27 February 2019 CTF Corporate Management Tax Conference
This summarizes remarks made by Ted Gallivan (Assistant Commissioner, International, Large Business and Investigations Branch, CRA) at a seminar of the Canadian Tax Foundation held in Toronto on 27 February 2019 in the segment entitled "Big Data, Big Brother and the Tax Function." Questions were asked by Pooja Mihailovich (Osler). The other presenters were Arthur Cockfield (Queen's University) and Peter van Dijk (PWC).
Status of Big Data at CRA
Q.1 Data gathering
Could you update us on how the CRA is using technology to gather information?
Gallivan: We are very strong on data collection and protection, but need to work more on analytics including AI. For example, we have all transactions over $10,000 since 1 January 2015. That is a huge volume of data, and we are essentially trying to drink from a fire-hose. We are still developing how to use that data responsibly in risk-assessment and general audits.
The common reporting system, which is a global exchange of banking information, also represents a subtle shift. We could always get that kind of information on request, but now we get it automatically and across the board. Again, what is the right way to use that data?
Country-by-country reporting is another example. Multinationals with global revenues exceeding €750 million (we have about 200 of them in Canada) file a more detailed report to tax authorities globally.
What we are finding is that our progress is less in taxpayer-by-taxpayer analyses and more in horizontal analysis of the data.
CRA is further along on big data than on data analytics. For analytics, we are asking how we use that rich data for purposes other than the same old tax audit.
Q.2 Use of gathered data
How are you getting supported in your initiatives?
Gallivan: We certainly have more data technologists and data scientists. Our annual IT spending is approaching $50 million. This includes some off-the-shelf software, as well as some tools by Homeland Security that similarly mines disparate pieces of information to spot things we should look into.
Having said that, administering the Act is different than operating a consumer-facing business. We have choices to make around not wanting to audit every Canadian – not everyone listed in the Panama Papers is necessarily mischievous, not everyone moving large amounts between Singapore and Canada has a tax issue, and those that do may be compliant.
We are well supported, but are still considering this area – what business are we in, and where can we influence taxpayer behaviour? For example, can we get information to taxpayers even before they file their returns? That is a new space for us that we have not yet expanded into.
Q.3 Results of increased data collection
What sort of efficiencies is CRA realizing?
Gallivan: Surprisingly, our ultimate objective is not to increase audit billings! However, the annual audit yield has grown from $8.8 to $13.8 billion gross. That’s a 60% increase, from fewer audits, and maybe 5% more in CRA resources.
We are also able to operate at scale. We can implement projects that entail contacting every taxpayer with a certain tax plan, or are part of a certain risk population. We have the ability to be more surgical.
On the other side, we are seeing more contention in our audits because our auditors arrive on the doorstep with a clear pattern of facts already in mind, and I can appreciate that it would be a bit more difficult for you to knock them off that path.
Impact of International Information-Sharing Measures
Q.4 Compliance effect of FATCA etc.
What has been the impact of recent information-sharing measures like FATCA?
Gallivan: There have been signals received of people complying voluntarily ahead of some of these changes, so the quantum of voluntary disclosures, including for off-shore matters, was significant – about twice the volume for voluntary disclosures overall, and four times as much off-shore natters. We tightened up the voluntary disclosure program, because we are more able to detect non-compliance.
From the Fiscal Monitor, a couple of years ago corporate tax was up $4 billion, and it was up $2 billion midway through this fiscal year, and the Parliamentary budget officer has stated that the $9 billion deficit has shrunk this fiscal year. Of course, that also comes from hard-working Canadians, businesses investing well, and losses evaporating.
I would say, however, that aggressive tax-planning is less appealing these days. On top of the risk of bills from the CRA, there can be a reputational impact as well. Of course, there are others who won’t change behaviour until the tax authority is knocking on their door.
Q.5 Tensions between CRA's data/Q's and taxpayer's representations
You mentioned there being more “contention” in response to increased CRA efficiency. Could you expand on that?
Gallivan: One of the big questions is, what is the unit of compliance today and going forward? Is it just the taxpayer – is the taxpayer the unit of risk, so that taxpayers are either risky or not risky? Or is it the transactions themselves, and we should look more at the amounts being moved, or the amalgamation? Do we need mandatory rulings for all transactions above a certain threshold? Or perhaps the unit of risk is the forms – the disclosure forms, the T1134 and T1135, the GST 111, and so forth – are those the right place to play out that tension between the tax authority’s data and questions and the taxpayer’s own representations? That moves away from the traditional evaluation of tax returns.
I also think that we all have a shared interest in getting certain things done faster, for the sake of taxpayer certainty. If we are sitting on a big risk indicator, I think we should tell the taxpayer as soon as we have it, rather than wait for an audit, when decisions have already been made and positions solidified.
Q.6 Transaction v. taxpayer v. return risk assessment
Is it fair to say, then, that CRA is set to focus on tax risk-assessment?
Gallivan: What we are struggling with is weighing transaction risk-assessment, taxpayer risk-assessment, and tax return risk-assessment.
Getting back to the idea of disclosure, we have a tight disclosure regime, where people are disclosing what they should be disclosing. Maybe focusing on that puts less pressure on risk-assessing the return when it arrives.
