For many years, countries have recognized in international forums that co-operation is the key to obtain tax information from abroad. The OECD’s work is at the forefront of international efforts to promote exchange of information for tax purposes. The organization developed different mechanisms for the exchange of tax information, many of which have been implemented worldwide.
The OECD started its work on harmful tax practices with regard to tax havens, initially in May 1998 with its Report Harmful Tax Competition – An Emerging Global Issue. This Report called for a concerted international effort to eliminate harmful tax practices and to adopt a series of recommendations.
Following the Report, OECD Global Forum Working Group on Effective Exchange of Information developed Model Agreement on Exchange of Information in Tax Matters (known as the Model TIEA) to push for greater transparency. It was issued in April 2002. The aim is to establish a standard for what constitutes the effective exchange of information.
The Model TIEA is not a binding instrument but contains two models for bilateral agreements. A large number of bilateral agreements have been based on this Agreement.
Later, the OECD Committee on Fiscal Affairs (CFA) approved a Model Protocol to the TIEA, which may be used by jurisdictions, in case they want to extend the scope of their existing TIEAs to also cover the automatic and spontaneous exchange of information. A Model Template for requests of information under TIEAs was designed to assist competent authorities in making requests for information.
Typically, a TIEA contains the following provisions:
- exchange of information that is “foreseeably relevant”;
- confidentiality obligations;
- information requested may relate to a person who is not a resident of a Contracting Party;
- no “domestic interest” for tax purposes is required for the provision of information;
- information covers banking details, ownership details of companies, funds, trusts, etc.;
- tax examinations in territory of another party.
It is believed that TIEAs are effective instruments to encourage a global fiscal environment for fair tax competition and level playing field amongst all countries. TIEA has significantly furthered these objectives of the Report/BEPS project.
In 2014 the OECD published its new single global standard for the automatic exchange of information between tax authorities worldwide. The Common Reporting Standard (CRS) includes details of the reporting and due diligence rules. In addition, a model competent authority agreement (CAA) contains detailed rules on the exchange of information. The legal implementation of the CRS is dependent upon each participating jurisdiction signing bilateral (or multilateral) CAAs, providing for the automatic information exchange.
The same year, the Global Forum on Transparency and Exchange of Information for Tax Purposes adopted the Standard for Automatic Exchange of Financial Account Information in Tax Matters (the AEOI Standard) developed by the OECD and member countries.
The OECD Model Tax Convention also encourages effective exchange of information and collection of taxes in its Article 26 (Exchange of Information) of the OECD Model Tax Convention and Article 27 of the OECD Double Tax Convention on the collection of taxes.
In October 2015, the OECD released its final report on BEPS Action 5 Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. It focuses on two main areas: defining a “substantial activity” criterion, and improving transparency. The report examines various issues, including the compulsory exchange of tax ruling information; and proposed best practices for cross-border rulings (eg. granting, terms, publication). These represent minimum standards to be met by states when implementing BEPS.
Pursuant to Action Point 13 of the BEPS Project, states will be introducing country-by-country reporting with regard to certain key corporate information. It foresees that tax authorities will automatically exchange key indicators (profits, taxes paid, employees and assets of each entity) of MNE groups with each other, which will allow tax authorities to make risk assessments as to the transfer pricing arrangements and BEPS-related risks of those groups. This in turn may lead to the commencement of a tax audit.
In June 2017, high-level representatives of States signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument”). A number of jurisdictions have also expressed their intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards signature. Thus, in addition to other steps, they moved forward to exchange of information.
OECD-led efforts to promote cross-border tax information exchange and cross border tax enforcements are ongoing. In March 2007, the OECD sponsored a series of meetings among more than one hundred tax inspectors from thirty-six countries to discuss aggressive 28 tax planning schemes within their jurisdictions.
