Sometimes the devil is in the detail but where international tax matters are concerned it is often in the overview. For a long time tax administrations have been at the sharp end of an asymmetric information problem which meant that they lacked a clear and complete picture of their taxpayer’s international activities. The consequences of this have become graphically clear from the various data leaks that have occurred over the last few years, the most recent being the ‘Panama Papers’. While the ‘Panama Papers’ deservedly grabbed global headlines, and highlighted the problems posed by the opacity of legal entities, the reality is that huge progress is being made in tackling this asymmetry. It is quite clear what the response should be and the steps being taken by the international community are already beginning to work. What remains to be done is to ensure the implementation of all measures in full.
The issue of international tax evasion and avoidance has been at the top of the international political agenda since 2009 when the G20 leaders picked it up and announced that the “era of bank secrecy was over”. Since then 134 countries and jurisdictions have agreed to join together to fight international tax evasion through improved international standards of transparency and exchange of information under the umbrella of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum). More recently, a growing number of countries and jurisdictions are fully participating in the OECD/G20 Base Erosion and Profit Shifting Project, to better coordinate the global response to international tax avoidance. Taken together these initiatives go a long way to providing tax administrations everywhere a much better overview of the full spectrum of their taxpayer’s international activities and address public concerns about the fairness and equity of the international tax system.
Though 2009 is very recent in terms of the life cycle of an international initiative, the follow through has been intense and the era of strict bank secrecy for tax purposes is finally coming to an end. The OECD and Global Forum have worked tirelessly over the last six years to bring about this change initially through the standard of exchange of information on request. The development of the global Common Reporting Standard (CRS) for Automatic Exchange of Financial Account Information (AEOI) by the OECD and G20 was another giant step in this direction. A total of 101 jurisdictions have now committed to implement the CRS, with the first such exchanges beginning in 2017 and 2018. The latest commitments, which followed quickly on the release of the Panama Papers, were those of Bahrain, Lebanon, Nauru, Vanuatu and Panama itself.
It is hard to overstate the importance of these developments. When we launched the work on the CRS in 2013 we recognised that its success depended heavily on its adoption by all relevant jurisdictions in order to establish a worldwide ‘level playing field’.
With the new commitments almost every jurisdiction where taxpayers are likely to hold assets has now signed up to the CRS and the US, which exchanges financial account information automatically with other countries on the basis of FATCA, has called on its Congress to enact “Reciprocal FATCA” legislation. The common global standard will minimise the compliance burdens for both governments and financial institutions and result in increased voluntary compliance.
There will also be a huge increase in the information available to tax administrations on their taxpayers’ overseas activities and assets. Beginning in 2017 when more than 50 countries begin exchanging financial account information automatically, and accelerating again the year after when almost another 50 join them, there will be a flood of new information coming out from financial institutions all over the world, subject of course to the strict confidentiality requirements, which are a central feature of the CRS. It will include names, addresses, bank account balances, details of settlors and beneficiaries in certain trusts among other things. The result is that it will be very difficult to hide money in financial accounts from now on.
The impact of the CRS is already apparent in the almost US$50 billion collected through voluntary disclosure programmes aimed at encouraging taxpayers to report income and wealth previously hidden from their tax authorities.
Further steps to eradicate secrecy of beneficial ownership information are also being implemented. The US recently announced a number of changes to improve their exchange of information in particular with respect to beneficial ownership information and has proposed to make further changes requiring the reporting of beneficial ownership information. Some of the international financial centres which are Global Forum members have led the way in this regard being among the first to take measures to ensure the availability of beneficial ownership information. But all 134 Global Forum members are now expected to ensure the availability of this information for tax purposes.
While it is easy to focus on the bad news from the Panama Papers, it is important to recognise the good news as well. It is clear from the information that has become available that the steps that the global community has been taking to address transparency of ownership information are starting to work. The figures presented by the ICIJ show that the number of bearer share companies formed by law firm Mossack Fonseca has been in decline for some time and had fallen to almost zero in 2015. All of the jurisdictions which were used to create these companies have now either immobilised bearer shares, including Panama itself which immobilised them in 2015 or as in the case of Seychelles, eliminated bearer shares entirely. What all this shows is that we are on the right track and that financial centres around the world are responding to the new environment with continued improvements in the area of tax transparency.
The fight against international tax evasion is far from finished but we have made great progress. The international standards of transparency and information exchange have been refined and improved since 2009 and are accepted all around the world. The Global Forum is delivering on its mandate to ensure that there is continued and effective implementation resulting in real changes on the ground.
In addition to our work, which addresses tax evasion by increasing the global implementation of tax transparency standards, a second component of the work is to increase tax transparency as concerns corporate tax avoidance strategies. The problem here is that, when reporting their global earnings, multinational companies can artificially move their profits around in search of the lowest tax rates, often undermining the tax bases of the jurisdictions where the real economic activities take place.
Like the exchange of information standards, the BEPS initiative provides governments with practical measures and tools to counter this. One of the key pillars of the BEPS project is transparency, which has resulted in two new international standards; country-by-country (CbC) reporting and exchange of information on taxpayer rulings.
These new standards will make a big difference to international tax transparency. All OECD and G20 countries have committed to implement them, and a significant number of others are expected to do so in the context of the BEPS Inclusive Framework. Interested countries and jurisdictions, including many leading financial centres have joined this framework as ‘Associates’ on an equal footing with OECD countries. The first meeting of OECD countries with the new Associates was held in Kyoto, Japan, on 30 June and 1 July 2016. Around 100 countries and jurisdictions were represented there.
In the meantime, countries are already enacting laws to require CbC reporting from multi-national enterprises (MNEs) headquartered in their jurisdiction. This will provide tax administrations with information on the largest multi-national enterprises, including information such as the total revenue, profit, tax paid and number of employees for every jurisdiction in which the MNE group operates. It will greatly assist tax administrations in performing risk assessments as they will now have an overview of the global picture of these largest MNE groups. CbC reports will start being exchanged between tax administrations annually from mid-2018
Countries have also commenced exchanging information on taxpayer rulings. This involves compulsory exchange of information on taxpayer specific rulings that, in the absence of exchange of information, could give rise to BEPS concerns. It covers information on rulings on preferential regimes (such as patent boxes), which are available in a number of OECD countries, unilateral advance pricing agreements, downward adjustments, permanent establishments, and related party conduit arrangements. The standard generally provides that information on rulings granted from 2010 will be exchanged by the end of 2016, and going forward, new rulings will be exchanged as quickly as possible and generally no later than three months after the date on which the ruling becomes available.
Recent improvements in global tax transparency are driven by two main concerns - the need to tackle international tax evasion by individuals and to reduce the opportunities for tax avoidance by multinationals. Key elements of the international community’s response to the concerns are the automatic exchange of financial account information, improving the availability of beneficial ownership information and improved visibility with respect to the operations of multinationals. These are now being rolled out around the world and mark a major step towards building a sound and reliable international tax system within which competition and innovation can continue to take place and where the devil is in the rear view.
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