Limits on Requests for Taxpayer Information
Q.7 Limitations on information/working paper requests
There has been a trend in the jurisprudence to put certain limits on what information CRA can request, such as working papers. How does CRA manage the balance of getting adequate information without crossing that kind of boundary?
Gallivan: Just because you can do something does not mean that you should. Canadian law gives the Minister broad power to compel the production of information – the word “any” is there in the Act – but of course judges have imposed a reasonableness test.
We have been focused on the idea of transparency, and that we should have valid reasons for requesting information, and should communicate those reasons to the taxpayer.
In the wake of some recent decisions, I was part of a group that decided not to appeal them to the Supreme Court because we would effectively have been asking for absolute authority.
What we have done is clarified our directions to our field auditors in order to emphasize the need to know. We need a valid business reason for seeking information, and to communicate that reason to the taxpayer.
This is not to say that we will not continue to see litigation in this area, but as the tax authority we have to be mindful and transparent about our reasons, and to operate consistently.
Q.8 Increasing taxpayer transparency
Has that approach led to increased transparency from taxpayers?
Gallivan: It is still too early to tell. There is an inherent delay between Headquarters making a pronouncement from our ivory tower and the new procedure being applied uniformly across Canada.
I was at an interesting meeting with an association. There was a representative embedded in one of the companies, there was an outside accounting advisor, and there was a litigator. As we came to the question of the new approach, the corporate representative said “I just share everything because it promotes goodwill,” the accountant said “I try to negotiate – I give a little and get a little,” and you can imagine what the litigator said! In other words, psychologically, people tend to model the stereotypes of their roles.
Again, it is too early to tell; but our commitment is to ask for what we need and tell you why we need it. For your part, if you can’t quickly give it to us, tell us why you can’t give it to us, or why it’s unreasonable. I think that kind of healthy dialogue would be better for the system, even if we end up in court.
Information Obtained Through Data Leaks
Q.9 Increased cooperation following data leaks
How does CRA intend to deal with information made available through data leaks (e.g. the Panama papers)?
Gallivan: In some ways it changes our risk posture – because the information is in the public domain, dealing with that information becomes a public litmus test of CRA’s resolve and effectiveness. Thus, in some ways we give that information more attention than we otherwise would.
Something important happened with the focus around these lists – the journalists who released them did us a service, in a way, because they made it a priority for all the tax authorities at the same time. Normally, the CRA might be concerned with foreign affiliates or a certain tax-haven, while Australia might be worried about a different problem. The UK might be worried about money-laundering; the IRS might have still another focus. When those lists hit, all 30 countries came together because that list was a priority for all of us at the same time. It really put blood into the veins of the connections between the authorities, and I think our day-to-day dynamic has improved.
Thus, while the lists were not necessarily for the most aggressive tax-planning that we have to deal with, it definitely lead to better international cooperation.
What are the goals going forward?
Gallivan: The main point about CRA and new information technologies is that the data is just an enabler. We are mindful that the data has the potential to let us go in certain directions too far, too fast.
We have focuses like quality, transparency, and timeliness, which are classic management principles. We are also mindful of the question of who deserves third-party penalties, gross negligence penalties, and criminal investigations, and who just needs a nudge-letter; and better differentiating between the two.
We are very focused on any work before audit, such as rulings and advance pricing arrangements, a campaign-based approach, education, and telling taxpayers what the risk indicators are.
We are trying to be thoughtful about not abusing this data to do more and more audits with a higher and higher audit yield, but rather use it to get more voluntary compliance (or at least semi-voluntary compliance) as efficiently as possible.
We are also looking increasingly at collective decision-making, again harnessing the power of data. You will see more Headquarters and field involvement, more involvement from Justice earlier in our work, and involvement with Finance in tax policy. We will see better coordination within different branches of CRA, such as between the rulings and audit functions, or possibly involving Appeals in the decision before we assess taxpayers.
A lot of what is next for CRA involves how we harness the power of this data and business information, and how to use it responsibly and differently. Simply doubling our staff from 10,000 to 20,000 and double our audit-yield from $13 billion to $26 billion would be a failure. We want to figure out how to use the data to not do that.
CRA-Generated Corporate Returns
Q.11 (from audience) CRA-generated corporate returns
How many years away are we from CRA generating corporate tax returns or collecting financial data from corporations to assess tax?
Gallivan: I wondered about that eight years ago – we had the technology then, but not the will to build a consensus. It’s less about technology than about management capacity and our own comfort with it.
We are working around in the T1 space – letting taxpayers “load in” their T4. I think there are questions about who is responsible for the T2, and there is concern among practitioners around the accountability for filing T2s. Depending on the structure between the corporation, the financial statement accounting firm, and the tax-preparing firm, I’ve seen a bit of a dance between the lawyers around that accountability.
We have thus debated about who is ultimately accountable for the filing, and what that does for the burdens for evidence if litigation does arise from the filing.
The short answer is that we have had the technology and epiphany eight years ago that there might not be a need to file it, but there has not yet been the critical mass of issues, problems, demand, and opportunity to force us to make a decision