operate at the start of the tax year. The individual will receive a notice showing how the tax code has been calculated. To maintain taxpayer confidentiality, the employer will only receive the tax code itself. HMRC can refund income ta |
2,435 | x overpayments or collect underpayments for previous tax years through adjustments to the PAYE code. HMRC reported in 2010 that around 5 million individuals overpaid or underpaid these taxes. HMRC officials said that they use information returns to help determine these adjustments under PAYE. In lieu of having their PAYE codes adjusted, taxpayers may receive a onetime refund of the overpayment or pay the underpaid amount in one lump sum. Taxes owed usually are collected through code adjustments as long as t |
2,436 | he taxpayer stays within the PAYE system. HMRC also uses information reporting and withholding to assess the compliance risks on filed returns. In assessing compliance risks, HMRC is attempting to identify underpaid and overpaid tax. The majority of the information for risk assessment is collected centrally from information returns, tax withholdings, filed tax returns, and public sources. This information is mined for risks by special risk-assessment teams. According to HMRC officials, the outcomes of such |
2,437 | mining are to be used to verify tax compliance. If low compliance is found, risk specialists are to develop programs to increase compliance. The data mining uses electronic warehouse “Data Marts” that HMRC has had for about 10 years. They have been configured with subsets of data and have been supplemented by sophisticated analysis tools for doing risk assessments. For example, an analyst can create reports to assess the risk for all self-assessment income tax returns where the legal expense is above a spec |
2,438 | ified amount. HMRC officials told us that Data Marts had recently been revamped and a strategic capability was added that links related information such as a business that files a corporate tax return for its business profits, pays value added tax, and has directors who submit self-assessment returns. According to HMRC officials, the use of Data Marts combined with their more recent Strategic Risking Capability has allowed them to assess risks at the national and regional levels. HMRC officials said that th |
2,439 | ey have moved towards national risk assessments because risk has not proven to be geographically based at regional levels. HMRC officials noted that while a return is being assessed for one type of risk, another type of risk can be found. HMRC is attempting to uncover emerging compliance risks by combining and reviewing data from the various sources in the Data Marts and elsewhere. The risk assessment process has two steps, resulting in identifying tax returns for examination. The first step is to identify |
2,440 | tax returns that have an inherent risk because of the taxpayers’ size, complexity of the tax return, and past tendency for noncompliance. For example, returns filed by high-wealth individuals are viewed as risky returns that are sent to a related specialty office. The second step assesses risk on returns that are not sent to a specialty office. HMRC officials said that a relatively large proportion of the risk-assessment effort focuses on the self-employed, who are seen as having the greatest risk for tax n |
2,441 | oncompliance since they usually are not under the PAYE system (unless they have some wage income) and instead are to file a self-assessment return. HMRC has separate risk-assessment approaches, depending on the type of individual taxpayer, as discussed below. For individuals under the PAYE system, HMRC’s computers capture most of the necessary data and the system carries out routine checks to verify data and link it to the taxpayer record. A risk to the PAYE system arises when employees receive benefits fro |
2,442 | m their employers that are not provided to HMRC at the time it determines the annual tax code. Employer benefits may include a car, health insurance, or professional association fees that employers report on information returns after the tax year and that may be subject to income tax. If these benefits received are not included in the tax code then an underpayment of tax is likely to arise. The unpaid tax can be recovered by an annual reconciliation or when the employee reports the benefits on the employee’ |
2,443 | s self-assessment tax return. Individuals not under the PAYE system are required to file a self- assessment tax return. To assess risk, HMRC checks some self-assessment tax returns for consistency by comparing them to returns from previous years, focusing on small businesses. For example, if the legal expense jumped from £5,000 to £100,000 (US$8,039 to US$160,780) over 2 years, HMRC may decide to review the reason. HMRC permits any self-employed small business with gross receipts of less than £68,000 (US$10 |
