Countries urged to get more aggressive on tax avoidance

Aggressive tax planning by large corporations and very wealthy people that add up to tax avoidance that complies with the letter of the law but abuse its spirit is costing honest tax payers in many countries a lot of money.

According to the Organisation for Economic Co-operation and Development (OECD), countries need to identify key risk areas and decide whether and how to respond. To do so, they need timely, targeted and comprehensive information.

Some countries, such as Australia, Canada, France, Ireland, Italy, Netherlands, New Zealand, Portugal, Spain, UK, and the US, have already introduced complementary disclosure initiatives aimed at improving their ability to identify and respond to aggressive tax planning.

‘Such early detection and resolution benefits both the taxpayer, providing them with increased certainty, and governments. It will make for fewer routine audits, increased transparency and have a positive impact on compliance culture in general,’ it says in a new report.

The report, Tackling Aggressive Tax Planning Through Improved Transparency and Disclosure, gives as an example the UK’s disclosure rules which have allowed the treasury to cut off £12 billion in avoidance opportunities.

It points out that aggressive tax planning ‘may undermine public trust in the system, create inequalities and reduce tax revenues. In its report it adds; ‘The amounts at stake are vast, often hundreds of millions of dollars in a single transaction’.

It explains that several countries have developed measures that either require or provide incentives for taxpayers to disclose instances of aggressive tax planning.

The reports says that audits are not enough as wealthy people and companies usually have business across international boundaries where classifications vary. Using a range of other approaches such as disclosure initiatives is needed, it suggests.

It says mandatory disclosure of tax avoidance schemes before a tax return is filled in has worked well in Canada, the UK, the US and Portugal. Other measures include a requirement to inform the tax authorities of an intention to claim a deduction for certain expenses, such as in the Netherlands, giving advance notice on capital losses, such as in the US and Italy, and reconciling differences between tax and financial accounting.

‘Tax audits will continue to play a key role in the detection, deterrence and prevention of aggressive tax planning schemes. However, traditional audits alone may not be a resource efficient way to obtain timely, targeted and comprehensive information on aggressive tax planning schemes,’ it concludes.