Given the significant investment made by the sector and its professionals in this pursuit, it is timely to consider the current landscape and the returns achieved to date as well as potential next steps.
Financial Services Firms Active Participants in the Tax Agenda
Over the past 20 years, the financial services sector and related professions of accounting and law have become lead participants in the implementation of various modalities targeting the improvement in tax administration and collection. In 1998, the Organisation for Economic Co-operation and Development (OECD) launched a report entitled Harmful Tax Practices. An Emerging Global Issue, which was the most visible initiation of this process. Significant progress has been experienced since, such that countries have undertaken focused pursuit in 2017 of negotiating, executing and reporting under a system for the automatic sharing of information between tax authorities.
Given the significant investment made by the sector and its professionals in this pursuit, it is timely to consider the current landscape and the returns achieved to date as well as potential next steps.
The Current Landscape – Gains Secured To Date
The G20, EU, the OECD and many others are correctly focused on improved tax administration. In the OECD 2003 Report entitled Tax and Development. Aid Modalities for Strengthening Tax Systems, the case is made that developing countries are caught in a vicious circle, where the lack of domestic resources directed at fair and efficient taxation impairs governance which, in turn, impairs tax compliance. This report posits that all effort should be made to ‘scale up support for tax reforms and tax modernization programmes’. The strong basis for this push is the now well documented view expressed in OECD reports that governance and taxation are intrinsically linked; in particular, the benefit that taxation has on the quality of governance. The reasoning proceeds as follows: As governments enhance their systems of tax administration, more citizens are brought within the tax net thereby ‘fostering fiscal bargaining, engaging citizens in the political process, and encouraging governments to be responsive, accountable, and efficient’.
Improving the Impact of Our Participation
In parallel, albeit less discussed in financial sector conferences and articles, is combatting corruption. In its first declaration under the auspices of the G20, the G20 Toronto Summit Declaration of 26–27 June 2010, noted under ‘Other Issues and Forward Agenda’: ‘We agree that corruption threatens the integrity of markets, undermines fair competition, distorts resource allocation, destroys public trust and undermines the rule of law. We call for the ratification and full implementation by all G-20 members of the United Nations Convention against Corruption (UNCAC) and encourage others to do the same … how the G20 could continue to make practical and valuable contributions to international efforts to combat corruption and lead by example, in key areas that include, but are not limited to, adopting and enforcing strong and effective anti-bribery rules, fighting corruption.’
Following on from this initial reference, through to the Anti-Corruption Summit: London 2016 ,advanced by former Prime Minister of the United Kingdom George Cameron, the 2017 agenda for the G20 seems set to continue this focus on this important area (see Table A).
Table A
PRIORITIES OF THE G20 SUMMIT IN 2017 SHAPING AN INTERCONNECTED WORLD |
||
Building Resilience |
Improving Sustainability |
Assuming responsibility |
World economy |
Climate and energy |
Tackling the causes of displacement |
Trade and Investment |
2030 Agenda |
Partnership with Africa |
Employment |
Digitalisation |
Fighting Terrorism |
Financial markets / Int. fin. Architecture |
Global health |
Anti-corruption |
International tax cooperation |
Empowering women |
Agriculture / food security |
Good governance mitigates against corruption. A commitment to good governance should serve as the lead tool to secure and multiply the gains to be gained through tax cooperation.
What is Good Governance?
So what is ‘good governance’? While I believe we can all utilize the litmus test of ‘knowing it when I see it’, according to the web site of the United Nations, ‘good governance is the process whereby public institutions conduct public affairs, manage public resources and guarantee the realization of human rights in a manner essentially free of abuse and corruption, and with due regard for the rule of law’.
Good governance has been said at various times to encompass: full respect of human rights, the rule of law, effective participation, multi-actor partnerships, political pluralism, transparent and accountable processes and institutions, an efficient and effective public sector, legitimacy, access to knowledge, information and education, political empowerment of people, equity, sustainability, and attitudes and values that foster responsibility, solidarity and tolerance.
Why is Good Governance Important?
Good governance produces the stated results desired by the international community. Unlike the global corporation, the place of one’s birth or formative years often determines the core location of wealth creation endeavours by the individual. The quality of the governance at this operational or granular level plays a critical role in promoting sustainable development in countries around the world. Further the quality of governance directly influences the rate of eradicating the ills of corruption and improving tax compliance.
Corporate governance is at the forefront of our thinking in the financial industry due to the reputational and regulatory risks, inter alia, that follow any perception of weakness. For financial services jurisdictions and firms as well as the professionals working therein, an enhanced knowledge of the governance ranking is critical. Ultimately, the quality of governance where they live and work – or lack thereof – impacts the behavioural pattern of our (potential) clients and the service providers. Our understanding and focus on this topic will aid in our ability to assess and mitigate risks that arise in certain countries.
