Transparency and global tax

Clearing the way

For a more effective global tax framework, more transparency between jurisdictions will be vital. An automatic exchange platform, which will strengthen other steps aimed at closing off international avenues to tax evaders, is now in the pipeline.

For most of the past 100 years tax transparency has been a muddy notion, with just a few information exchange agreements in a few bilateral treaties allowing governments to keep tabs on finances which, for the most part, eluded them. The amount of information exchanged under these agreements was low and the agreements themselves often included significant restrictions on the information that was required to be exchanged. In a number of cases they did not require exchange of bank information, as bank secrecy was seen as “set in stone” in the public consciousness of some countries. Other mechanisms, such as bearer shares, which allowed the real owners of companies to be hidden, were not adequately addressed in these arrangements.

The era of globalisation, multinational corporations and international finance quickly exposed the limitations of this bunkered regime, whereby global banks could duck behind national borders and claim secrecy, ostensibly to benefit clients, though with potentially deleterious effects on tax revenue. Tax authorities simply could not get enough information to ensure that all taxpayers paid the proper amount of tax in jurisdictions across the globe.    More transparency was needed. Without it, ordinary taxpayers and entire tax bases, not to mention sovereignty, would lose out.

The current financial and economic crisis was the wake-up call, and 2009 became a watershed for fighting tax havens and clamping down on tax avoidance when the G20 announced that the “era of bank secrecy is over”. One of the key decisions taken at the summit that year was to set up the Global Forum on Transparency and Exchange of Information for Tax Purposes to strengthen the capacity for co-operation in international tax matters. As Monica Bhatia, who heads the forum, put it, effective tax co-operation ensured that countries were no longer allowed to use secrecy from tax authorities as a lure.

The OECD, already the home of the half-century- old Model Tax Convention and leader in the international clampdown against illicit tax havens since the 1990s, was the obvious location for the forum.

The forum developed a standard of transparency and exchange of information for tax purposes which was quickly accepted by the G20, OECD countries, offshore financial centres, developing countries and beyond. In 2010, the European Bank for Reconstruction and Development incorporated the standard into its investment policies, and the World Bank did the same in 2011. The standard requires three elements: reliable information must be available, the tax authority must have access to the information, and there must be a legal basis for its exchange, on request, with relevant treaty partners, which includes provisions for safeguards, strict confidentiality rules for the information exchanged, and timelines.

By April 2013, the number of jurisdictions that had committed to implement the standard and joined the Global Forum on Transparency and Exchange of Information for Tax Purposes had grown to 119, and around 1,100 new bilateral arrangements had been signed, based on the international standard. In addition, the forum had completed 113 peer reviews−that is, countries reviewing each other’s practices in published form−and issued over 600 recommendations for improvement, more than 300 of which had been, or were in the process of being, acted upon.

The results show that even stones change, and now it is no longer possible for countries to claim that they cannot exchange bank information for tax purposes because of their strict bank secrecy rules. In addition, many other changes in domestic legislation have been introduced to comply with the standard, such as measures to ensure that the owners of bearer shares can be identified. Compliance with the international standard is now a constant theme for international financial centres, and the peer reviews and monitoring continue. The peer reviews also show that the volume of information being exchanged for tax purposes is now growing rapidly, and the time taken to provide information is falling just as quickly, helping countries to enforce their laws much more effectively.

The next step for the forum will be to rate how well jurisdictions are complying with the standard, and to identify jurisdictions that are not in step with the international consensus. At the end of 2013, jurisdictions will start to receive ratings for the 10 individual elements of the international standard, and an overall rating: “compliant”, “largely compliant”, “partially compliant” or “non-compliant”.

Tax authorities, meanwhile, continue to explore more ways to co-operate. In 2011, after the G20 indicated its support for automatic exchange of information for tax purposes, it tapped the OECD to provide analysis of the issues involved. In response, the OECD presented a report on automatic exchange to the G20 leaders at their June 2012 summit in Los Cabos, Mexico, describing what automatic exchange is, how it works, where it stands and what challenges remain.

In April 2013, the G20 finance ministers endorsed automatic exchange of information for tax purposes as the new expected standard, and the G8 followed suit in June by committing to work with the OECD to “develop rapidly a multilateral model that will make it easier for governments to find and punish tax evaders”. The G8 has also recommended that multinationals should provide tax authorities with data on income and taxes by country, and that tax authorities should have access to information on the ownership of companies.

An OECD report, “A Step Change in Tax Transparency”, which was presented at the June 2013 G8 Summit in Lough Erne, Northern Ireland, provides four concrete steps needed to put in place a global, secure and cost-effective model of automatic exchange of information: enacting broad framework legislation, selecting a legal basis for the exchange, determining the information to be exchanged and related procedures, and developing common or compatible IT standards.

Two main considerations stand out. First, as tax evasion is a global issue, a model for automatic exchange of information needs to be developed and used worldwide to avoid merely relocating the problem elsewhere. Second, the process needs to be standardised to minimise costs for businesses and governments and to improve effectiveness.

The model is still under development but is advancing quickly, steered by the OECD’s Working Party 10. The aim is to complete the development of a common model for reporting and automatic exchange of certain account information held by financial institutions, including due diligence rules, reporting formats and secure transmission methods.

In July 2013 the G20 finance ministers and central bank governors called upon the forum to establish a mechanism to monitor and review the implementation of the global standard on automatic exchange of information. Similar directions are expected from the upcoming meeting of the G20 leaders in September 2013.

Tax transparency is also relevant for the OECD’s widely publicised Base Erosion and Profit Shifting (BEPS) Plan, which was issued in July 2013. The 15-point action plan aims to reduce the ability of multinationals to artificially move profits away from jurisdictions where business activity actually takes place and declare them in low-tax jurisdictions as a way of reducing taxes, or paying none at all. Actions to counter profit shifting go hand-in-hand with measures to improve transfer pricing methods and make for clearer disclosure of aggressive tax positions. None of these can work without enhancing transparency and information exchange for tax purposes.

This may be another significant step in the ongoing process of sharing information, and hopefully it is one which even the end of the crisis will not quell. “Over the past few years we have been seeing a dramatic rise in tax transparency,” says Monica Bhatia. “This is irreversible and the future will bring in even more effective information sharing. The message to tax evaders is clear: the avenues for hiding money are shrinking very rapidly.” Gerri Chanel

For more information, contact Monica Bhatia and Dónal Godfrey at the OECD.

References

OECD (2013), “A Step Change in Tax Transparency,” report to G8, June 2013

OECD (2010-2013, various) Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Reviews, ISSN: 2219-469X (online), ISSN: 2219-4681 (print), DOI: 10.1787/2219469x, available at www.oecd-ilibrary.org/

Visit www.oecd.org/tax, go to “Exchange of information”

© OECD Observer No 295 Q2 2013




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