2,444 | 9,330) to file a simple three-line tax return to report business income, expenses, and profit. HMRC officials said that the threshold allows over 85 percent of all self-employed businesses to file simplified returns with less burden. According to HMRC officials, their policy is to collect as much data as possible up front through information returns, and correct the amounts of tax due with the PAYE system, facilitating the payment of tax liabilities. Since information is shared with HMRC, taxpayers are like |
2,445 | ly to voluntarily comply if they have to file a tax return. Further, data from information reporting and withholding are to help simplify or eliminate tax reporting at the end of a tax year. According to HMRC officials, the PAYE system makes it unnecessary for most wage earners to file an annual self- assessment tax return. HMRC conducts risk assessments because staff cannot check every tax return in depth due to the large number of taxpayers and the need to lower the costs of administering the tax system. |
2,446 | Data from information reporting and withholding provide consistent sources for doing risk assessments. HMRC officials said the income tax system has been simplified because most individual taxpayers fall under the PAYE system, which generally relieves them of the burden of filing a tax return. Even so, some implementation problems have occurred. The House of Commons identified problems with an upgrade to the PAYE information system in 2009-10. The upgrade was to combine information on individuals’ employmen |
2,447 | t and pension income into a single record to support more accurate tax withholding codes and reduce the likelihood of over- and underpayments of tax. However, software problems delayed processing 2008-09 PAYE returns for a year. In addition, data-quality problems from the upgraded PAYE system for 2010-11 generated about 13 million more annual tax coding notices than HMRC had anticipated and some were incorrect or duplicates. With these problems, of the 45 million PAYE records to be reconciled, 10 million ca |
2,448 | ses needed to be reconciled manually. The House of Commons reported a backlog of cases before the PAYE system was upgraded. Limitations of the previous PAYE system and increasingly complex working patterns have made it difficult to reconcile discrepancies without manual intervention. As of March 2010, a backlog of PAYE cases affected an estimated 15 million taxpayers from 2007-08 and earlier; the backlog included an estimated £1.4 billion (US$2.25 billion) of tax underpaid and £3 billion (US$4.82 billion) o |
2,449 | f tax overpaid. HMRC has reported that risk assessment has provided three benefits: (1) improved examination decisions to ensure that they are necessary and reduce the burden on compliant taxpayers; (2) tailored examinations to the risk in question; and (3) deterred taxpayers from concealing income. HMRC’s risk-assessment approach has increasingly focused on providing help and support to individuals and smaller businesses to voluntarily comply up front. To minimize the need for examinations, HMRC aims to he |
2,450 | lp larger businesses achieve greater and earlier certainty on their tax liabilities. HMRC’s sharper focus on risk assessment means that businesses with reliable track records of managing their own tax risks and being open in their dealings with HMRC benefit from fewer HMRC examinations while those with the highest risks can expect a more robust challenge from dedicated teams of specialists. The UK and United States both have individual income tax returns and use information reporting and tax withholding to |
2,451 | help ensure the correct tax is reported and paid. However, differences exist between the countries’ systems. The United States has six tax rates that differ among five filing statuses for individuals (i.e., single, married, married filing separately, surviving spouse, or head of household) and covering all types of taxable income. In general, the UK system has three tax rates, one tax status (individuals), and a different tax return depending on the taxable income (e.g., self- employed or employed individua |
2,452 | ls). U.S. income tax withholding applies to wages paid but not interest and dividend income as it does in the UK. U.S. wage earners, rather than the Internal Revenue Service, are responsible for informing employers of how much income tax to withhold, if any, and must annually self-assess and file their tax returns, unlike most UK wage earners. Another major difference is that the United States automatically matches data from information returns and the withholding system to data from the income tax return t |
