Tax authorities' detection and deterring of tax evasion of high net worth individuals : a comparative study

Abstract

Annually hundreds of million in tax revenue is lost by tax authorities due to aggressive tax planning and tax evasion. Tax evasion poses serious threats to voluntary tax compliance as it may create a perception that the tax system is unfair and this perception will demoralize the majority and make them reluctant to pay their fair share of tax. The challenge for tax authorities around the world is to use the limited resources available to them in the most effective manner in order to protect the integrity of the tax systems. Several research studies have been done on the behavioural drivers of tax compliance and tax evasion, also on the psychological cost of tax evasion and it is important that tax authorities understand the drivers of tax evasion to ensure effective detection and deterring. It was found that tax compliance is, among other factors, driven by how taxpayers regard the tax compliance behaviour of the group to which they belong. This study focuses on high net worth individuals as it is the one group, which was identified by all four tax authorities, identified for the study, as a high risk for tax authorities due to, among others, the complexity of their affairs, their contribution to tax revenue as well as the influence their tax compliance has on the integrity of the tax system. It was also found that tax evasion is more prominent for income with a lack of third party data which is mainly the case for income received by high net worth individuals. Offshore tax evasion is specifically a high risk for high net worth individuals due to their international mobility and available funds. This study compares how the tax authorities of the USA, Australia, England and South Africa define high net worth individuals, the general methods as well as systems used, the success of their audit sections, the whistle-blower programmes, offshore tax amnesty and exchange of information agreements used, in order to ensure evasion is detected and deterred. A review was also done of the proposals by the Organization for Economic Co-operation and Development in 2009 on how the tax risks posed by high net worth individuals should be addressed. It was found that, although the four tax authorities may have different names to refer to a high net worth individual, all four tax authorities look holistically at an individual and that the methods used by the four countries are in line with the proposals of the Organization for Economic Co-operation and Development, with just differences in the way it is executed. It was also found that risk systems are used to identify risk cases, but that it is important to also measure the validity of the identified risks on a regular basis. The whistle-blower programme, where informants are awarded for information, seems to be more successful than other programmes while off-shore amnesty programmes are also used successfully, especially where the media is used to inform taxpayers of the importance to make use of these programmes and the consequences if they don’t. The automatic exchange of information agreements, where information will be shared automatically and not just on request, appears to be a successful tool which will be used in future to counter tax evasion. It is also important that tax authorities recognise the influence electronic trading may have on the integrity of the tax systems and that systems are put in place to obtain third party data of electronic trading.