Further to my last post on the newly released Tax Gap study by the Canada Revenue Agency, the following comes from guest blogger
Iain Campbell (ARC, UK):
I hope this
comment is not too long but I’ve been following Tax Gap discussions for so long
that it’s hard to pass by the chance to comment!
Background
This is an
interesting development. Writing from the UK I’m not in regular contact with
developments in Canadian tax administration. But I do recall there has been
some entertainment over the Tax Gap, with the Parliamentary Budget Officer asking
for the CRA to do some work on it - and being rebuffed.
In fact, the CRA
has not been keen on preparing a Tax Gap analysis. In 2002 it reported that attempting
to estimate overall levels of reporting non-compliance such as the ‘tax gap’ or
the total amount of smuggling activity was fraught with difficulty. (CRCA
Performance report
for the period ending 31 March 2002.) Ten years later the CRA were still not
convinced. At the start of 2013 they told the PBO:
The CRA later pointed
out “the significant debate about the precision, accuracy and utility of any
methodology to calculate the tax gap”. It drew attention to critical comments
from the UK Treasury Select Committee, as well as the fact of 52 tax
administrations surveyed by the IRS, 33 did not produce one, and the high costs of doing so. (CRA, PBO
Information Request
IR0102: tax gap estimates, letter 20 March 2013,] and PBO Information Request
IR0102: tax gap estimates, letter 1 August 2013.) In 2014 the PBO even
threatened to take legal
action in order to compel production.
But in the
recent election there was a promise to undertake such a study, ending this long
standing reluctance to follow the example of other countries, including the
USA and UK. And following the Panama
Papers the Revenue Minister said in January a tax gap study would be done.
The new Canadian study comprises a 31pp paper on a conceptual study of the
Canadian tax gap and an 11pp study on the Canadian GST/HST, which gives a gap
of 5.5% in 2000 and 6.5% in 2014. (It explicitly references the decision
announced by the Minister of National on 11 April.)
Basis of study – what’s in and what’s out
The conceptual
study does, to an outsider, seem to spend a lot of time in not saying a great
deal. It seems to add qualification to qualification, caveat after caveat, so
that at times I wondered if the CRA really wanted to publish anything at all. Gus
O’Donnell is the UK civil servant who wrote the Report that led to the UK Customs
and Excise combining with the Inland Revenue to form HM Revenue and Customs. In
that Report he surely got it down to a few words: “Making estimates of the tax
gap is methodologically and empirically difficult, although easier for indirect
taxes where tax can typically be related to consumption. Direct tax gaps are
particularly difficult to estimate because the aggregate figures for income,
for example, are built on tax data.”
The CRA's conceptual
study refers a lot to the HMRC papers and policies on calculating the Tax Gap.
But in some of the key areas it dances around what might be difficult decisions
e.g., whether to report the gross tax gap, or, as in the UK, the gap after
action to tackle non-compliance.
Avoidance
More
controversially, the UK includes tax avoidance. This is a good illustration of its overall
approach.
On the other
hand, academics and members of the accountancy profession have argued the
opposite, that any estimate should not include avoidance as referenced by the
“spirit of the law”. For example, during a Treasury Select Committee Hearing on
The Administration
and Effectiveness of HMRC, Judith
Freedman (Professor of Tax Law, Oxford University) commented “I really take
issue with the spirit of the law part, because either you have law or you don’t
have law and the law has to state what it is.”
The Canadian
paper discusses this option and concludes “the appropriate treatment of tax
avoidance is less clear”. It seems Canada has decided to not include avoidance
in its definition: “In general the CRA’s approach to the tax gap encompasses
non-compliance related to non-filing, non-registration (in the case of
GST/HST), errors, under-payment, non-payment, and unlawful tax evasion” (p29). There seems to be no explicit position on
avoidance but, although I doubt it will happen, “under-payment” is potentially
broad enough to include under-payment via avoidance.
Other “Gaps”
Another area the
study did not address is what the IMF and EU call the “tax policy gap”. I agree
with this decision (which mirrors the UK). The IMF would widen the definition
and use of the Tax Gap approach. It suggests including the effects of policy
choices that lead to reduced revenues. In a study
on the UK Tax Gap it refers to the impact of compliance issues on revenue as
“the compliance gap” and the revenue loss attributable to provisions in tax
laws that allow an exemption, a special credit, a preferential rate of tax, or
a deferral of tax liability, as the “policy gap” (para 68). As part of this they recommend tax avoidance
schemes deemed legal through litigation should be considered part of the policy
gap, not the compliance gap, and this distinction should be made clear.
A similar point
was made by an EU report
on VAT. They suggested that a possible link between
the policy and the compliance gaps, since using the reliefs and allowances
intended by policy could make compliance more difficult. “Reducing the policy
gap may often be the simplest and most effective way to reduce the compliance
gap. “ (p21)
In my view these
kinds of proposals are likely to be very complex, perhaps contentious, and hard
to administer. It seems a sensible decision to not refer to them or suggest
their inclusion.
Then there are
the base erosion issues where tax is avoided through the use of legal
structures that make use of mismatches between domestic and international tax,
e.g. permanent establishments. The Canadian study nods in the direction of BEPS
and then passes by.
What’s the point of working out a Tax Gap?
But putting
aside these sorts of issues, or whether “top-down” targeting is better than “bottom-up”,
does the size of the hidden or “informal” economy predict the level of GST/VAT
underpayment (or is it the other way around?), perhaps the big $64K question is whether any of this
means anything. If there is no clear agreement on the numbers, how they are
calculated and their reliability, then is there are any point in preparing
them?
The very concept
of the tax gap is not universally agreed to be a useful analytical or strategic
lever. Apart from the earlier Canadian reluctance, the Australians were slow to
go down this road. UK Parliamentarians have been less than keen. In 2012 the
Treasury Select Committee said they thought it was essentially a waste of time
and resources. Worse, they feared it would misdirect HMRC away from ensuring
every taxpayer paid the right amount of tax. Such fears have not died. The
current TSC is examining UK corporation tax. Their early work involved scoping
the problem and they heard some evidence on the tax gap. Andrew Tyrie (the
Chair) seemed less than enthused at the very concept.
I think it has
merits. But it ought not to be elevated to some shibboleth. It is one high-level
measure of how successfully legislation is being applied, use of resources, etc.
The UK Government’s official
position is that that “thinking about the tax gap forces the department to
focus attention on the need to understand how non-compliance occurs and how the
causes can be addressed—whether through tailored assistance, simpler
legislation, redesigned processes or targeted interventions. Measuring the tax
gap helps us to understand whether increasing returns from compliance activity
reflect improved effectiveness or merely a decrease in voluntary compliance.”
The Canadian
paper says broadly the same things (pp22-24). It talks of providing insight
into the overall health of the tax system, of understanding the composition and
scale of non-compliance, but warns of their limitations.
If that is how
it used then I think it is a useful aid to policy making and how robust is the
assurance being provided by the tax administration.