2,453 | o identify individuals who underreported income or failed to file required returns. Matching is done using a unique identifier taxpayer identification number (TIN). HMRC officials told us that they have no automated document-matching process and the UK does not use TINs as a universal identifier, which is needed for wide-scale document matching. The closest form of unique identifier in the UK is the national insurance number. HMRC officials said they are barred from using the national insurance number for w |
2,454 | idespread document matching. Instead, HMRC officials said that they may do limited manual document matching in risk assessments and compliance checks. For example, HMRC manually matches some taxpayer data—such as name, address, date of birth—from bank records to data on tax returns. Australia has a federal system of government with revenue collected at the federal, state, and local levels. For 2009-2010, about 92 percent of federal revenue was collected from taxes rather than nontax sources, like fees. The |
2,455 | principal source of federal revenue for Australia is the income tax, which accounted for about 71 percent. Australia’s state and local governments rely on grants from the national government and have limited powers to raise taxes. The states receive significant financial support from the federal government. In 2009-10, total payments to the states were 28 percent of all federal expenditures. Individuals accounted for about 65 percent of the 2009-2010 income tax revenue. The system is progressive with tax ra |
2,456 | tes up to 45 percent for taxable income in excess of A$180,000 (US$161,622). In 2007-2008, a small proportion of Australian taxpayers paid a large proportion of Australian taxes, as shown in figure 1. The Australian High Net Wealth Individuals (HNWI) program focuses on the characteristics of wealthy taxpayers that affect their tax compliance. According to the Australian Taxation Office (ATO), in the mid 1990s, it was perceived as enforcing strict sanctions on the average taxpayers but not the wealthy. ATO f |
2,457 | ound that high-wealth taxpayers, those with a net worth of more than A$30 million (US$20.9 million), tend to have complex business arrangements, which made it difficult for ATO to identify and assure compliance. ATO concluded that the wealthy required a different tax administration approach. ATO set up a special task force to improve its understanding of wealthy taxpayers, identify their tax planning techniques, and improve voluntary compliance. Initially, the program focused on the tax return filed by a we |
2,458 | althy individual. Due to some wealthy taxpayers’ aggressive tax planning, which ATO defines as investment schemes and legal structures that do not comply with the law, ATO quickly realized that it could not reach its goals for voluntary compliance for this group by examining taxpayers as individual entities. To tackle the problem, ATO began to view wealthy taxpayers as part of a group of related business and other entities. Focusing on control over related entities rather than on just individual tax obligat |
2,459 | ions provided a different understanding of wealthy individuals’ compliance issues. To address the special needs of the wealthy, ATO developed publications that included a separate high-wealth income tax return form, a questionnaire on the wealthy as an entity and a tax guide, Wealthy and wise—A tax guide for Australia’s wealthiest people. According to ATO, a number of factors led to the HNWI program. First, ATO was dealing with a perceived public image that it showed preference to the wealthy while enforcin |
2,460 | g strict sanctions on average taxpayers during the 1990s. Second, ATO was perceived as losing revenue from noncompliant taxpayers. Third, high-wealth individuals used special techniques to create and preserve their income and wealth through a “business life cycle.” The cycle includes creating, maintaining, and passing on wealth through complex tax shelters. For example, businesses owned or controlled by wealthy individuals are more likely to have more diverse businesses arrangements, which tend to spread we |
2,461 | alth across a group of companies and trusts. Each of these groups controlled by wealthy individuals was classified as a separate taxpayer entity, which made understanding the tax implications of these networks of entities difficult for the ATO. The HNWI approach followed ATO’s general compliance model. The model’s premise is that tax administrators can influence tax compliance behavior through their responses and interventions. Since taxpayers have different attitudes on compliance, ATO used varied response |
