Introduction

Australian resident taxpayers are subject to tax on their worldwide income. Accordingly, Australia's taxation system of self assessment places a responsibility on taxpayers to declare all of their assessable income and claim only deductions and/or offsets to which they are entitled.

Tax havens seek to attract international trade and investment by establishing financial, legal and tax systems that may be beneficial to some activities. The systems that make tax havens attractive for legitimate purposes may also be used in arrangements designed to evade paying tax elsewhere, or for other criminal pursuits. The illegitimate use of tax havens is a problem for many countries, including Australia. The compliance risks associated with the use of tax havens for the Australian Taxation Office's (Tax Office) and the community is that the illegitimate use of tax havens adversely affects the revenue base and has the potential to affect confidence in the administration of the tax system.

The Tax Office, as Australia's principal revenue agency, has responsibility for administering Australia's tax system under the law. The Tax Office's business model includes a compliance program which outlines the approach taken to encourage high levels of voluntary compliance with the law. The compliance risk model seeks to allocate compliance resources to areas identified as having the highest risk.

The Tax Office's analysis of Australian Transaction Reports and Analysis Centre (AUSTRAC) data shows that from 2001-02 to 2005-06 total direct transfers to and from tax havens has increased from A$5.8 billon to A$13.7 billion, an increase of more than 230% over the five year period. The Tax Office uses this information, empirical data from case work and intelligence gained from overseas experience as part of their risk identification and assessment. As a consequence, the Tax Office for the last several years has identified international tax risks, with a specific focus on tax havens (and other low tax jurisdictions that maintain banking secrecy—referred to as preferential regimes), as being a ‘headline issue' warranting increased compliance activities.¹

Ensuring tax payer compliance in respect of tax havens is challenging; in general the extent of the tax avoidance risk is difficult to determine due to concealment and the lack of transparency in particular tax haven jurisdictions. The nature of the risk is also constantly changing as taxpayers and their advisers become more sophisticated and knowledgeable in their approach to tax compliance.

The Tax Office's response to their identification and assessment of risks relating to the illegitimate use of tax havens has included a range of risk treatment strategies such as active compliance and audit work, treaty negotiations, disclosure initiatives, participation in international forums, and also increased education and marketing.

The Tax Office is not solely responsible for addressing tax haven compliance issues in Australia. The Australian Crime Commission, the Australian Federal Police and the Commonwealth Director of Public Prosecutions share responsibility for litigating illegitimate tax haven related schemes. At a government level, the Treasurer, with assistance from the Department of the Treasury (Treasury), is responsible for initiating changes to tax legislation, and for negotiating tax treaties that protect Australia's right to tax international transactions.

Audit objective and scope

The objective of the audit was to assess the Tax Office's strategies to address tax haven compliance risks. Particular emphasis was given to the Tax Office's:

• management arrangements relating to the administration of tax haven compliance risks;
• risk management framework for the identification and evaluation of compliance risks, specifically the activities of the Offshore Compliance Program (OCP); and
• risk mitigation strategies.

The audit did not include an examination of cases related to the promoters of tax haven related schemes nor the criminal use of tax havens.

Conclusion

The concealment of assets and income in offshore arrangements presents significant challenges for the Tax Office. The inability to easily access information beyond Australia's jurisdiction presents difficulties in fully understanding the nature of taxpayers' offshore transactions. This is compounded in countries where banking and legal frameworks ensure that information is not disclosed to third parties. The impact for the Tax Office and the community is that the illegitimate use of tax havens adversely affects the revenue base and has the potential to affect confidence in the administration of the tax system. In these circumstances, the Tax Office's compliance approach needs to be constantly evolving, employing a range of effective strategies and leveraging from domestic and international experience.

The Tax Office has adopted a risk management framework for its compliance program where risks are identified and assessed, and in response treatment mitigation strategies are developed, implemented and evaluated. Within the Tax Office's risk management model, there are specific management arrangements to mitigate the tax haven compliance risks. This comprises a combination of oversight committees, intelligence areas and compliance staff from a number of operational areas to undertake specialist audit work. The framework had been adjusted to provide enhanced governance and appropriate focus on the risk and whole of Tax Office co-ordination at both formal and informal levels. However, at a formal level the key steering committee responsible for determining strategic direction has not yet met in accordance with its charter, thus not providing the expected high level co-ordination for the Tax Office's approach to managing the identified tax haven compliance risks. The Tax Office can improve its governance of tax haven risks by ensuring this key strategy setting committee meets on a regular basis in accordance with the terms set out in its charter.

