This article series on tax voluntary disclosure programs includes 5 parts: Part I introduces the OECD framework and structures for tax voluntary disclosure programs around the world, providing a high-level overview; Part II delves into the tax voluntary disclosure program in Canada, examining the key elements of the program as well as its importance for Canadian taxpayers who are looking to correct their prior tax mistakes; and Parts III through V compares the tax voluntary disclosure program in Canada with similar programs in the United States of America, in the United Kingdom, and in some countries within the European Union. This is Part I of the series, which focuses the conceptual aspect of the tax voluntary disclosure programs around the world and discusses how tax voluntary disclosure programs have affected taxpayers and the governments.
Introduction: What Is A Tax Voluntary Disclosure Program?
A tax voluntary disclosure program is an opportunity offered by taxing authorities or administrations to allow certain taxpayers with prior tax non-compliance to correct their tax affairs under specified terms and conditions. Although the design of the program varies, a voluntary disclosure program generally offers incentives for taxpayers to voluntarily disclose their non-compliance, including but not limited to reduced penalties and interest charges, together with some form of protection from prosecution. Dubbed “a pathway to tax compliance,” a voluntary disclosure program aims to improve both short-term and long-term tax compliance in a cost-effective way.
There are generally two types of voluntary disclosure programs, in correspondence to the short-term and long-term goals: a permanent voluntary disclosure program and a temporary voluntary disclosure program. A permanent voluntary disclosure program is normally general in nature, allowing an eligible taxpayer to come forward at any time to settle any undisclosed or unpaid tax liabilities. The design of a permanent voluntary disclosure program gives the majority of taxpayers an opportunity to participate at any time and does not have a specified end-date. For example, the voluntary disclosure program in Canada is of a permanent nature, which has been successfully operating for many years. A temporary voluntary disclosure program, in contrast, often addresses a specific problem aimed a specific group of taxpayers. The USA, in addition to its permanent voluntary disclosure program, as an example, has also had special temporary programs. In 2014, the Internal Revenue Service (IRS, the taxing authority in the USA), announced the Offshore Voluntary Disclosure programs for unreported income from undisclosed offshore accounts, as well as for reporting offshore accounts not previously reported in 2009, 2011, 2012, and in June 2014.
Voluntary Disclosure Programs Around the World
In 2015, the OECD released a report on the voluntary disclosure programs around world, reviewing and analyzing practical experience gained by a total of 47 countries. The report discussed the design and implementation of the voluntary disclosure programmes around the world, which aims to improve taxpayer compliance. According to the OECD report, a short-term boost to tax revenues and to tax compliance is often a primary goal of a voluntary disclosure program. Subsequently, taxpayers’ perception of and response to the voluntary disclosure program determine its long-term success to deter non-compliance. It is important for taxing authorities to demonstrate that they have the tools, powers, and capabilities to deal with those who are noncompliant, specifically those who have been targeted by specific tax policies. As a result, the OECD concluded that a successful voluntary disclosure program “needs to be designed and resourced so as 1) to create a substantially increased risk that those eligible for the program but who choose not to participate will be detected in due course any way; and 2) in the case of temporary initiatives, to provide a tangible, credible, and time-limited incentive for the eligible population to participate.”
The suggested design by the OECD also presupposes that there should be adequate and credible enforcement measures put in place by the taxing authorities, to detect and to deter noncompliant taxpayers. At the same time, it is necessary to set up a system that makes it as easy as possible for eligible taxpayers to participate in a voluntary disclosure program. Some forms of interest and penalty reliefs and possibility of immunity from criminal prosecution can also be effective in encouraging participation of a voluntary disclosure program.
Subsequently in April 2022, the International Monetary Fund published “Voluntary Disclosure Programs – Design, Principles, and Implementation Considerations”, which further examined voluntary disclosure programs around the world and impact of the 2015 OECD report. The article acknowledged the popularity of voluntary disclosure programs with tax authorities as a countermeasure against tax evasion and an avenue to obtain short-term revenue, despite the potential deleterious effect on long-term revenue collections. Later, in the 2023 Global Forum on Transparency and Exchange of Information for Tax Purposes, the annual report showed that “close to EUR 126 billion of additional revenues (tax, interest, penalties) have been identified since 2009, thanks to voluntary disclosure programs, similar initiatives, and offshore tax investigations.”
Overview Of Voluntary Disclosures Program Around The World
Although the general goal and design of tax voluntary disclosure programs seem similar, no two voluntary disclosure programs are exactly the same. The majority of the countries operate a general voluntary disclosure program or allow administrative practices that provide relief similar to a general voluntary disclosure program. Other countries may operate or have operated temporary tax disclosure programs, alone or alongside with a general voluntary disclosure program.
When designing a voluntary disclosure program, a set of steps are generally followed to determine the structure of the program. First, the reason and scope for such a program must be established, whether it is for the majority of taxpayers or a limited and specified group of taxpayers. Second, incentives are set, which generally include reduction in or waiver of tax, interest, and/or penalty. A common feature of the incentive also includes immunity against prosecution for tax offences. Third, detailed requirements should be in place to explain how a taxpayer can make the voluntary disclosure, when a taxpayer can benefit from the voluntary disclosure program, and who qualifies as an eligible taxpayer for the program. Last but not least, the taxing authority then has to decide the appropriate communication and intelligence gathering strategy, in order to attract targeted taxpayers to use the tax voluntary disclosure program and to ensure long-term compliance.
Pro Tips – When Should You Look Into A Tax Voluntary Disclosure Program
In an ideal world, taxpayers are able to comply with applicable tax laws and pay taxes on a regular basis. However, events outside of a taxpayer’s control can easily throw anyone off the right track. In addition, as tax laws have become more and more complicated, it has become increasingly difficult for taxpayers to stay compliant, especially when they move to a new country or they incur foreign income from their country of residence or origin. As a result, we highly recommend taxpayers to speak with a knowledgeable Canadian tax professional or a tax lawyer before they make any major investments, move internationally, or dispose of any significant assets.
If you are making or have made important financial and personal decisions, which can potentially affect your tax obligations in Canada, or are potentially offside with respect to your Canadian income tax compliance obligations including crypto currency reporting, please engage with one of our expert Canadian tax lawyers for legal advice.
FAQ
How Do I Know What Types Of Voluntary Disclosure Programs Are Available To Me?
For Canadian taxpayers, currently the only voluntary disclosure program available is a permanent one. You can read more about the Canadian voluntary disclosure program via our articles, such as “Voluntary Disclosure Applications: Canadian Tax Lawyer’s Guide” and “Revived Voluntary Disclosure Application; Shut Down CRA’s Effort To Deny A Corporation Its Right To A Fair And Impartial Administrative Review.” You can also refer to Part II of the article series for the voluntary disclosure program in Canada. For those who live outside of Canada or may be eligible for voluntary disclosure programs in other countries, we recommend that you can speak with a tax professional licensed to practice in that country or contact the taxing authority in that country for more information.
What Are The Common Features Of Tax Voluntary Disclosure Programs?
Voluntary Disclosure Programs generally allow eligible taxpayers to voluntarily come forward to disclose their prior tax non-compliance, before the taxing authorities become aware of or take actions regarding the compliance issues. The commonly declared goal or justification for VDPs is to promote declaration of asset ownership, payment of outstanding taxes, and the broadening of the tax base. The eligibility criteria for taxpayers may be different pending on the jurisdiction and the type of voluntary disclosure programs. To attract as many eligible taxpayers as possible, VDPs commonly provide immunity against prosecution for tax offences and provide other incentives, such as reduction in or waiver of penalties and interests.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.