2,462 | s and interventions tailored to promote voluntary tax compliance across different taxpayer groups. The first part of the standard model is to understand five factors that influence taxpayer compliance. The factors are Business, Industry, Social, Economic, and Psychological. For example, the Business factor included the size, location, nature, and capital structure of the business as well as its financial performance—all of which help ATO understand why compliance or noncompliance occurs. The second part of |
2,463 | the model involves taxpayers’ attitudes on compliance. It refers to one of four attitudes that a taxpayer may adopt when interacting with tax regulatory authorities. These attitudes are willing to do the right thing, try to do the right thing, do not want to comply, and decided not to comply. The third part of the model aligns four compliance strategies with the four taxpayer attitudes on compliance and refers to the degree of ATO enforcement under the concept of responsive regulation. ATO prefers to simpli |
2,464 | fy the tax system and promote voluntary compliance through self- regulation. If the taxpayer tries to comply, ATO should respond by helping the taxpayer be compliant. If the taxpayer is not motivated to comply, ATO should respond to the level of noncompliance with some degree of enforcement, ending with harsh sanctions for the truly noncompliant. ATO created a High Wealth Individual (HWI) taskforce to assess wealthy individuals on their probability of compliance and place them into one of four broad risk ca |
2,465 | tegories using its Risk Differentiation Framework (RDF). RDF is similar to the compliance model in that it is to assess the tax risk and determine the intensity of the response for those with high net wealth, ranging from minimizing burden on compliant wealthy taxpayers to aggressively pursuing the noncompliant. The four broad categories of the RDF are as follows: Higher Risk Taxpayers—ATO performs continuous risk reviews of them with the focus on enforcement. Medium Risk Taxpayers—ATO periodically reviews |
2,466 | certain transactions from them or where there is a declining trend in effective tax performance with a focus on enforcement. Key Taxpayers—ATO continuously monitors them with the focus on service. Low Risk Taxpayers—ATO periodically monitors them with the focus on service. The HNWI program has produced financial benefits since its establishment in 1996. ATO 2008 data showed that the program had collected A$1.9 billion (US$1.67 billion) in additional revenue and reduced revenue losses by A$1.75 billion (US$1 |
2,467 | .5 billion) through compliance activities focused on highly wealthy individuals and their associated entities. ATO’s approach also has been adopted by other tax administrators. According to a 2009 Organisation for Economic Co-operation and Development (OECD) study, nine other OECD countries, including the United States, had adopted some aspect of Australia’s HNWI program. Like ATO, the IRS is taking a close look at high-income and high-wealth individuals and their related entities. In 2009, IRS formed the G |
2,468 | lobal High Wealth Industry (GHWI) program to take a holistic approach to high- wealth individuals. IRS consulted with the ATO to discuss ATO’s approach to the high-wealth population as well as its operational best practices. As of February 2011, GHW field groups had a number of high-wealth individuals and several of their related entities under examination. One difference is that Australia has a separate income tax return for high- wealth taxpayers to report information on assets owned or controlled by HNWI |
2,469 | s. In contrast, the United States has no separate tax return for high- wealth individuals and generally does not seek asset information from individuals. According to IRS officials, the IRS traditionally scores the risk of individual tax returns based on individual reporting characteristics rather than a network of related entities. However, IRS has been examining how to do risk assessments of networks through its GHWI program since 2009. Another difference is that ATO requires HNWIs to report their busines |
2,470 | s networks, and IRS currently does not. Hong Kong’s Inland Revenue Department (IRD) assesses and collects the “earnings and profits tax,” which includes a Profits Tax, Salaries Tax, and Property Tax. IRD also assesses and collects certain “duties and fees” including a stamp duty, business registration fees, betting duty, and estate duty. Hong Kong only taxes income from sources within Hong Kong. Principle revenue sources for tax year 2009-10 are shown in figure 2. According to a Hong Kong tax expert, Hong K |
2,471 | ong created the Salaries Tax at the start of World War II without using periodic tax withholding. The lack of withholding was not then, and is not now, considered to be a significant problem. The Salaries Tax is paid by about 40 percent of the estimated 3.4 million wage earners in Hong Kong, while the 60 percent are exempt from the Salaries Tax. Taxpayers whose salary income is lower than their entitlement to deductions (i.e., basic allowance, child allowance, dependent parent, etc.) are exempt from paying |
