CRA Response to Offshore Compliance Advisory Committee Recommendations
On November 1, 2017, the Minister of National Revenue received a letter from the Offshore Compliance Advisory Committee (OCAC) outlining five recommendations with regard to the Canada Revenue Agency’s (CRA) use of “big data” in compliance activities. This document provides the CRA’s response to each of those recommendations.
Metrics or other evaluation criteria be developed to measure the effectiveness of the data mining techniques now being used and developed.
Data mining refers to the practice of using information technology (IT) to detect trends and extract and analyze information found in large electronic data sets.
The CRA agrees that performance metrics and other evaluation criteria are key elements in ensuring the effectiveness of its operations, including data mining and other IT.
The CRA recently created a Chief Data Officer role to enhance the governance and management of the CRA’s data and to realize its value as a strategic asset.
The CRA measures the effectiveness of business intelligence activities, including, for example, data mining. Further, compliance projects allow the CRA to measure and refine the effectiveness of its risk assessment rules and data models for high-risk taxpayers. For example, in its Postal Code Project started in 2017, the CRA is using data about households in selected wealthy neighbourhoods in a more systematic way to conduct in-depth risk assessments and initiate audits.
One example of the CRA’s use of evaluation criteria is in the context of the Integrated Risk Assessment System (IRAS) project. This system analyzes taxpayer information from CRA databases and applies sophisticated algorithms to assess the risk of tax non-compliance of large businesses. IRAS ranks the relative risks of all of the large-business population to identify the highest-risk cases nationally, enabling the CRA to focus its compliance resources on these cases. This makes non-compliance more difficult. In 2017-18, the CRA conducted a validation exercise that confirmed that IRAS is a good predictor of risk and potential audit results. In 2018-19, the CRA will improve its IT so that it can automatically test the effectiveness of the risk assessment indicators within the IRAS annually. The Organisation for Economic Co-operation and Development (OECD) Tax Administration Series recognized IRAS as a global best practice.
As the CRA puts in place new IT infrastructure to further advance its data mining capability, it will incorporate performance measurement criteria to evaluate whether the data mining activities are contributing to effective auditing and compliance programs. Effective use of business intelligence also allows the CRA to validate taxpayer compliance. In this regard, the CRA is currently developing a “tax assured” performance metric, which identifies the assessed tax base that is at a low risk of non-compliance.
CRA work with the tax authorities of other countries to benefit from their experience to ensure that CRA’s data mining and analysis techniques become and remain among the most sophisticated in the world.
The CRA is committed to international cooperation. This is particularly important in the growing field of IT in tax administration. For example, the CRA is an active participant in the OECD Forum on Tax Administration (FTA). The FTA enables tax administrations around the world to share best practices and develop new ideas to enhance tax administration, including those that involve IT, data mining and advanced analytics.
The CRA is co-sponsoring a risk assessment project under the Large Business and International Programme. Various countries will share their risk assessment approaches for large enterprises, drawing on their experiences with the Country‑by-Country (CbC) reporting initiative of the Base Erosion and Profit Shifting project of the OECD.
The CRA has been working with other tax administrations regarding data mining and analysis techniques in several recent initiatives, including:
- The CRA and its key international partners use the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) to share information about data mining techniques and analytics for various projects (for example, Panama Papers and Paradise Papers). Canada is leading the High Net Worth Individuals residency project, which serves to identify taxpayers who may be circumventing rules about where they should pay tax. The CRA will continue to leverage its JITSIC participation to enhance data mining and analytics.
- In 2018, the CRA will begin exchanges with identified treaty partners under the Common Reporting Standard (CRS), the new international standard for the automatic exchange of financial account information between tax administrations. As a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes, the CRA collaborates with over 100 jurisdictions on issues related to CRS implementation. The CRA is also participating in an FTA project on the “intelligent use and assurance of CRS data”, and is engaged bilaterally with various jurisdictions to discuss issues such as data cleansing (identification and correction of invalid or incomplete data) and the analysis of various sources of data, including the CRS and Electronic Funds Transfers (EFTs).
- As co-sponsor of the FTA’s Capacity Building Network, the CRA works closely with FTA members in order to broaden the reach and impact of FTA activities and products and help strengthen tax administration capacity in developing countries – in part by collaborating with regional tax organizations representing developing countries throughout Africa, the Americas and la francophonie. A key element of this Network is the CRA’s development of the Knowledge Sharing Platform for Tax Administration (KSPTA), a global online platform for sharing tax knowledge and expertise among the tax administration community.