The high profile corruption cases pursued in recent years demonstrate the value in being cognizant of these matters.
Teva Pharmaceutical - The global generic drug manufacturer agreed to pay US$519 million to settle parallel civil and criminal charges that it paid bribes to foreign government officials in Russia, Ukraine, and Mexico. (22 December 2016)
Braskem S.A. - The Brazilian-based petrochemical manufacturer agreed to pay US$957 million in a global settlement for concealing millions of dollars in illicit bribes paid to Brazilian government officials to win business. (21 December 2016)
VimpelCom - The Dutch-based telecommunications provider agreed to a US$795 million global settlement to resolve its violations of the FCPA to win business in Uzbekistan. (18 February 2016)
Total S.A. - SEC charged the France-based oil and gas company for paying bribes to intermediaries of an Iranian government official who then exercised his influence to help the company obtain valuable contracts to develop oil and gas fields. Total agreed to pay US$398 million to settle SEC and criminal charges. (29 May 2016)
The disclosure of these conclusions taken together with the advancement on current and perhaps more substantial cases being weighed in the balance, the financial services jurisdictions and industry should prepare for greater scrutiny that will likely demand not only the amendment of legislation but a substantive focus on their effectiveness.
In the OECD 2014 report Illicit Financial Flows from Developing Flows From Developing Countries: Measuring OECD Responses, a frank assessment was made: despite the myriad of laws in the OECD pursuant to the signature and ratification of the United Nations Convention against Corruption, the report, and I quote, concludes in part:
An estimated USD 1 trillion is paid each year in bribes. Reducing bribery reduces the opportunities for illicit gains, and hence illicit financial flows. The 1997 OECD Anti-Bribery Convention tackles the supply side: the bribe payers. The criminalization of bribe payers outside of developing countries, as well as their effective prosecution, is central for drying up this source of illicit financial flows. In OECD countries, the sanctions for foreign bribery offenses are increasing. While peer reviews confirm that OECD countries are taking a harder stance against corruption, around half of OECD countries have yet to see a single prosecution. Some countries have loopholes for bribe payers in their legal frameworks, including overly narrow definitions or short statutes of limitations; other countries impose impractical burdens of proof, or let strategic considerations influence whether or not to pursue a bribery case. To mitigate these challenges, potent mechanisms to uncover bribery and prosecute bribe payers are needed, including penalties that will constitute a tangible deterrent. Effective protection for whistle-blowers is also essential.
Continued Role of Governance in a Post-Global Account Tax Compliance Act World
The widely held view that the increased quality of tax administration promotes good governance will hopefully be progressively amplified as more countries demonstrate their commitment to principles of good governance with improved tax administration being an important by-product. To be certain, an undesirable outcome is the combination of poor governance with the sharing of vast financial information bringing greater concern for personal safety and prompting acts of bribery and corruption. This would have perverse and unwanted consequences.
While we are busy implementing automatic information sharing this year, it is quite possible that the very developing countries set to benefit from improved tax administration and tax revenue see a loss of high value tax revenue generators as the perceived lack of good governance in those countries drive them to reside in countries with a strong governance infrastructure.
The focus on anti-corruption by the G20 in 2017 is urgent and supported by the key elements of the Universal Declaration of Human Rights, in particular:
Article 3
Everyone has the right to life, liberty and security of person.
Article 12
No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.
Article 13
Everyone has the right to freedom of movement and residence within the borders of each State.
Everyone has the right to leave any country, including his own, and to return to his country.
Wendy Warren
Wendy Warren is the Founder and Managing Director of Caystone Group. Prior to establishing Caystone, Ms. Warren spent 11 years as CEO and Executive Director of the Bahamas Financial Services Board (BFSB), a financial sector body that works closely with government, regulators and private industry to ensure The Bahamas provides global clients with best-in-class financial services. Following her time with BFSB, in 2012 Ms. Warren established Caystone, an operational family office focused on full corporate and fund administration services. She is also a director and founder of Onyx Partners Ltd., an independent, international fiduciary company. Ms. Warren has worked in a variety of roles in the fund administration, wealth management and audit fields including 8 years co-leading the establishment and operation of a leading investment funds administrator. She has worked with families and family businesses for over 30 years and her knowledge of the financial services business and community is broad, augmented by a deep understanding of The Bahamas and its legislative framework. Ms. Warren has served as a director on various boards and committees including Bahamasair Holdings, Bahamas Electricity Corporation, Bahamas Trade Commission, the Financial Services Consultative Forum and the Bahamas Association of Mutual Fund Administrators. Ms. Warren, a Chartered Accountant, holds a bachelor’s degree in Accounting from the University of Waterloo, Canada and has completed postgraduate studies in Corporate Governance at the Kellogg School of Management (Northwestern University). She is an Anti-Money Laundering Certified Associate (AMLCA) and completed the STEP Professional Postgraduate Diploma in Private Wealth Advising.