15 July 2000. Thanks to Declan McCullagh, "Is Encryption Tax-Protective?": http://www.wired.com/news/politics/0,1283,37573,00.html

Source: http://www.ustreas.gov/press/releases/ps759.htm

TREASURY NEWS

FROM THE OFFICE OF PUBLIC AFFAIRS

FOR IMMEDIATE RELEASE
July 10, 2000
LS-759

"TAX ADMINISTRATION IN A GLOBAL ERA"
TREASURY SECRETARY LAWRENCE H. SUMMERS REMARKS
TO THE 34^TH GENERAL ASSEMBLY OF THE INTER-AMERICAN
CENTER OF TAX ADMINISTRATORS
WASHINGTON, DC

Thank you and welcome to the annual CIAT General Assembly. The USA is proud to be your host in 2000. The theme for this year's event is "Tax Administration for the New Millennium" This is a very relevant topic in light of globalization and rapid developments in technology.

Tax administration has always been a national challenge. As Oliver Wendell Holmes once said: "Taxes are what we pay for a civilized society." In the 19^th Century when inter-state commerce was taking off, we in the United States came to recognize that a greater degree of interconnectedness between states also called for common institutions and understandings at a national level.

The same is true today, to a certain extent, at a global level. New technology and globalization presents us all with the challenge of adapting our national institutions to meet the needs of a changing world. In a world economy where capital is mobile but labor is relatively immobile, we needed to develop common standards in order to prevent a damaging "race to the bottom".

Today, I would like to discuss how we can act both to maximize the benefits of new technology in terms of tax administration while at the same time minimizing the potentially negative effects of both technology globalization by cooperating on an international level.

Let me divide my remarks into three parts.

• First, what we have accomplished in our efforts to modernize the IRS with new technology.
  
• Second, the importance of adapting our tax systems to an increasingly electronic world.
  
• And third, the goal of ensuring that we maximize the benefits of globalization.

I. Modernizing the IRS

In the past decade and a half, an unprecedented number of countries in the Americas and round the world have changed their governments towards the model of government by the people. The next step is to ensure effective government for the people. Building an efficient and responsive tax administration is an integral part of that challenge.

In the United States we have faced similar challenges in recent years. In 1996, we realized that public confidence in the Internal Revenue Service was low and that there was much room for improvement in the level of customer service. We have turned the situation around to a large extent by taking advantage of new technology to provide better and more responsive customer service.

In its new mission statement, the IRS pledged to focus on two core priorities: "Providing America's taxpayers top quality service by helping them understand and meet their tax responsibilities, and applying the tax law with integrity and fairness to all."

As a result of the modernization and re-organization of the IRS, we have been able to take advantage of new technology to provide a genuinely user-friendly and efficient service. For example:

• In FY2000 electronic tax filing hit a new record with more than 35 million taxpayers filing electronically - a 20 percent increase over last year. Over the same period, the number of taxpayers filing self-prepared tax returns from their home computers grew by 44 percent to 7.6 million.
  
• The number of recorded hits on the IRS website rose by 15 percent to over 791 million in the tax year that ended in May. This makes the IRS website one of the most frequently visited sites on the Internet.

Clearly, we have much more to accomplish. I believe, that under the leadership of Commissioner Charles Rossotti, the IRS will continue to build effective reforms around the needs and interests of ordinary and law-abiding taxpayers partly through the use of new technology. It is also encouraging to hear that some of our partners in the region are taking advantage of new technology to improve customer service. For example, I believe that taxpayers in Chile can now access their returns over the Internet.

II. Meeting the Challenge of E-Commerce

The Internet provides new ways for tax administrations, such as the IRS, to improve the ease and transparency of tax collection. But new technology also raises certain problems. In a world where cyber-transactions are growing at a rapid pace, tax administrations face the challenge of adapting existing tax systems to an economy that increasingly ignores physical borders.

In such a world, it will be easier for companies to avoid tax collectors by operating worldwide through web-sites based in jurisdictions that are unwilling to share taxpayer information.

Similarly, it will be increasingly easy for companies to avoid taxes by taking advantage of different tax rules and tax systems that do not operate well together. We have seen that, for example, in retail sales on the Internet, where companies have taken advantage of the fact that sales taxes may not apply when sales are made from some jurisdictions but not others.

Additional problems could arise from the increasing sophistication of Internet encryption codes that are established for valid reasons of commercial secrecy but can also be used to conceal relevant tax details from tax administrations.

How can tax administrations best respond to these challenges?

