Taxpayer Rights: Privacy and Transparency

One of the key challenges in modern tax administration is the balance between the right to privacy and the need for transparency. Increasingly, there seems to be a move toward promoting transparency at the expense of privacy, especially for corporate tax. Calls for greater transparency are not new, and the Scandinavian experience, which favors significant tax disclosures, is often cited in that regard.¹

Australia is also moving toward greater tax transparency through several initiatives, including mandatory disclosure by the Australian Taxation Office (ATO) of some tax information of certain corporate taxpayers²; a voluntary tax transparency code,³ which corporate taxpayers may adopt; and a measure for the disclosure of tax debt information of businesses that have not effectively engaged with the ATO to manage their debts.⁴

The Inspector-General of Taxation (IGT) has, for some years, recognized the importance of balancing the need for individual privacy and serving the public good through greater transparency. For example, in his 2009 settlements review,⁵ the IGT said:

This article examines the competing issues of privacy and transparency in the context of cross-border exchange of information (EOI) and draws in large part from the IGT’s recent review of the Australian Taxpayers’ Charter and taxpayer protections.⁷ It reflects the Australian experience, includes a discussion of the impact of information exchanges on individuals and small businesses, and touches on the media’s role in promoting greater tax transparency.

I. Cross-Border EOI

It has been broadly recognized that cross-border EOI is vital for enhancing global tax transparency and cooperation in the interest of maintaining the overall integrity of the tax system:

Accordingly, like many of its comparable jurisdictions, Australia engages in cross-border EOI with foreign revenue agencies through its extensive international tax treaties, conventions, and information exchange agreements.⁹ There are also several other international tax transparency measures intended to foster cross-border EOI, including the Joint International Tax Shelter Information Centre network¹⁰ and the Australia-U.S. intergovernmental agreement to implement the U.S. Foreign Account Tax Compliance Act.¹¹

A more recent development in cross-border EOI is country-by-country reporting under action 13 of the 2013 action plan on base erosion and profit shifting. In October 2015 the OECD released its final action 13 report, which concluded that a standardized approach to transfer pricing documentation is required so that revenue authorities will have “relevant and reliable information to perform an efficient and robust transfer pricing risk assessment analysis.”

The above measures reflect the increasing commitment by the Australian government and the ATO to exchange information with other jurisdictions to combat tax avoidance.

As noted, the IGT recently completed a review that considered the ATO’s international obligations and internal procedures for addressing cross-border EOI. The IGT found that while the ATO’s procedures largely accord with international norms, there was minimal publicly available information about them. Accordingly, it recommended increased public guidance on the ATO’s approach in that area, particularly regarding notifying taxpayers if their information is being exchanged and giving them the opportunity to review and raise concerns regarding that information, as well as maintaining data security across borders.

A. Notifying Taxpayers of EOI

Internationally, there does not seem to be a general practice of notifying affected taxpayers before engaging in cross-border EOI. A 2014 report by Dentons compared 15 jurisdictions in Europe and North America, finding that only France and Kazakhstan provided taxpayers with any notification when their information was sent to a revenue agency in another jurisdiction. It also found that only Germany, Spain, and Switzerland notified target taxpayers when a request for a cross-border EOI had been received regarding their affairs.¹²

However, the OECD has recognized that notifying affected taxpayers of cross-border EOI may be important for preventing mistakes, such as addressing any identity mismatches.¹³ It may also facilitate voluntary, direct cooperation between the taxpayer and the jurisdiction requesting the information.¹⁴ Exceptions to that approach have been envisaged to facilitate effective EOI:

In keeping with international norms, Australia’s tax treaties do not require taxpayers to be informed before a cross-border EOI is initiated.¹⁶ There is also no domestic law in Australia that requires the ATO to do so.¹⁷ However, the ATO must take reasonable steps to notify taxpayers or ensure they are aware it is collecting their information, with several exceptions.¹⁸

The ATO’s general guidance on information gathering supports a cooperative approach, including informing taxpayers of the possibility of cross-border EOI and generally giving them notice before formal information-gathering powers are exercised.¹⁹ The ATO has also advised that other than in limited high-risk situations, taxpayers should generally be aware of any proposed cross-border EOI through engagement with ATO audit teams.

Consistent with the above general practice and the broader principles governing domestic EOI, the IGT has said the ATO should inform taxpayers when considering cross-border EOI and even give them an opportunity to provide the required information themselves. That kind of approach would promote greater transparency and efficiency through better engagement between the parties. For example, the taxpayer may be able to provide domestically held information that would address the ATO’s inquiries that might not have been previously provided because the taxpayer misunderstood the ATO’s request. In addition to time and cost savings for both parties, a cooperative approach could prevent unnecessary escalation of disputes and avoid litigation. Naturally, exceptions would be required, such as in cases of serious fraud or evasion, if there could be a risk of otherwise prejudicing the investigation or the taxpayer is the subject of a covert audit. In those cases, the taxpayer should not be informed until the audit is complete and an assessment has been issued, at which time the ATO can take protective recovery action, such as freezing orders, garnishee notices, and departure prohibition orders.

Ultimately, the point at which taxpayers are informed of EOI and afforded an opportunity to review the information obtained depends on many factors. The inherent risks associated with the investigation and the need to protect the revenue must be balanced with a taxpayers’ rights to understand and answer the case against them.

