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Improving trust and confidence in the tax system is our end game

Last updated 9 February 2023

Jeremy Hirschhorn, Second Commissioner
Speech delivered to the 2023 OECD Tax Gap Conference
2 February 2023
(Check against delivery)

Welcome and introduction

Colleagues and friends, good morning.

It is my great pleasure and privilege, on behalf of the Organisation for Economic Cooperation and Development (OECD), to welcome all of you, from here and abroad, to the first ever OECD conference focused on “tax gap”. It is fantastic we are finally all here together and I hope we all make best use of the next few days to share our experiences and also to learn more about how each of us are developing ways to measure the revenue performance of our respective tax systems. If you have been following my speeches over the past few years, you will know I am passionate about tax gap thinking and how it can transform tax administration.

At the outset, I would like to acknowledge the sustained efforts of Peter Green and Oliver Petzold of the OECD Secretariat, who have brought this conference and agenda together. I would also like to thank Anthony Siouclis, Assistant Commissioner at the ATO, who has led our tax gap program for the past few years, and his hard-working team, as well as all their predecessors on whose work they have built.

Performance of tax systems, supported by the effectiveness of revenue authorities, is critical to stable economic and social development – domestic and international. Tax gap analysis supports revenue authorities in this critical role. Tax gaps focus us on the right things so we can sustain a reliable revenue system for our communities for the long term.

Today in opening this conference I want to explore two key themes – and share some of our own experiences in Australia – which I hope will set us up for our conversations over the next two days:

  • Tax gaps shift revenue agency thinking away from compliance yield towards evidence-based stewardship and long-term system health, and
  • Tax gaps support communities to understand the health of their tax system, itself reinforcing tax system health, a virtuous cycle.

Before I begin, I thought I might start off with a little context around my own personal interest in estimating tax gaps and experience in how tax gaps change revenue agency thinking and community understanding.

Some of you would be aware Australia has a high reliance on corporate tax. From a cultural perspective we also have a highly tax conscious population and one that has a low appetite for budget deficits.

In 2015, I led our large corporate groups area at a time when community, media, and political scepticism about the corporate tax affairs of big business operating in Australia (and around the world) had reached a peak. A parliamentary inquiry into Corporate Tax Avoidance had been called in late 2014 and so the ATO was preparing to publicly defend its effectiveness as a tax administrator. The inquiry – I would add – ran for over 3 years.

From a tax administrator’s perspective, the difficulty was all we could really say about the health of the tax system was that each year we raised about $2 billion in liabilities against public and multinational enterprises and collected $1 billion of cash from those liabilities, and that it had been that way for some time. We had nothing else to provide to the community on the health of the tax system. In fact, for sceptics, these activities, far from dispelling concerns, actually proved there was a problem – “If you caught that much, imagine how much else there is”.

External tax gap estimates for large corporate groups and multinationals however, ranged from $6 billion to $30 billion – despite these companies only reporting about $50 billion income tax per year.

These “amateur” gap estimates made good headlines, but they ultimately reinforced the lack of confidence the broader community had in the tax system and the ATO, which was not a good basis for the right conversation.

It was obvious we needed a measure that provided a more accurate measure of the health of the system; one that was both credible and defensible externally, but also usable for internal strategy development. The measure would form the bedrock for building trust and confidence in the tax system as well as setting the north star for all our compliance programs.

Fast forwarding to the present, we have a much more informed discussion around tax performance and far less sensationalist media coverage. The ATO is also now seen as a highly competent regulator, including explicit recognition from some previously concerned civil society bodies.

That said, despite the strength of Australia’s corporate tax system and these world-leading levels of tax compliance, there is still work to do to build confidence in the tax system. Our latest community perception survey shows that only 27% of respondents believe big business pays the correct amount of tax (of course this can blur administration and policy aspects). However, discussions of the tax system by critical stakeholders such as politicians, media and civil society groups are now anchored around ATO analysis of tax performance (tax gaps).

At this point, I must mention a recent AusFinance “subreddit” entitled “What are your opinions of the ATO?”. The two major themes of the feedback were (surprisingly and pleasingly) positive around making it easy to file a tax return, and also being good to deal with when behind on a tax debt. An occasional theme was that the ATO should be tougher on business, big business in particular. But I was encouraged to see this interaction citing our gap program (I don’t think from an ATO employee!):

  • "SearlyBear: It’s disappointing how much time they spend on individual taxes when there are a lot of large companies using questionable tactics to pay minimal taxes."
  • "FaithlessnessKey1590: I’m not sure why this repeated so often when it’s simply false."

Then the post links to the ATO’s website tax gap statistics, and sets out a few gaps.

While establishing a formal program for tax gap measurement helped to address external pressures such as the Corporate Tax Avoidance enquiry, we knew the program, and the insights gained, would also have much broader benefits, including using these insights to inform our thinking around compliance approaches.

