by Stuart Gibson
The whole concept of tax amnesty raises a basic public policy conflict. On the one hand, it is disrespectful to law-abiding citizens who foot the bills for the government to give special consideration to others just for obeying the law. On the other, it serves little purpose for the government to threaten to bring the hammer down when tax cheats and scofflaws continue to hide in the shadows.
The best policy may be a combination of carrots and sticks. The IRS has successfully used the carrot for seven years. It recently announced that since 2009, when it began its alphabet-soup series of offshore disclosure initiatives, more than 56,000 Americans have disclosed their previously hidden offshore accounts. They paid back taxes, penalties, and interest totaling about $10 billion. Another 48,000 Americans used a streamlined disclosure procedure, and paid nearly a half-billion dollars to come into compliance. And all the IRS had to agree to do was promise not to throw the violators in jail.
Brazil has also reaped financial benefits by offering amnesty in exchange for disclosing offshore assets and paying back taxes. Achieving a level of success far higher than the IRS, Brazil's Ministry of Finance recently announced that in just the past six months more than 25,000 Brazilian individuals and corporations have paid nearly $16 billion in taxes and fines under the amnesty program. This is welcome news for a country that is struggling with crippling debt, high unemployment, and a lagging economy, all of which have drained government coffers. Argentina, which hopes to replicate the success of its neighbor to the north, has just extended its amnesty program by three weeks to November 21.
When government officials do not voluntarily disclose their financial affairs, they run the risk of being outed in a very public way. Responding to information leaked in the Panama Papers, the Pakistan Supreme Court will appoint a commission to investigate whether Prime Minister Nawaz Sharif and his children lied about their ownership of property in the U.K. through entities in the British Virgin Islands.
The U.K. has deployed a big stick, an entire unit devoted to going after high-net-worth (HNW) taxpayers. But HM Revenue & Customs has recently come under fire for that unit's work. While it collected an additional £416 million from HNW individuals during the 2015-2016 tax year, the unit has yet to identify which approaches to compliance are most effective. HMRC has also been criticized because the special unit has successfully prosecuted just one HNW individual since it was formed in 2009.
U.K. tax professionals are taking steps to prevent abuse in the first place. Seven prominent associations of tax accountants and other professionals in the U.K. recently issued a joint statement along with guidance on professional conduct in relation to taxation. The guidance, set to take effect next March, directs U.K. tax advisers to avoid promoting tax planning arrangements that set out to achieve a tax result contrary to the clear intention of Parliament.
The growing trend toward automatic exchange of tax and financial information among governments may moot much of the discussion about whether countries must or should offer amnesty to promote tax compliance. Mindy Herzfeld reviews the global proliferation of disclosure regimes, and cautions that they could lead to a new world order in which tax administrations use the information for purposes other than routine audit work, including to attack legitimate tax planning.
Stuart Gibson is editor of Tax Notes International.