Tax Confidentiality – A Relic from a Bygone Era
20 September 2016
Posted by: Author: Johan van der Walt
Author: Johan van der Walt (KPMG)
An in-depth look at how the emphasis in the tax world has changed from “tax confidentiality” to “tax transparency.
"It's the End of the World as We Know It (And I Feel Fine)" featured on the 1987 album Document by the rock band R.E.M. The song was inspired by Bob Dylan's "Subterranean Homesick Blues". [Real pedigree stuff... unfortunately, it gives away one's age.]
In 1998 the New York Times chose “transparency” as a “word of the moment”. It has remained a buzz-word ever since.
What has the above got to do with tax?
Maybe lots: On one hand there is a sense of erosion in the traditional “tax confidentiality” approach; on the other, a whole new world of “tax transparency” seems to be gaining traction.
It is against this background that the Special Voluntary Disclosure Programme will play out.
From Tax Confidentiality to Tax Transparency
Worldwide confidentiality of taxpayers’ affairs has been a cornerstone of tax legislation and administration. The thinking was that tax confidentiality would motivate taxpayers to make honest and full disclosure. Even ill-gotten gains would be fully declared because of the bond of secrecy between taxpayer and tax authority. But, of late, wide-scale ultra-aggressive tax planning, mainly by multi-national enterprises (MNEs) and high net worth individuals (HNWIs), has been exposed. Suddenly the question has become: has tax confidentiality actually encouraged tax honesty or has it been abused to facilitate aggressive tax planning on a hitherto unprecedented scale?
Following the global financial crisis there appears to be an erosion of, and decline in, tax confidentiality and a shift towards greater tax transparency. The tax affairs of MNEs and HNWIs are becoming more visible to other tax jurisdictions and other taxpayers.
The reason for the push towards tax transparency appears to be the same as the original premise for confidentiality. Transparency will increase honesty. But is this the case?
Moving from tax confidentiality as bedrock of tax compliance behaviour to complete tax transparency could mean a paradigm shift for the global tax environment. In Norway, for example, all tax returns are already publicly available on the Internet. It is to be expected that the shift to tax transparency, in conjunction with other factors, would impact participants in the taxation regulatory community in different ways and to varying degrees. It should probably benefit tax authorities by engendering better tax compliance behaviour and aiding enforcement efforts.
But, there could be a downside with transparency initiatives being undermined by competing legislation like privacy laws and statutory access-to-information regimes, prohibitions on information-sharing between government departments and/or other tax jurisdictions, and technology advances e.g. “data encryption” (which recently prevented the US government accessing information on an Apple iPhone). Legal and technological instruments for pushing back on transparency initiatives are only part of the story. Powerful elites with interests in ensuring that they do not give up their power to taxing authorities are likely to shape the way in which transparency initiatives are developed and implemented.
Finally, increasing tax transparency could be a double-edged sword for revenue authorities. Currently there is limited oversight, and little public scrutiny, of tax authorities’ conduct. This applies particularly to tax dispute resolution (closed litigation), tax rulings (published anonymously), and tax settlements (secret). Issues of consistency and fairness loom large when secret transactions are commonplace. A shift to tax transparency could therefore see pressure on revenue authorities to also become more transparent. The UK court case questioning Her Majesty’s Revenue Services’ alleged “sweetheart” deal with Goldman Sachs is an example of this.
Drivers of the Shift Towards Tax Transparency
Historically, tax confidentiality strongly informed thinking on, and approaches to, tax compliance. Tax confidentiality was guaranteed and underpinned through e.g. : tax authority staff oath of “secrecy” (statutory obligation); limitation of, and prohibitions on, information-sharing between inter-governmental agencies (statutory obligations); prescribed protocols to procure and share information cross-border (tax treaty provisions); rulings published in anonymous form; tax dispute resolution process via closed court proceedings; secret tax settlements.
The above was strengthened through tax authorities acknowledging and respecting e.g. legal professional privilege, the accountants’ concession with regard to the non-disclosure of e.g. audit papers and the safe harbour dispensation in relation to board documentation dealing with tax governance (refer for example to the Australian Tax Office’s positions in respect of the afore-mentioned).
For MNEs and HNWIs the above dove-tailed nicely with the impenetrable bank / client confidentiality arrangements and secretive tax havens that literally keep preying tax authorities at bay.
But, as the song goes, “…it’s the end of the world as we know it”.
The push towards greater tax transparency is informed by a number of mutually reinforcing drivers:
First driver: More information, more quickly to tax authorities
The above has three sub-themes:
At the domestic level, amendments to legislation governing local tax administration has given tax authorities stronger information gathering powers. Positive court decisions on information-gathering powers have also generally bolstered tax authorities’ positions. There is also better access to, and greater reliance on, “third party data” to facilitate data-matching. Local regulators, like tax authorities, prudential regulators, central banks, financial intelligence centres, etcetera all share information more readily, giving rise to the so-called “whole of government” approach. On top of this comes the technological advances like data analytics, facilitating faster analysis of voluminous data to inform revenue authority risk profiling resulting in more efficient targeting by limited revenue authority resources.