2,472 | Salaries Tax and neither they nor IRD prepare a tax return for this income. However, exempt taxpayers may receive a tax return from IRD once every few years to verify their tax-exempt status. If these exempt taxpayers receive a tax return from IRD, they are required to complete and submit it within 1 month. The Salaries Tax rates are fairly low, according to Hong Kong tax experts. The Salaries Tax has progressive rates starting at 2 percent of the adjusted salary earned and may not exceed the standard rate |
2,473 | of 15 percent. In comparison, the highest personal income tax rates in the EU range from about 10 percent to over 56 percent as described in appendix IV. Hong Kong does not use periodic tax withholding (e.g., biweekly or monthly) by employers to collect Salaries Taxes. Rather, IRD collects the Salaries Tax through two payments from taxpayers for a tax year, which runs from April 1 to March 31. The first payment is due in January (9 months into the tax year) and is to be 75 percent of the estimated tax for t |
2,474 | he whole year. The second payment is for the remaining 25 percent, which is due 3 months later in April—immediately after the end of the tax year. In May, IRD is to mail the tax return to the individual for the just- completed tax year based on information provided by employers and other sources. Information reporting to IRD has four parts. First, employers must report when each employee is hired and the expected annual salary amount. Second, at the end of the tax year, employers must report the salary paid |
2,475 | to each employee. Third, the employers must report when the employee ceases employment. Fourth, employers must report and temporarily withhold payments to an employee they know intends to leave Hong Kong. If the employer fails to comply with these requirements without a reasonable excuse, penalties may be imposed. Individuals have 1 month to file the return. For those who elect to file their returns electronically, IRD will prefill the return based on information provided in their past returns and by their |
2,476 | employers. They have a month and a half to review the prepared tax return, make any revisions such as changes to deductions, and file it with IRD. IRD reviews the filed tax returns to determine the final Salaries Tax. IRD electronically screens all returns to check for consistency between the information provided by the employer and taxpayer. Assessments will normally be made based on the higher amount reported, and taxpayers have the right to object within 1 month. IRD also can cross-check reported salary |
2,477 | amounts with salary deductions claimed by businesses on Profit Tax returns, which should normally be supported by information returns on employee salary amounts. If the final Salaries Tax for the tax year turns out to be higher than the estimated tax assessment, taxpayers are to pay the additional tax along with the first payment of the estimated tax for the next tax year during the following January, as shown in figure 3. Several factors contribute to Hong Kong’s collection of the Salaries Tax through two |
2,478 | payments for a tax year without resorting to periodic withholding by employers. The tax only affects about 40 percent of the wage earners who have the highest salaries and uses relatively low tax rates, making it more likely that the taxpayers will have the funds necessary to make the two payments when due. The simplicity of Hong Kong’s tax system, according to Hong Kong tax experts, makes it easier to compute tax liability and to manage the payments. IRD uses a combination of controls to assure that tax p |
2,479 | ayments are made, according to a senior IRD official. In addition to information reporting, island geography contributes to the controls. Hong Kong entry/departure points are limited and tax evaders are likely to be identified. Hong Kong government can detain a tax evader from leaving or entering Hong Kong until the tax is paid. IRD has varied processes to trace the assets of delinquent taxpayers as part of collecting any unpaid tax. Culture encourages taxpayers to pay their taxes. Hong Kong experts said ta |
2,480 | xpayers fear a loss of face if they are recognized as noncompliant, which could reflect negatively on the family. A Hong Kong official told us that residents try to avoid being taken to court. An expert on public opinion in Hong Kong told us that this cultural attitude generates high tax morale. The expert told us that Hong Kong residents have high regard for Hong Kong’s government as being “cleanly” run and as putting tax revenues to good use. IRD is viewed as having fair and equal treatment of all taxpaye |