The Tax Office has employed a variety of strategies to identify and evaluate tax haven compliance risks on an ongoing basis. This includes: the use of information collected by AUSTRAC; empirical data from business lines; and intelligence gained from overseas experience and Tax Office participation. The additional resources that have been applied through the new strategies and compliance activities should provide a stronger basis for informed risk identification by the Tax Office. However, the Tax Office could improve its assessment of the extent of the risk through greater trend analysis of qualitative and quantitative data, particularly in the use and increased analysis of AUSTRAC data. This is particularly important as funds may be transferred in the first instance to a country which is not a tax haven. Any subsequent transfers are extremely difficult to monitor by the Tax Office.

The Tax Office is currently undertaking a variety of treatment strategies to mitigate the assessed tax haven compliance risks. These includes: targeted active compliance and audit work; marketing and education; and treaty negotiations. These compliance activities assist in continually informing the Tax Office of the changing nature and extent of tax haven compliance risks. The Tax Office also effectively leverages from its significant involvement in international forums.

The evaluation of the tax haven compliance treatment strategies is an important tool for the Tax Office in the final stage of their risk management process. The ANAO found the method of measurement did not necessarily inform the extent of success of their strategies; there was often no direct link between the measurement and the key outcome. A key management challenge for the Tax Office is how to measure the effectiveness and utility of their compliance strategies as they evolve in response to the changing nature of the risks.

The ANAO made three recommendations aimed at improving the Tax Office's ability to measure the effectiveness of their strategies to address tax haven compliance risks. The recommendations relate to the management of the strategic risk, the assessment of the extent of the risk and the measurement of the effectiveness of their compliance strategies.

Key findings by chapter

Background (Chapter 1)

Australia is part of a dynamic global economy that presents a variety of opportunities for individuals and businesses of all sizes to more easily trade offshore with countries that can have very different financial and legal systems to that of Australia.² Tax havens seek to attract international trade and investment by establishing financial, legal and tax systems that may be beneficial to some activities. Modern communication methods and the internet have made it easier for financial services to be provided from previously remote locations.

The Tax Office's analysis of AUSTRAC data reveals that most direct transactions between Australia and tax havens are lawful international dealings and not attempts to evade tax payable in Australia. The systems that make tax havens attractive for legitimate purposes may also be used in arrangements designed to evade paying tax elsewhere, or for other criminal pursuits. The Tax Office defines a tax haven based on three key factors:

• it imposes no or nominal taxes and can be used by non-residents to escape tax in their country of residence;
• there is a lack of effective exchange of information with outside tax authorities based on strict secrecy rules and other protections; and
• there is a lack of transparency in the operation of its legislative, legal or administrative provisions, making it difficult, if not impossible, for other tax authorities to apply their laws effectively and fairly.

These criteria are based on the definition used by the Organisation for Economic Cooperation and Development (OECD), of which Australia is a member. The Tax Office has identified 32 tax havens.

Tax Information Exchange Agreements (TIEA) are used by OECD countries to assist in overcoming the lack of access to specific transactional information in countries considered to be tax havens. When Australia enters into a TIEA with a tax haven, the Tax Office no longer identifies that country as a tax haven (the particular country may still be monitored as a part of the Tax Office's focus on abusive offshore arrangements). Australia has entered in three TIEAs, and is in the process of negotiating another seven, and the Isle of Man has agreed to sign a TIEA.³

The Tax Office is not solely responsible for addressing tax haven compliance issues in Australia. The Australian Crime Commission, the Australian Federal Police and the Commonwealth Director of Public Prosecutions share responsibility for litigating illegitimate tax haven related schemes. At a government level, the Treasurer with assistance from the Treasury is responsible for initiating changes to tax legislation, and for negotiating tax treaties that protect Australia's right to tax international transactions.

The Tax Office, as Australia's principal revenue agency, has responsibility for administering Australia's revenue system under the law. To mitigate against the potential illegitimate use of tax havens, the Tax Office relies on taxpayers having the right information and support to ensure voluntary compliance as well as employing a range of enforcement activities. Within the Tax Office responsibility for managing the haven compliance risks is shared across numerous business lines and executive forums with differing responsibilities and accountabilities.

Management arrangements (Chapter 2)

Development and implementation of sound governance arrangements supports the effective management of agencies' programs and service delivery. The tax haven compliance risk manifests itself across numerous business lines within the Tax Office. The Tax Haven Steering Committee (THSC) was set up in 2007 to be the main strategic body providing leadership and direction on tax haven matters across the Tax Office.