Globally and regionally there is also increased information-sharing and cooperation. In the developed world, the OECD initiated the Automatic Exchange of Information programme supported by the Common Reporting Standard. The OECD also has its Aggressive Tax Planning shared database of tax aggressive schemes. In the developing world (e.g. through ATAF’s efforts in Africa), capacity-building of tax authorities is occurring and country-by-country reporting will give developing world economies a better sense of whether they are getting their “fair share” of the global tax pie. In many jurisdictions domestic legislation now allows for joint cross-border audits by multiple tax authorities, giving less opportunity for MNEs and HNWIs to “arbitrage” tax positions between tax jurisdictions due to improved cross-border transparency and cooperation.
Extraneous information sourcing: Data-theft, information peddling and tax whistle-blowing have become real threats to MNEs and HNWIs. Tax authorities pay handsomely for (and then share) stolen data (think e.g. the HSBC leaks and recent Panama Papers). The Internet provides easy access to, and presents an almost running-commentary on, what’s going down in tax havens around the globe (see e.g. UK Guardian newspaper, the website OffshoreAlert, NGO publications, etc.) For tax authorities, this means better visibility of MNEs’ and HNWIs’ tax affairs, deeper insight into compliance attitudes and the ability to identify the main players in the aggressive tax planning industry.
Second driver: Tax authorities pressurising MNEs to improve tax risk management (“TRM”)
This driver of tax transparency has seen revenue authorities’ demand improved TRM from MNE’s. TRM has already been elevated to board level and now sits as part of corporate governance. TRM documentation is there for all to see, publicly available on the Internet (see Vodafone and SABMiller). South Africa recently got King IV requiring TRM to be embedded as part of corporate governance, but with the added expectation that MNE’s should be “good corporate citizens”. Furthermore, King IV introduces concepts of ethics and “societal impact” into TRM. For MNE’s and HNWI’s the emphasis, going forward, could see a shift towards managing reputational risk rather than seeking to aggressively navigate, and exploit, tax-technical statutory provisions (i.e. “game playing”).
Third driver: More oversight and stricter regulation of the total tax planning industry
Worldwide, the tax planning industry has experienced more oversight and stricter regulation. This driver of tax transparency no longer targets only tax practitioners and promoters of aggressive schemes. Of late, the UK has considered introducing legislation aimed at “enablers” of tax avoidance, i.e. the UK Government proposes to criminalise corporations that fail to prevent their staff from facilitating tax evasion. All of this points to stronger and more invasive regulation at all levels of the tax planning industry. The outcome could be a new adviser mind-set coming to the fore, e.g. KPMG globally now subscribes to “Responsible tax for the common good”.
Fourth driver: the “political push” for tax transparency
The “political push” for greater tax transparency derives momentum from the search for “global tax fairness”. This seems to be a battle of developed vs. developing countries, often with references to the huge capital outflows experienced by developing countries (quite a prevalent debate in the African context). The protagonists seek, therefore, to mend the fault lines in the international tax system which they argue deprive both developing and developed countries of critical tax resources: This tax transparency driver is best summarised in a quote from the blurb of the book Global Tax Fairness edited by Thomas Pogge and Krishen Mehta: “The key to reducing the tax gap and consequent human rights deficit in poor countries is global financial transparency. Such transparency is essential to curbing illicit financial flows that drain less developed countries of capital and tax revenues, and are an impediment to sustainable development. A major break-through for financial transparency is now within reach.”
Fifth driver: the “moral”, “ethical”, “societal impact” and “reputational” push factors
The fifth driver towards tax transparency is a catch-all of diverse concepts that somehow appear related and which feed off each other in helping the push towards tax transparency. In this regard one can briefly mention:
Tax morality appears to be making a come-back: tax literature is abound with concepts like “ethical taxpaying”; tax as an “ethical and moral obligation” for MNEs rather than a purely legal obligation (MNEs must pay their “fair share”); King IV now introduces “ethics”, “societal impact” and “good corporate citizenship” into the TRM and corporate governance regimes of MNEs.
NGO’s, civil society and shareholder activists are all shaping public perceptions regarding the culture of tax non-compliance. Organisations like Tax Justice Network are vociferous regarding MNEs’ and HNWIs’ tax affairs. The broad public has effectively become a “tax watchdog” as seen in the picketing of Starbuck shops in UK; and Google being brought before House of Commons in the UK. Attacks on MNEs and HNWIs often totally ignore tax-technical positions and focus simply on emotive “naming and shaming”. This makes it extremely difficult to counter by means of tax-technical arguments.
So MNEs and HNWIs might be facing a future where their “confidential” tax affairs have rather become “everybody’s business” and where, having purely a robust tax-technical position, might no longer be a sustainable tax strategy.
Where to From Here?
The push towards greater tax transparency has already claimed some scalps.
Bank secrecy has been eroded significantly. What started with the USA’s FATCA legislation has developed into a “perfect storm” for banks globally. Switzerland has, in effect, abolished bank secrecy for foreigners.
Demonising and demolishing so-called tax havens is a global sport. First there was the OECD’s “blacklisting” of non-cooperating low tax jurisdictions, of late the Panama Papers expose, and then the initiative from the USA to close loopholes allowing foreigners to open anonymous US-incorporated companies.
It all points to a future with fewer low-tax jurisdictions facilitating aggressive tax-planning.
Brave New World
The South African Government has warned recently: “In order to encourage compliance, government saw the need to give non-compliant taxpayers the last opportunity to come forward and disclose their offshore activities.”
More tax transparency means the opportunities for “ducking and diving” are over.
South African taxpayers who have tax and exchange control skeletons in the cupboard should take the warning above to heart.
This article first appeared on the September/October 2016 edition on Tax Talk.