Some have argued that we should respond to the challenge of e-commerce by suspending taxes on Internet transactions. Others have suggested that we create new forms of tax that specially target certain aspects of the virtual economy. We reject both views. The position of the Clinton Administration is that tax administrations can and should provide an environment in which e-commerce can flourish, while at the same time ensuring that the Internet does not become a tax haven that undermines the revenues that allow public services to function normally.

In 1996, the US and its main industrialized partners, agreed that there should be intensified international cooperation through the OECD to ensure that we adapt our tax administrations as smoothly as possible to a world increasingly driven by e-commerce. This Administration's main objective in this regard is to work with both OECD and non-OECD partners to build an international consensus on the framework underlying any taxation of e-commerce. We are conducting an on-going dialogue to this end, with two principles in mind:

• First, tax rules and tax administration should be neutral and non-discriminatory between e-commerce and non-Internet transactions. In our view, tax administrators and policy makers can apply existing tax principles to e-commerce, based upon international consensus on the application of those principles. This ensures that any taxation of e-commerce will be guided by the same principles of neutrality, efficiency; certainty, simplicity; effectiveness, fairness and flexibility that govern other forms of commerce.
  
• Second, international cooperation should aim to prevent the emergence of double taxation or unintentional non-taxation of e-commerce, while maintaining the fiscal sovereignty of participating countries. A key element of this effort must be to minimize opportunities for tax arbitrage across borders.

Cooperation between national tax administrations is absolutely critical if we are to adapt to the new world of e-commerce. At the same time it is important that we listen to other groups within and across national borders to make the transition successful. We believe it is important to ensure, wherever possible, that revenue authority initiatives are integrated into overall government policy and with private sector initiatives.

Under the leadership of Vice President Gore, this Administration has made enormous progress in coordinating the views of both the private sector and various U.S. government agencies to ensure that the U.S government continues to play a constructive role in shaping a practical and realistic response to e-commerce tax issues.

III. Promoting Cooperation to Maximize the Benefits of Globalization

It is a priority of the Clinton Administration to ensure that the otherwise positive forces of global capital mobility do not undermine our national interests by facilitating increased tax evasion or abusive tax avoidance. In a world where capital can silently traverse the globe at the touch of a button, tax evasion and tax avoidance schemes can be undertaken just as easily and just as quietly.

In the same way that it is critical that we build consensus to ensure that e-commerce does not give rise to distortions in our national tax administrations, it is also important that we foster a climate of cooperation among nations to combat tax evasion.

Let me highlight two areas where we have taken recent steps to further these important goals:

• First, at the multilateral level, the OECD last month published a report of its work on harmful tax competition. While the two lists included in the report have drawn widespread attention, the real story from the OECD's work is the commitment of OECD members and six non-OECD members to cooperate with each other and eliminate their harmful tax practices. This cooperation ultimately will provide new tools that will allow tax administrators to discover and fully evaluate transactions that may be abusive. We encourage all countries that have not yet made a commitment to eliminate their harmful tax practices to do so.
  
• Second, at the national level, we are supporting a legislative proposal that would require the reporting of payments to "identified tax havens," determined under criteria similar to that developed by the OECD. Another measure would restrict certain tax benefits for income flowing through such havens. In addition, banks based in tax havens that wish to be Qualified Intermediaries under U.S. regulations will have to comply with more rigorous requirements than banks based elsewhere so that we can establish the identity of the beneficial owners of interest income.

The OECD's work to date and our unilateral initiatives are first steps in ensuring that our policy objectives can be realized without fear of eroding our tax base and creating distortions that could undermine the substantial benefits that arise from global capital mobility. Other countries similarly will benefit from the OECD's work and are in various stages of considering and implementing their own rules to prevent the erosion of their respective tax bases.

For example, 29 non-members of the OECD met with OECD members in Paris last month, and I am pleased to report that a strong consensus emerged from that meeting regarding the need to address globally the problem of harmful tax competition. It has been our experience in the United States that many troubling transactions and tax shelters have been designed with the aim of avoiding taxes in non-OECD member counties rather than in the U.S.

In today's global environment, a country cannot develop its tax policy or administer its tax laws without giving consideration to the actions of other jurisdictions. Further, our national efforts to encourage and mandate disclosure are effective only up to a certain point. In order to uncover and properly evaluate transactions, we need to cooperate and work closely with the tax administrators of all countries.

IV. Conclusion

In conclusion, let me take this opportunity to congratulate CIAT on its impressive work. The Department of Treasury strongly supports IRS's membership of CIAT and we encourage you in your continued efforts to build more effective tax administration systems and to share information and experiences with one another.

We all benefit from the development of more transparent and effective tax systems. And we should make every effort to assist one another in ensuring that best practices are as widely available as possible. It is also in all of our interests to ensure that we continue to work together at the international level so that we can derive maximum benefits from globalization.