The ANAO found that the THSC was not executing its roles and responsibilities as set out in its charter, thus not providing the expected high level co-ordination for the Tax Office's approach to managing the identified key tax haven compliance risks. The Tax Office can improve its governance of the tax haven risk by ensuring that the THSC meets on a regular basis in accordance with the terms set out in its charter.

The Tax Haven Advisory Group (THAG) is the main operationally based forum covering tax haven compliance risks, with responsibilities incorporating monitoring and reporting on tax haven risks, active compliance case work and compliance program outcomes across all affected business lines. The information sharing aspect is an important mechanism for intra Tax Office intelligence sharing reflecting its more operational focus. The THAG is performing an effective role as the operational based forum for tax haven compliance risks.

The Tax Office has an established planning framework. The ANAO analysis showed that the Tax Office's planning documents reflect the risks associated with tax haven compliance and are clearly linked and cross referenced to particular outputs. The business lines' delivery plans identified the particular initiatives and program of work, while the team and individual plans reflect their overall responsibilities and areas for improved performance.

The Tax Office has responded to the increased public and parliamentary interest in tax haven related activities with regular external reporting of tax haven compliance activities. The Tax Office utilises a variety of forums to report on activities including their annual report, specific publications, media releases and speeches. The ANAO found the internal reporting generally aligned with the Tax Office wide reporting structure and provided a framework to support the ongoing management of tax haven compliance risks. The ANAO identified a lack of consistency of reporting particularly in relation to the Tax Office's annual reports which made trend analysis difficult.

Tax haven compliance risks (Chapter 3)

Compliance risk management is a structured process for the systematic identification, assessment, ranking and treatment of tax compliance risks.⁴ Treating tax haven compliance risks is particularly difficult; in general the extent of the tax avoidance risk is difficult to determine due to concealment and the lack of transparency in particular tax haven jurisdictions. The nature of the risk is also constantly changing as taxpayers and their advisers become more sophisticated and knowledgeable in their approach to tax compliance.

The ANAO found that the Tax Office had adopted a sound risk management framework for tax haven compliance risks. The Tax Office's business model reflects the compliance risk model and seeks to allocate its compliance resources to areas identified as having the highest risk. The Tax Office publishes its Compliance Program annually which describes the Tax Office's overall approach to managing compliance, discusses the risks associated with Australia's revenue system, and how the Tax Office proposes to treat those risks. For the last six Compliance Programs, International tax risks, with a specific focus on tax havens has been identified as a headline issue warranting increased compliance activities and resources.

The ANAO found that the Tax Office uses a variety of techniques to inform their understanding of the compliance risks relating to tax havens including the use of AUSTRAC data, business line case experience and participation in international activities. The Tax Office uses this intelligence to inform their risk analysis, assessment and responses through a centralised unit for tax haven compliance risks. Through the centralised unit the Tax Office is able to leverage the combined intelligence to perform sound risk assessments and appropriate treatment of the risks including potential case work.

The Tax Office uses a variety of criteria to evaluate the level of risk in relation to tax haven compliance including: materiality, seriousness, and likelihood of recurrence. The evaluation of risks must take place within the context of the nature and extent of the risk. Through analysis and past compliance work, the Tax Office has gained an understanding of the nature of the risk. The Tax Office has also previously attempted to measure the extent of the risk at a broad level. While the historically based measurement was done with little detailed analysis, it is still currently used in part for resource justification and risk work. The Tax Office could improve its assessment of the extent of tax haven compliance risks through greater trend analysis of qualitative and quantitative data, particularly in the use and increased analysis of AUSTRAC data. This is particularly important as funds may be transferred in the first instance to a country which is not a tax haven. Any subsequent transfers are extremely difficult to monitor by the Tax Office.

Tax haven compliance activities (Chapter 4)

The Tax Office uses a range of risk treatment products to mitigate tax haven compliance risks. The Tax Office's overall aim for compliance is to achieve high levels of voluntary compliance. This is facilitated by a Compliance Program that “….involves a mix of help and information (including helping taxpayers deal with us online at minimal cost and effort) and verification and enforcement activities (such as risk reviews, audits and prosecutions)”.⁵

The Tax Office produces a wide range of education and information products and provides a number of services to assist people and entities in meeting their taxation obligations. This includes the specific Tax havens and tax administration⁶ booklet, a comprehensive document outlining the key risks for taxpayers and promoters and how the Tax Office deals with tax haven arrangements. The ANAO notes that within the OECD, the Tax Office is alone as a revenue body having a publicly available strategy document regarding tax haven compliance issues. The booklet is a positive element of the broader education approach.