2,481 | rs. A senior official of Hong Kong’s IRD believes that the Salaries Tax collection system leads to high tax compliance. Low tax rates in concert with a simple tax system that offers generous deductions and effective enforcement mean that taxpayers are fairly compliant, according to the Hong Kong official. It also means that few taxpayers use a tax preparer because the tax forms are very straightforward and the tax system is “stable.” The official also said that taxpayers comply because the cost of noncompli |
2,482 | ance is high. If a taxpayer does not pay by the due date, the costs include paying the tax liability, interest surcharges on the debt, and legal costs. Further, submitting an incorrect tax return without reasonable excuse may carry a fine of HK$10,000 (US$1,283) plus three times the amount of tax underpaid and imprisonment. Unlike Hong Kong’s twice-a-year payments for the Salaries Tax, the U.S. income tax on wages relies on periodic tax withholding. IRS provides guidance (e.g., Publication 15) on how and wh |
2,483 | en employers should withhold income tax (e.g., every other week) and deposit the withheld income taxes (e.g., monthly). Further, the U.S. individual tax rates are higher and the system is more complex. These tax rates begin at 10 percent and progress to 35 percent. Further, the United States taxes many forms of income beyond salary income on the individual tax return. Nations have many choices on how to structure their tax systems across the federal, as well as state and local, government levels. The propor |
2,484 | tion of revenue collected at each governmental level can widely vary. Finland, New Zealand, and the United Kingdom (UK) have a unitary system in which government, including tax administration, is generally centralized at the national level with limited state and local government. For example, in New Zealand, the national government assessed about 90 percent of all the revenue collected across the nation. In contrast, the United States has a federal system in which the national level shares governmental auth |
2,485 | ority with state and local governments. In the United States about half of all tax revenue is collected by the national government and about half is collected by the 50 states and tens of thousands of local governments. The revenue data in table 4 below were provided by each nation and compiled by the Organisation for Economic Co-operation and Development (OECD) for consistent presentation. These data cover all taxes in each nation including federal and state/local levels. Using these data, we computed the |
2,486 | percent that each type of tax represents of the nation’s total revenue. OECD provided the following definition for each of the major categories of tax in the table: Taxes are compulsory unrequited payments to general government and are not for benefits provided by government to taxpayers in proportion to their payments. Governments include national governments and agencies whose operations are under their effective control, state and local governments and their administrations, certain social security schem |
2,487 | es and autonomous governmental entities, excluding public enterprises. Taxes on income, profits, and capital gains cover taxes levied on the net income or profits (i.e., gross income minus allowable tax deductions) of individuals and businesses (including corporations). Also covered are taxes levied on the capital gains of individuals and enterprises, and gains from gambling. Social security contributions are classified as all compulsory payments that confer an entitlement to receive a (contingent) future s |
2,488 | ocial benefit. Such payments are usually earmarked to finance social benefits and are often paid to institutions of general government that provide such benefits. These social security benefits would include unemployment insurance benefits and supplements, accident, injury and sickness benefits, old-age, disability and survivors’ pensions, family allowances, reimbursements for medical and hospital expenses or provision of hospital or medical services. Contributions may be levied on both employees and employ |
2,489 | ers. Taxes on payroll and workforce cover taxes paid by employers, employees, or the self-employed either as a proportion of payroll or as a fixed amount per person, and which do not confer entitlement to social benefits. Taxes on property, goods, and services cover recurrent and nonrecurrent taxes on the use, ownership, or transfer of property. These include taxes on immovable property or net wealth, taxes on the change of ownership of property through inheritance or gift, and taxes on financial and capita |