The Convention on Mutual Administrative Assistance in Tax Matters was developed jointly by the Council of Europe and the OECD in 1988. This Convention was revised in 2010 to align it to the internationally agreed standard on transparency and exchange of information, and to open it up to states which are not members of the OECD or of the Council of Europe. It was framed to provide for extensive co-operation on collection of assessed taxes.
The Convention is particularly important as it provides the instrument to implement the OECD on automatic information exchange (the Common Reporting Standard). The Convention had built multilateral platform to allow for automatic exchange of information between states. Tax authorities from over 90 jurisdictions have signed a Multilateral Competent Authority Agreement (MCAA) under the provisions of Article 6 of the Convention.
The MCAA can be implemented within existing frameworks such as Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or the equivalent of Article 26 in the model bilateral tax treaty. Panama joined the Agreement in January 2018, bringing the current total number of signatories to 98.
In 2015, the EU published proposals for a Tax Transparency Package. As part of these proposals legislation for the compulsory exchange of information on cross-border tax rulings was published. The Directive on Administrative Cooperation (DAC) was amended to include tax rulings.
The Directive was amended so as to widen its scope (DAC1 to DAC5). DAC4 – adopted in May 2016 widens its scope to include exchanges between MSs of country-by-country reports on certain financial information, provided by global MNEs, effective as from 1 January 2017, in respect of calendar year 2016.
The EU Council Directive On mutual assistance for the recovery of claims relating to taxes, duties and other measures (MARD) lays down the basis for one Member State requesting assistance from another Member State in the collection of tax due to the former state. The MARD covers all entities established, and persons residing, in the EU. The scope of the Directive includes all national taxes and duties, local taxes and motor taxes and it permits Member States to exchange information without request on refunds (except VAT).
The Foreign Account Tax Compliance Act (FATCA) is a US provision enacted in March 2010 aimed at foreign financial institutions and other financial intermediaries to prevent tax evasion by US citizens and residents through the use of offshore accounts.
FATCA has pushed forward the move towards automatic information exchange between countries. FATCA-style intergovernmental agreements between the UK and the Crown dependencies (overseas and dependent territories) and Gibraltar came into force in 2014.
The most significant development with regard to the FATCA provisions has been the signing of new intergovernmental agreements (IGAs) with certain countries which will exempt foreign financial institutions in that territory from the withholding requirements, on condition certain information is provided to the respective tax authorities in that country. There is a reciprocal and a non-reciprocal version of the agreement (Model 1, Model 2A, Model 2B).
In addition, the UK has introduced new criminal sanctions, applicable from September 2017, which aim to further tackle tax evasion. The provisions require individuals to explain the origin of assets that appear disproportionate to their known income. Avoidance of taxes is now treated as pure criminal tax evasion.
An example of cooperation between tax authorities is a court case Ben Nevis Ltd v HMRC (2013). The UK-South Africa double tax treaty article for the mutual assistance in the collection of debts was held by the UK Court of Appeal to apply to all outstanding debts, not just those arising after the mutual assistance article came into force.
As of 5 April 2018, there are now already over 2700 bilateral exchange relationships activated with respect to 80 jurisdictions committed to the CRS.
In an era of globalization and increased mobility of taxpayers, traditional attitude towards assistance in the collection of taxes is changing. In the light of international capital flows, the governments and tax authorities are struggling to preserve tax base and allocate jurisdiction to tax. The outcomes from the OECD’s BEPS project are leading to greater cooperation between states in the fields of taxation, automatic exchange of information. There are concerns about confidentiality, however, this will not stop the global move towards cooperation, cross-border enforcement and exchange of information (a development of universal jurisdiction concept).
Automatic exchange of information is an important, and key step forward globally, the recent tendency shows that it will be expanded further, towards to universal jurisdiction concept, and soon it will be very difficult to hide undeclared wealth. The key objective is to promote international co-operation for a better operation of national tax laws, while respecting the fundamental rights of taxpayers.
By far, the most important change in international tax over the last fifteen years is the growth in information exchange between states. Soon it will be impossible to hide undeclared wealth.