The impact of information exchange on international tax

February 8, 2013

Information exchange among tax administrations is now the norm, which means that the era of tax secrecy is over.

By Gerri Chanel

Cross border information exchange among tax authorities

Cross-border information exchange by tax authorities is nothing new. But, over the years, relatively little information was actually exchanged.

The first seismic shift came in 2009 with OECD-country pressure to crack down on tax havens and bank secrecy by introducing agreements on exchange of information upon request. Now, a second major shift in information exchange is under way.

Tax authorities across borders are cooperating to an unprecedented extent and significantly more data is now passing from one national body to another – and for issues that go far beyond bank secrecy.

Why now?

The impetus for major action came in 2009 following the G20 meeting in London.

“The crisis led countries to search deeper for revenues and to show their citizens that all taxpayers were paying their fair share of taxes in their home country, ” says Jeffrey Owens, Ernst & Young Senior Policy Advisor to the Vice Chair-Tax and former head of the OECD’s Centre for Tax Policy and Administration.

“With the combination of technical work that the OECD had been doing and political support from the G20 in place, things really began to move forward.”

Three years on, the policy and regulatory environment for information exchange on tax matters has changed substantially. The OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes now extends well beyond core developed markets, with support not only from the G20 but also international institutions such as the World Bank, International Monetary Fund, European Commission, European Bank for Reconstruction and Development, and Asian Development Bank.

“There is now universal acceptance that effective information exchange on tax matters is an essential part of a well-governed and stable financial system,” says Mike Rawstron, who has just completed a three-year term as Chair of the Global Forum on Transparency and Exchange of Information for Tax Purposes at the OECD.

In April 2009, the OECD launched its list of jurisdictions supporting bank secrecy and impeding information exchange. Countries were scored black, gray or white, depending on the steps that they had made to ease the flow of information and clamp down on bank secrecy. Today, not a single country remains on the OECD’s “black” list, although some jurisdictions are still working toward implementation of standards.

The rise of information exchange: a company concern

The rise of information exchange has significant implications not only for high-net worth individuals, but corporates as well. Key areas of focus for information exchange include transfer pricing, along with aggressive tax planning that uses hybrid or highly structured products involving a connection with a tax haven or offshore financial center.

And it is becoming more likely all the time that inconsistencies will be uncovered. Since 2009, more than 800 bilateral tax information exchange agreements have been signed under the auspices of the Global Forum and the number continues to grow. Multilateral agreements are also on the rise.

At an EU-level, exchange measures continue to grow. The Interest Savings Directive now requires EU Member States to provide other Member States with certain information with respect to interest.

Ultimately, the directive is intended to achieve full automatic exchange of information for all 27 Member States on cross-border interest flows. Yet another information exchange initiative is the US Foreign Account Tax Compliance Act (FATCA), which is aimed at preventing tax evasion by US citizens and residents through the use of offshore accounts.

Joint and simultaneous audits

Coordination is starting to go beyond mere information exchange. “Governments are beginning to move from just cooperating to actually coordinating their codes to get better tax compliance,” says Owens.

The rise of joint audits – by which two or more countries form a single audit team to conduct a taxpayer examination – is one notable area in which this coordination is already happening. For example, the new EU Directive on Mutual Assistance facilitates joint audits as of 1 January 2013.

While such audits mean that a taxpayer’s position across borders will quickly become transparent, joint audits can also benefit companies as much as they do governments. “If you have a joint audit, it helps you to resolve issues on a real-time basis and it reduces the risk of double taxation because you have all the partners in the room,” explains Owens.

On the horizon: Phase 2 

As these activities continue to increase, so does the speed at which countries are signing bilateral and multilateral agreements to expand the exchange of information. “We have seen an increase in the frequency of exchange and in the contents of the information exchanged,” notes van Eijsden.

Moreover, the work of the organizations overseeing these initiatives has only just begun. Peer reviews, which are designed to assess a country’s implementation of information exchanges, are under way.

Phase 1 reviews – which review the legal provisions in place – have been done for about 80 countries. These reviews test that the legislation is established and assess whether there are any legislative barriers to effective exchange of information.

What will now happen is a move to Phase 2, which covers how countries put exchange into practice. “These reviews will look at how a country responds to a request for information, if it does so on time, whether the information is of a high quality and so on,” explains Owens.

As information exchange rises, so does the question of confidentiality. Some issues to be addressed include how the receiving tax authority can ensure that it will maintain the confidentiality of information received, and how to prevent speculative searches for incriminating information, so-called “fishing expeditions.”

Information exchange in a smaller world

It is difficult to overstate the impact that information exchange has had on the international tax landscape. “The era of bank and tax secrecy is well and truly over,” says Rawstron.

Owens agrees. “Over the next decade, there’s going to be one word that’s going to dominate the tax debate, particularly the international tax debate, and that word is transparency,” he says. In an era of increasing financial and reputational risk – and exchange of information – that’s a word for multinationals to heed.

New sources of tax risk and uncertainty

  1. Tax administrations around the world become more aggressive and focused
  2. High pace of legislative change creates more risk and uncertainty
  3. Growing disclosure and transparency requirements
  4. Expansion in emerging markets is creating tax risk and uncertainty
  5. A new breed of tax activism has emerged

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