OECD - Promotion of Tax Transparency
09 October 2013
Posted by: Author: PwC
Big brother will be watching you!
On 5 September 2013, the summit meeting of the leaders of the G20 nations came to a close and the leaders issued a declaration of their commitment to work together to strengthen the global economy. A section of the declaration was concerned with "Addressing Base Erosion and Profit Shifting, Tackling Tax Avoidance, and Promoting Tax Transparency and Automatic Exchange of Information”.
The OECD plan to tackle base erosion and profit shifting (BEPS) had been outlined to the leaders by the secretary general of the OECD during the summit, and the leaders endorsed the project and summarised their concern in the following terms:
"In a context of severe fiscal consolidation and social hardship, in many countries ensuring that all taxpayers pay their fair share of taxes is more than ever a priority. Tax avoidance, harmful practices and aggressive tax planning have to be tackled”
In the eyes of the world’s leaders:
"Profits should be taxed where economic activities deriving the profits are performed and where value is created. In order to minimize BEPS, we call on member countries to examine how our own domestic laws contribute to BEPS and to ensure that international and our own tax rules do not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions.”
Of particular interest in the promotion of tax transparency is the work that is being carried on to facilitate the exchange of information. The leaders fully endorsed the OECD proposal for the establishment of a truly global model for the multilateral and bilateral exchange of information.
The work of the OECD on transparency and exchange of information is conducted through the Global Forum on Transparency and Exchange of Information for Tax Purposes, a consultative body that now has 119 member countries (including South Africa). This body has been reviewing the law and practices of the various member jurisdictions to evaluate their preparedness for exchange of information and recommend changes to enable the exchange of information. It reports to the G20 Finance Ministers and Central Bank Governors, who meet annually ahead of the G20 leaders’ summit. Approximately 87% of member countries have undergone or are undergoing the Phase I reviews while some 47% have been subjected to or are undergoing Phase 2 analysis.
The review of the Global Forum’s work revealed that transparency has been enhanced by jurisdictions:
- improving legislation to ensure that accounting and ownership information is available;
- enhancing access to information, particularly bank information, for purposes of exchange of information; and
- improving the procedures and capability for timely exchange of information.
Of greater interest however is the plan for the automation of exchange of information.
The plan is to develop a global model for the exchange of information with a broad scope, focusing on:
- the nature of income that is the subject of evasion;
- the identity and characteristics of account holders engaged in evasion; and
- the range of financial institutions that would be compelled to report.
A comprehensive due diligence methodology is envisaged by which financial institutions would identify reportable accounts and obtain the information concerning the account holder that would be required for the exchange of information.
A sound and universally acceptable legal basis will require that there be rules for domestic reporting and for the exchange of the information reported. Within these rules provision must be made to observe the confidentiality of information that is reported by limiting the persons to whom the information may be disclosed and the purpose for such disclosure. Both the reporting and the receiving jurisdictions must have the legal framework, administrative capacity and processes that ensure protection of information.
The plan takes account of the technical aspects of the exchange of information and notes that information is currently exchanged between jurisdictions from one country’s exchange of information portal to another country’s exchange of information portal or through a secure network. The information that is exchanged needs to be encrypted and the adoption of compatible encryption and decryption methods is a priority. The process is gathering pace. The USA and five European jurisdictions have implemented Model 1 IGA, which "provides for reporting by financial institutions to their local tax authorities, which then exchange the information on an automatic basis with the residence jurisdiction tax authorities.” By way of example, a bank in Germany will report on non-resident account holders to the German tax authorities and the German tax authorities will automatically disseminate details of account holders who are resident in the USA, UK, France, Italy and Spain to the respective tax authorities. This model represents a logical basis for the development of a global tool for this purpose.
The OECD has demonstrated that considerable progress has been achieved and is committed to pressing forward with this project with the utmost haste, and the G20 leaders sought to push the programme aggressively by setting milestones:
"… we are committed to automatic exchange of information as the new global standard, which must ensure confidentiality and the proper use of information exchanged, and we fully support the OECD work with G20 countries aimed at presenting such a new single global standard for automatic exchange of information by February 2014 and to finalizing technical modalities of effective automatic exchange by mid-2014. In parallel, we expect to begin to exchange information automatically on tax matters among G20 members by the end of 2015."
It was perhaps recognised by the summit that a number of countries that have not committed to membership of the Global Forum are developing countries, and the leaders sought to encourage their participation:
"Developing countries should be able to reap the benefits of a more transparent international tax system, and to enhance their revenue capacity, as mobilizing domestic resources is critical to financing development. We recognize the importance of all countries benefitting from greater tax information exchange. We are committed to make automatic exchange of information attainable by all countries …”
Exchange of information is becoming increasingly relevant in the tax enforcement arena. With the rapid advances in technology and the growing focus on combating tax evasion and money laundering, it is only a matter of time before the automatic exchange of information between the tax jurisdictions of the world becomes a reality.
This article was first published on pwc.co.za (Tax Synopsis: September 2013)