2,490 | l transactions. Taxes on goods and services include all taxes and duties levied on the production, sale, and lease of goods or services. This category covers multistage cumulative taxes; general sales taxes, value added taxes, excise taxes, or taxes levied on imports and exports of goods. Table 4 shows that the largest source of revenue for 4 of 5 countries is the tax on individuals’ and corporations’ income, profits, and capital gains. Also, the tax paid by individuals is a larger percentage of revenue tha |
2,491 | n the corporation tax in each country. The tax on property, goods, and services is the next most important tax except in the UK where the income tax is the second largest source. A large component of the taxes on property, goods, and services is the value added tax and sales tax. In Australia, New Zealand, the UK, and Finland, value added tax and sales tax ranged from 25 percent to 31 percent of the taxes collected in the nation. The United States does not have a value added tax, but sales taxes alone total |
2,492 | ed about 14 percent of all U.S. revenue. In addition to the contact named above, Thomas Short, Assistant Director; Juan P. Avila; Debra Corso; Leon Green; John Lack; Alma Laris; Andrea Levine; Cynthia Saunders; Sabrina Streagle; and Jonda VanPelt made key contributions to this report. |
2,493 | Despite efforts undertaken by TARP to bolster capital of the largest financial institutions, market conditions in the beginning of 2009 were deteriorating and public confidence in the ability of financial institutions to withstand losses and to continue lending were further declining. On February 10, 2009, Treasury announced the Financial Stability Plan, which outlined measures to address the financial crisis and restore confidence in the U.S. financial and housing markets. The goals of the plan were to (1) |
2,494 | restart the flow of credit to consumers and businesses, (2) strengthen financial institutions, and (3) provide aid to homeowners and small businesses. Under SCAP, the stress test would assess the ability of the largest 19 BHCs to absorb losses if economic conditions deteriorated further in a hypothetical “more adverse” scenario, characterized by a sharper and more protracted decline in gross domestic product (GDP) growth, a steeper drop in home prices, and a larger rise in the unemployment rate than in a b |
2,495 | aseline consensus scenario. BHCs that were found not to meet the SCAP capital buffer requirement under the “more adverse” scenario would need to provide a satisfactory capital plan to address any shortfall by raising funds, privately if possible. CAP, which was a key part of the plan, would provide backup capital to financial institutions unable to raise funds from private investors. Any of the 19 BHCs that participated in the stress test and had a capital shortfall could apply for capital from CAP immediat |
2,496 | ely if necessary. The timeline in figure 1 provides some highlights of key developments in the implementation of SCAP. In a joint statement issued on February 10, 2009, Treasury, along with the Federal Reserve, FDIC, and OCC (collectively referred to as the SCAP regulators), committed to design and implement the stress test. According to a Treasury official, the department generally did not participate in the design or implementation of SCAP, but was kept informed by the Federal Reserve during the stress te |
2,497 | st. The SCAP regulators developed economic assumptions to estimate the potential impact of further losses on BHCs’ capital under two scenarios. The baseline scenario reflected the consensus view about the depth and duration of the recession, and the more adverse scenario reflected a plausible but deeper and longer recession than the consensus view. Regulators then calculated how much capital, if any, was required for each BHC to achieve the required SCAP buffer at the end of 2010 under the more adverse scen |
2,498 | ario. The SCAP assessment examined tier 1 capital and tier 1 common capital, and the BHCs were required to raise capital to meet any identified capital shortfall (either tier 1 capital or tier 1 common capital). Tier 1 risk-based capital is considered core capital—the most stable and readily available for supporting a bank’s operations and includes elements such as common stock and noncumulative perpetual preferred stock. SCAP’s focus on tier 1 common capital, a subset of tier 1 capital, reflects the recent |
2,499 | regulatory push for BHCs to hold a higher quality of capital. The focus on common equity reflected both the long held view by bank supervisors that common equity should be the dominant component of tier 1 capital and increased market scrutiny of common equity ratios, driven in part by deterioration in common equity during the financial crisis. Common equity offers protection to more senior parts of the capital structure because it is the first to absorb losses in the capital structure. Common equity also g |
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