International Cooperation for Improving Tax Compliance and How Japan Should Respond

With the globalization of economic and financial transactions, there has been a conspicuous rise in recent years in the use of a scheme called "aggressive tax planning." Against this backdrop, how to ensure tax compliance to address this disturbing trend has become a major issue of international concern and the ongoing efforts to enhance international cooperation among tax authorities have made some progress at the Organization for Economic Cooperation and Development (OECD) and other international forums.

The world's tax authorities have typically attempted to counter aggressive tax planning by means of stricter enforcement. More recently, however, some tax authorities - particularly those in major advanced economies - have come to emphasize the need to focus on real-time problem solving, while continuing to pursue, but not relying solely on, the conventional approach of enforcement enhancement. The new approach calls for building an enhanced relationship between tax authorities and taxpayers that is firmly underpinned by mutual trust and understanding, whereby taxpayers would be required to report and disclose transactions for taxation purposes to ensure transparency. With this groundwork properly in place, a prior confirmation-and-consent system can be introduced to realize real-time problem solving.

This paper provides an overview of recent moves toward international cooperation among the world's tax authorities, sheds light on the significance of such initiatives and the challenges ahead, and considers how Japan should respond in its taxation policies, primarily from an administrative point of view.