The Tax Office has recently embarked on a range of active compliance activities following the implementation of the revised tax haven strategy. Many of the initiatives were in the phases of rollout as at November 2007 including an Offshore Voluntary Disclosure Initiative, and increased audit work on high risk cases. The Tax Office should be able to leverage from the increased activity in this area to enhance their compliance risk understanding and their compliance focus.

The Tax Office is actively involved in international forums as part of their compliance activities. The international forums, in particular those within the OECD, have played a significant role in concentrating efforts and creating a dialogue around tax havens in a global context. The Tax Office aims to leverage from the international dialogue to develop its own strategies and courses of action. This includes entering into TIEAs with cooperative tax havens. Australia has concluded agreements with three countries to date. The Tax Office is actively negotiating agreements with seven other countries and the Isle of Man has agreed to sign an agreement with Australia. The ANAO notes the advanced progress the Tax Office has made in negotiating agreements in comparison to other OECD nations. Australia is second only to the United States of America in the number of agreements negotiated and has actively pursued agreements with every declared OECD participating partner tax haven.

Recording and analysing the outcomes of active compliance and non-audit compliance activities is important to inform future planning and targeting of compliance risks. The Tax Office has set a range of effectiveness measures surrounding tax haven compliance activities. The ANAO found the method of measurement did not necessarily inform the extent of success; there was often no direct link between the measurement and the key outcome. The Tax Office also did not consistently set benchmarks or estimates of what success looks like in their business case or program plan. The ANAO notes the difficulty encountered by the Tax Office in measuring their success given the ‘unknown factor' of tax haven compliance risks. Nevertheless, the ANAO considers there should be greater alignment between the Tax Office's performance effectiveness measures and the current strategies. This would assist the Tax Office's ability to assess the effectiveness of their treatment strategies over time.

Summary of agency response

The Tax Office welcomes the Australian National Audit Office's (ANAO) recommendations in relation to its strategies to address tax haven compliance risks.

The concealment of assets and income in tax havens in an attempt to put them beyond our scrutiny is an ongoing challenge for the Tax Office. As the report acknowledges, the Tax Office is well regarded by the Organisation for Economic Cooperation and Development (OECD) and its member nations for its innovative strategies and activities in dealing with tax haven compliance risks.

The audit did not cover the full spectrum of our tax haven work including Project Wickenby and the joint work we are doing with other countries on emerging schemes. However, the report acknowledges that our response to tax haven work has included a range of risk treatment strategies including audit work, prosecutions, treaty negotiations, voluntary disclosure initiatives, leveraging off international experience and an increased focus on marketing and education.

It is encouraging to note the ANAO found that the Tax Office has adopted a sound risk management framework for tax haven compliance risks and has in place appropriate strategies in relation to tax haven compliance risk identification and assessment. In addition, the report specifically acknowledges that the framework has been adjusted to provide enhanced governance and appropriate focus on the risk and whole of Tax Office co-ordination at both formal and informal levels.

As noted in the report the Tax Office is the only tax administration within the OECD to have a publically available strategy document regarding tax haven compliance issues, in the form of its Tax haven and tax administration publication. The report further notes the advanced progress the Tax Office has made in negotiating Tax Information Exchange Agreements in comparison to other OECD countries and acknowledges that the Tax Office has been able to bring the experiences of exchanging tax information under a tax treaty to the negotiation of a TIEA.

Footnotes

^{1 The Tax Office collectively refers to their compliance activity in this area as being focused on ‘abusive offshore arrangements' (Tax Office, Tax havens and tax administration, October, 2007, p 3). Note that while the focus of this audit was on the Tax Office's strategies to address tax haven compliance risks, as a result of the approach of the Tax Office, the audit focus extended beyond defined ‘tax havens' to include ‘abusive offshore arrangements'. References in this report to the Tax Office's strategies to address ‘tax haven' compliance risks should be taken to apply equally to the Tax Office's strategies to address ‘abusive offshore arrangements' compliance risks.}

^{2 References in this Report to ‘countries' should be taken to apply equally to ‘territories', ‘dependencies' or ‘jurisdictions'.}

^{3 Australia has entered into a TIEA with Antigua and Barbuda, Bermuda and the Netherland Antilles. Australia is in the process of TIEA negotiation with Anguilla, Aruba, British Virgin Islands, Jersey, Grenada, Guernsey, and Nauru.}

^{4 OECD, 2004. Compliance Risk Management: Managing and Improving Tax Compliance, Centre for Tax Policy and Administration Guidance Note, p. 8.}

^{5 Tax Office, Compliance Program 2007–08, p. 5.} 

^{6  Tax Office, Tax havens and tax administration, October, 2007.}