The Organisation for Economic Co-operation and Development (OECD) has long played a leading role in facilitating the exchange of tax information by tax authorities. The publication on 18 June of a proposed framework for developing a standard multilateral model for automatic exchange of financial account information was another significant milestone in the broader conversation about tax information exchange and transparency.
The proposed framework, modeled after the Foreign Account Tax Compliance Act in the United States, would require a global partnership between financial intermediaries and tax authorities of multiple countries, with the private sector investing resources to provide assistance to tax authorities on a global scale for the first time.
Implementing the framework would require substantial changes in systems and processes for most financial services organisations. It should also prompt careful consideration by tax authorities of how they can best use the information that would be obtained through the proposed mechanism and how they can minimise the burden imposed on financial services firms in providing needed tax information.
Additional tax transparency between businesses and governments can be appropriate and productive, particularly when it leads to greater mutual understanding of the needs of both tax administrators and taxpayers, and creates a more consistent approach that reduces uncertainty for all parties.
Tax authorities need to know a company’s income and expenses, and taxes paid. But sometimes the company can benefit if the tax authorities understand more about their business. This greater understanding can help authorities understand the fuller context for tax positions taken. Companies need to be open and responsive with the relevant tax authorities. But the prudent company will go beyond merely reacting and will consider where it is appropriate to be proactive in their dealings with the tax authorities. Companies of course need to answer the questions that the tax authorities ask. And sometimes companies should raise and answer the questions that the tax authorities may not have asked yet.
For example, a company might benefit from taking a more open and proactive approach toward disclosure and discussion with tax authorities of its transfer pricing arrangements. Regulatory change often causes material change to business models and group structures, and uncertainty around tax issues may cause enterprises to make suboptimal business choices. Helping the tax authorities and companies to best understand the regulatory landscape and how organisations are likely to change in reaction to it would likely lead to a more constructive relationship.
Any new push to require wide-scale public release of tax information would be counterproductive to the constructive dialogue between taxpayers and the tax authorities. The need for greater transparency and more information is about constructive and productive taxpayer to tax authority dialogue, not something that should play out on the public stage.
It is essential that confidentiality is maintained as transparency must be built on mutual trust. Fears that commercially sensitive information could potentially be released would undermine such trust.
It is also important that any new transparency requirements be agreed on a multilateral basis; the unilateral adoption of “custom” country-specific requirements on an isolated basis would further increase the compliance burden for business. To that end, the OECD deserves recognition for stressing the need for coordinated action and a multilateral approach to tax information sharing.
Building more trust between companies and tax authorities will help inform the current public discussion of tax issues, creating a more fruitful conversation about tax policy choices for the 21st century.
The business community and tax authorities share a common interest in the objective of having tax systems that are suited to the ever-changing global business environment, that provide certainty to business and that can be administered by tax authorities across geographies. Transparency between taxpayers and tax authorities can contribute to achievement of that objective.
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©OECD Observer No 295, Q2 2013