In Australia we see our role as custodians of the tax and super system, we are in a unique position where we see the operation of the system close-up. We always ask ourselves: how well is the system performing in a practical sense? How can our administration be improved so the system performs better? And finally, how can we educate and inform the community about the impact of the work we do on the tax system, thereby improving community trust and confidence in the work we do and the system itself?

Thanks to the work that has been done in our tax gap program, we can now answer these questions in a more evidence-based and complete way because we have a much clearer understanding of the difference between the taxes actually being paid and collected, and the taxes that theoretically should have been collected, and the drivers of those gaps. Not only do we have this clearer understanding of the size of the gaps, but thanks to the research and random audit programs we have undertaken, they have provided us with insights into the behaviour of clients and agents, and what is driving the size of the gaps

We are also able to refine our strategies having regard to whether they are influencing willing participation in the system (influencing the gross gap) or post-lodgment compliance (influencing the net gap). As I said just before, back at the start of our program we imagined it would be helpful, but it has definitely exceeded our expectations!

Measuring tax gap helps us know what’s going on and can inform our strategies

Estimating tax gaps is difficult because you are measuring what is not observable. Over the next two days, we will have the opportunity to listen to, share and discuss experiences from around the world in measuring tax performance. Our conference agenda is organised in much the same way we would go about developing and implementing a tax gap program.

Our first few sessions set the context for understanding why and how we measure tax gaps and some of different experiences administrations have had with measuring them. It is critical to have a clear intent of what you are aiming to measure and why, and to have support across the tax administration.

One thing we have learned in our tax gap journey, is it is also important to understand and engage with key external stakeholders, particularly when you embark on publishing tax gap estimates. External stakeholders can be critical to helping get the right messages out to the public, which in turn helps build trust and confidence in the performance of the system. This afternoon, we will get some external perspectives of tax gap measurement.

Developing credible gap estimates also requires deep thinking about measurement. We need to explore different approaches that reflect the complexity of the environment in which each country is operating, as well as understanding how the availability of data can impact on the choice of approach.

Tomorrow, we will share experiences in estimating tax gaps, looking at how significant challenges were overcome to develop estimates using both operational data that is a natural feature of each tax administration and also data that comes from the implementation of a random audit program.

When Australia first published the full suite of tax gap estimates in September 2020, I called it the “end of the beginning”. It was, of course, a moment to be celebrated.

Having credible estimates across all 15 income and transaction-based taxes allowed Australia to publish its headline tax gap estimate and be more transparent with the Australian community than ever before about the operation and our administration of their tax system. But success is more than getting to the point where you can measure the gap and know what’s going on. The next stage, which I called “beyond gap thinking”, looks at how measuring the tax gap can inform and change strategy, and provide evidence-based insights to inform resource allocation and policy improvement.

I suspect every revenue agency has a rubric along the lines of “prevention is better than correction”, but this has been difficult to make a reality when the key financial metrics have been compliance yields.

The data and insights mean we are rethinking where we focus our attention around the concept of “sustainably reducing the tax gap”. Tax gap estimates are now beginning to form one very important input into our strategy development and resourcing planning decisions. Some strategies might be specifically designed to reduce the tax gap, while others might be designed to maintain the gap, essentially locking in improvements from previous years, and preventing any increase in the gap – protecting against back-sliding risk. Importantly, regardless of how a strategy links to the tax gap, we can link each strategy back to gap which means our work program continues to become more grounded in evidence-based insights rather than general risk approaches, or worse gut feel!

Gap measurement is moving beyond just knowing how much isn’t collected, to giving us insights into the amount of additional tax gap at risk if there were increases in levels of non-compliance that we don’t address, or if there are changes in our program investment (and indeed how much gap is intractable regardless of the resources thrown at it).

It is clear that if our end goal is to have a sustainable system with high tax performance, we must focus on improving gross tax performance. This requires a change in thinking (and financial metrics) at both the organisation and individual staff level, and a shift to more preventative approaches that influence voluntary compliance, which importantly will include converting today’s compliance intervention into sustained compliance in future years.

We are using the data from our tax gap program to change the internal conversation and not just continuing to invest heavily in post-lodgment activities. While these activities would still close the gap through increased net tax performance (at least in year 1), improving gross tax performance is much more sustainable as we can’t get gap reductions by focusing primarily on the net gap without ongoing, significant investment. Thinking about gap measurement combined with the underlying behavioural drivers shifts our staff culture from a focus on revenue raising to our goal of a sustainable tax system with high tax performance. This is becoming increasingly important in an environment where we are operating within limited resources and need to ensure we focus our efforts on the right transformational programs as well as meet some immediate challenges.

All organisations are likely in a similar position where there is increasing competition for funding or at least a much stronger focus on justifying what we do and why. Ultimately the work we have done over time in setting up our tax gap program has positioned us well in this current complex operating environment and ensures we are focused on the largest drivers which gives us the best outcome from our investment.

These new concepts form the foundation of our “beyond gap thinking”, and when we link them to what we know about compliance risk, and our understanding of our operational tolerance for certain taxpayer behaviours, they start to give us meaningful insights into how we can best allocate resources to achieve an optimal level of tax performance.