The additional cost of those techniques be measured in terms of the additional tax revenue they generate. We would note, however, that the cost of these measures set against the additional revenue generated, is not the sole test of effectiveness. An effective program to combat offshore non-compliance will bolster public confidence in the tax system and have a positive effect generally on taxpayer compliance, whether domestic or offshore.
The CRA agrees that both additional revenue generation and public confidence in the effectiveness of its efforts to combat offshore tax non-compliance are valuable outcomes of its ongoing work to automate its compliance activities.
By using tools and business intelligence effectively, such as enhanced analytics and focused offshore business intelligence, the CRA is casting a wider net to identify aggressive tax planning and is focusing resources in the areas of highest risk, both domestically and internationally. Furthermore, there is a downstream impact on the revenue generating activities of the CRA, insofar as the techniques help to identify higher risk files for audit. Better audit results, when combined with activities that promote awareness, contribute to deterrence, voluntary compliance, and public perceptions of fairness.
For instance, we receive on average 1.2 million international electronic funds transfers of $10,000 and above per month,which is a source of business intelligence that the Agency has been receiving since January 2015. The CRA has the ability to more fully examine potential international tax evasion and aggressive tax avoidance across an entire jurisdiction. As for the Paradise Papers, the CRA is using its business intelligence tools to analyze the large volume of data from the leak. It is starting audits and will cross-reference this information with all available data it has already obtained through existing tools, such as EFTs, tax returns, foreign reporting forms, and Canadian asset holdings.
By having efficient technologies and skilled resources to mine and interpret the vast array of data, the CRA will be well-positioned to proactively identify specific taxpayer behaviours and jurisdictions of concern and to address and deter offshore non-compliance. There are also additional benefits to having technology enabled projects that don’t necessarily have an immediate dollar value and are more difficult to measure and directly link to the technology, such as deterrence and voluntary compliance.
The CRA is committed to ongoing transparency and communication with Canadians regarding its activities and results to reassure the public that the CRA is taking action. This not only increases confidence in Canada’s tax system, but also reminds the public of their reporting obligations and the consequences of non-compliance with tax laws.
Consideration be given as soon as possible to extending the risk analysis program to taxpayers other than large MNEs and the high net worth individuals associated with them.
The CRA is continually improving its risk assessment processes and systems.
The CRA also uses automated, rules-based risk assessment systems in its small- and medium-sized business audit programs. To complement these systems, the CRA is developing predictive models. These models use machine-learning techniques to identify potential areas of non-compliance by discovering unseen patterns in data.
Other business lines are implementing the IRAS model to risk assess their population segments. The CRA is using additional data sources such as CRS and international EFTs to develop new risk assessment rules and data models to identify high-risk taxpayers.
The CRA is implementing social network analysis to automate the identification of links between individuals and businesses. It is enhancing its suite of risk assessment tools to address the compliance risk associated with all taxpayer groups, including those using offshore and aggressive tax planning. In addition, the CRA is conducting risk assessments and compliance treatments on the promoters of aggressive tax schemes to Canadian taxpayers.
The existence and operation of these data mining techniques be given greater publicity to enhance public perception of the effectiveness of the tax system. Public perception is important in this context for at least two reasons:
- It reminds non-compliant taxpayers that aggressive non-compliance behaviours are more likely to be detected and challenged, and
- It reassures compliant taxpayers that tax is being imposed fairly so that all taxpayers are bearing their fair share of the tax burden, and consequently reinforces compliance generally.
The CRA is committed to ensuring a tax system that is responsive and fair for all Canadians.
It recognizes the importance of increasing public awareness of the work that is under way, including the use of IT. Informed Canadians are more likely to fulfil their own tax obligations and have confidence that others are paying their fair share as well. The CRA has already begun its efforts to communicate its use of business intelligence and data to achieve its compliance mandate through activities such as letter campaigns.
The CRA uses its webpages, public awareness campaigns, marketing and social media to broadly communicate with and inform Canadians. For example:
- In September 2017, the CRA launched a results webpage that will be updated quarterly.
- For many years, the CRA has publicly announced criminal convictions for tax evasion. Starting in November 2017, the CRA has made a subscription service available to all Canadians, by which the public can access information on notices of compliance actions such as convictions, criminal charges laid, and searches done under search warrants.
- The CRA will launch a new webpage in 2018 that will highlight the CRA’s activities to identify promoted tax schemes. This will be supported by a public awareness campaign on social media.
The CRA, through its involvement in a variety of transparency and compliance initiatives, has been sharing its best practices with international partners and continues to enhance its reputation as a leader in tax administration.
Going forward, the CRA will continue to seize opportunities to inform Canadians of the work that it performs to address tax evasion and aggressive tax avoidance. In the coming weeks, the CRA will release and publicize information about its data mining and related IT projects.
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