B. Challenging the Use of Information

Taxpayers who become aware of cross-border EOI involving them can raise concerns about the exchange or accuracy of the data obtained through existing ATO channels.²⁰ They may also raise concerns through the IGT’s complaints-handling service and seek assistance to engage with the relevant ATO offices. In addition to being informed of any cross-border EOI affecting them, the IGT has also said that taxpayers should have the opportunity to review, correct, or appropriately contextualize any information obtained. More generally, as mentioned earlier, the IGT has recommended that the ATO publish information on its practices in relation to all aspects of cross-border EOI, including these matters.

For information obtained through cross-border EOI, there is no legal precedent in Australia regarding the extent to which the ATO can rely on that information if, for example, the EOI was outside the scope of any relevant treaties. However, Australian case law has tended to favor the ATO in its use of information obtained through means other than its usual channels. For example, in Denlay v. Commissioner, [2011] FCAFC 63, the Federal Court of Australia ruled that the ATO’s use of stolen Liechtenstein bank documents did not amount to conscious maladministration and it did not vitiate the assessments issued.

It seems that for now, taxpayers who do not want the ATO to rely solely on information obtained through cross-border EOI should use dispute resolution channels to present evidence that supports their view or casts doubt on the veracity of any collected information. Beyond that, the taxpayer can challenge the assessments through the court system.²¹

II. Impact of Information Sharing

Individual and small-business taxpayers may also be subject to the ATO’s data-matching program, in which the ATO matches large volumes of data from domestic and foreign sources to identify potential discrepancies in reported income. Such data are also used to assist taxpayers with their compliance obligations by prefilling their income tax returns.

The impact of data matching on individual and small-business taxpayers differs from that of large corporate entities. While data for individuals or small businesses may be used to identify small, discrete discrepancies, for larger corporate entities, information and data analysis may point to complexities that require more in-depth engagement. However, the relative impact on individuals and smaller businesses could be the same as or greater than those for large businesses, particularly if the ATO’s data matching does not accurately target those who are noncompliant.

Therefore, the data-matching program, like all risk assessment tools that can be used as a basis for a compliance action, should be examined to ensure it is yielding appropriate and fair outcomes while minimizing costs for both taxpayers and the government. In his review of the program, the IGT made several recommendations, including some aimed at ensuring that the relevant data is reasonably accurate before it is used in compliance activities and raising awareness of channels for review if taxpayers disagree with the resulting ATO decisions.²²

Many jurisdictions use data for prefilling tax returns, an important tool for helping taxpayers meet their tax obligations.²³ Australia’s prefilling initiative is similar to Canada’s,²⁴and the OECD has found it to be substantial and in line with other jurisdictions, including the Netherlands, Portugal, and Singapore.²⁵ However, while the ATO continues to improve the accuracy of prefilled information, it is important that taxpayers and their advisers do not rely solely on that information when completing returns. Inaccuracies are contrary to the integrity of the system and could result in compliance actions that might impose additional burdens on both the ATO and taxpayers.

III. Role of the Press

In recent years, the media has been instrumental in unearthing and reporting instances of major tax fraud or avoidance, such as in the Panama Papers, LuxLeaks, and the Liechtenstein affair. Accordingly, the media can play an important public interest role in maintaining the integrity of tax systems around the world. It can also play a broader role in promoting constructive dialogue on tax topics and fostering voluntary compliance. However, factual accuracy and context are crucial to facilitating a well-informed debate that may lead to positive outcomes, particularly regarding the release of taxpayer information.

The ATO is required to publish a corporate tax transparency report with specific information. It includes the total income and tax payable for Australian public- and foreign-owned entities with income of more than AUD 100 million or Australian-owned resident private companies with income of more than AUD 200 million.²⁶ The ATO identifies the relevant taxpayers and provides a separate, general accompanying narrative, but it does not specifically comment on the tax affairs of any of the reported entities.²⁷

Australia has also adopted a voluntary Tax Transparency Code (TTC), which is a set of principles and minimum standards to guide large and midsize businesses on public disclosure of tax information. It was developed by the Board of Taxation and endorsed by the government in the 2016-2017 federal budget:

Entities that participate in the TTC may provide additional information and narratives. Some commentators have noted the challenges in doing so (including the lack of any relevant accounting standards²⁹):

Processing and presenting data in both sets of the above ATO and TTC disclosures is challenging for tax professionals and media outlets. Concerns have been raised that inaccuracies, lack of context, and selective reporting might not result in a true depiction of a taxpayer’s tax position.

Accurate reporting that takes into account relevant circumstances is crucial to credibility and whether well-informed debates and positive changes occur. Inaccuracies could result in inadequate attention being given to reports, unwarranted and adverse perceptions of some taxpayers, or a loss of confidence in the tax system.

IV. Conclusion

Transparency is fundamental to ensuring the integrity of the tax system and maintaining public confidence, a key driver of voluntary compliance. Although transparency must be balanced against the right to privacy, it might be inevitable that increasingly more tax information will enter the public domain through mandatory reporting initiatives, data leaks, and the media. The increase in available information could shape tax policy in a positive way with minimal adverse consequences if there is accurate reporting and appropriate contextualization. In that regard, revenue agencies, tax professionals, taxpayers, and the media all have important roles to play.