We can also start to better understand tax performance across the current four pillars of compliance, and what might be described as the fifth pillar, which is how the taxpayer’s behaviour directly affects tax obligations of others or affects the ability of others to comply. We have done some important foundational work in this area we expect to release publicly later in the year.

Because metrics matter when you want to change what your people do every day, (and gaps are too abstract / high level to link to day-to-day performance), we’re changing how we talk about revenue performance, moving away from reporting liabilities raised and cash collected to reporting revenue based on our action and the consequence of that action. We now (internally and externally) measure and report the impact on the tax system in one of four categories;

  • The revenue from traditional audit actions and stopping incorrect claims and refunds;
  • Revenue from preventative actions and revenue from improvements in voluntary compliance from previous interactions;
  • Revenue from actions that are designed to addressed late or non filing; and
  • The sustained effect of those interventions.

Finally, and very importantly, tax gap insights can inform better policy choices and decisions, by helping policy agencies and the Government better understand the tax system in operation.

Using the tax gap to inform the community about their tax system

While using the tax gap to inform strategy and resources allocation is important, what is equally important is how we use gap analysis to inform the community.

I have said you need to be a competent administration to estimate tax gaps. The challenges to estimating gaps are real and it requires a strong commitment to put in place the people and processes to develop credible estimates.

I have also previously said that you need to be a confident administration to publish gaps. When you tell the community how much you are not collecting, ears will prick up and tough questions will be asked (you can no longer hide behind high compliance yields!). Navigating the external communications piece (to stakeholders within and outside Government) is equally important as estimating tax gaps, and it comes down to having a clear intent to what and how you are communicating tax performance to the public. Publishing tax gaps is around informing the community of the health of their tax system, but is also in part a reflection on regulator performance.

We have also been publishing tax details on large public entities, private entities and entities that have a petroleum resource rent tax obligation since 2013-14. This data, supported by contextual analysis published by the ATO, informs the public of how much tax large businesses are paying, and puts into the spotlight those that aren’t paying any tax. Importantly, we also publish Tax and Corporate Australia which understands the broader tax system in which large business operates, focus areas of the ATO and other performance metrics, such as justified trust ratings. For small businesses and individuals, we publish detailed insights from the random audit program that underpins the tax gap estimate for those two markets, this details the types of issues we are seeing and our action to address them.

Improving trust and confidence in the tax system is our end game

So what does success look like?

In the early days of our tax gap program, success was getting estimates that were both credible and defensible. But the aim isn’t who can make the theoretically most precise estimate with the most sophisticated analysis. Don’t get caught up in the measurement and continual improvement – it’s not just a technical exercise, and at some point, you need to bite the bullet and move forward and start using the estimates (for communication and/or strategy).

Great success is then being able to link tax gap to strategy and system changes, and in planning and resourcing decisions, particularly when those strategies sustainably reduce the tax gap by locking in willing compliance. Once again, don’t get caught in the trap of having something perfect before you start to use gap to make decisions.

The real end game is a self-reinforcing trust, the trust the community and policy makers have in the tax administration. Tax is important to society and trust in the tax system is important to society. We are seeing an increased focus on environmental, social and governance factors influencing the decisions businesses are making as they recognise they need a social licence to operate. An informed community now expects everyone to pay their share.

At the ATO we were incredibly proud when the 2022 Trust in the Australian Public Service Annual Report showed the ATO ranked number 1 across all Australian Federal Government agencies for trust and for service satisfaction. I would like to think this is a culmination of our efforts over the past few years – to be more transparent in our administration, better understand and improve our clients’ experience with the tax system and through our effective delivery of COVID stimulus measures. Our tax gap program has been integral to informing our decision-making, measuring our effectiveness and informing future approaches.

The work all of us are doing to estimate tax gap, and what I hope will soon be formally recognised as an official “Community of Interest”, are vital to continuing to build that trust. As I mentioned at the outset, measuring tax gaps isn’t easy and that’s why I am such a strong supporter of this group. I know how important it has been to help solve complex problems and for those administrations further down the road, to share their experiences with those who are just starting out on the journey.

We, like some other administrations, have also taken the opportunity to use our tax gap thinking to measure the impact of economic stimulus programs. We feel we have a lot to share and offer the rest of our governments to have more sophisticated measures of their performance. That’s the natural next step of our work.

Reflections for the next two days

I know we will all make the most of our time together for the next two days.

By tomorrow afternoon I hope you will have had a chance to reflect on how tax gap is more than just a measure of revenue performance. While it is important to get defensible measures of tax gap in place, the real value of tax gap is the insights into how the tax system is operating and understanding what drives improvements in the tax system – important insights for both the revenue authority but also your communities. While the activities and strategies of a tax regulator might be effective at raising tax assessments and collecting audit yield, they might not be the right activities or strategies to improving voluntary compliance and improving tax performance. The latter are key to increasing the trust and confidence stakeholders have in us as regulators.