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EXCLUSIVE: Pascal Saint-Amans defends OECD’s Common Reporting Standard despite loopholes identified by TJN

13 March 2014

Salman Shaheen

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By shining a spotlight on loopholes and failing legislation, the Tax Justice Network has been at the fore of global tax policy development in recent years. In its latest report, it praises the OECD’s work on automatic information exchange, but identifies areas for improvement.

For decades the OECD has set the agenda of the debate over, and dictated the pace of progress for, global tax policy development. Last month’s publication of its Common Reporting Standard, endorsed by the G20, requires, for the first time, jurisdictions that commit to it to obtain information, such as investment income, account balances and sales proceeds from financial assets, from their financial institutions and exchange it automatically with other jurisdictions on an annual basis.

But the global demand for automatic information exchange (AIE) did not come from the OECD. AIE has long been a campaigning priority for the Tax Justice Network (TJN) and as the TJN’s influence has grown with every new tax avoidance scandal, the OECD has had to pay increasingly close attention to the non-governmental organisation’s campaigning to have it introduced.

In a report seen exclusively by International Tax Review, the TJN praises the "significant progress" the OECD had made by endorsing the TJN and civil society’s principle of AIE.

"There are many positive details in the report [on CRS]: it is wide in its scope, covering not just individuals but trusts and foundations, and various investment entities," the TJN paper states. "Perhaps the most promising feature is that under the new system, an enormous hurdle - likely to involve many trillion dollars’ worth of assets - could be tackled for the first time. What could be called 'ownerless’ assets are often held in structures such as foundations or discretionary trusts. These are the mechanisms through which the world’s top income earners can hide tax evasion and remain unaccountable."

However the TJN identifies a number of key weak spots in the OECD’s standard, which may become gaping holes as it is watered down by negotiations and lobbying.

"If we look at the membership of the OECD Global Forum group that will be rolling out the new standard globally - including notorious secrecy jurisdictions such as the Cayman Islands, Jersey, Luxembourg and Liechtenstein - we are going to have to be on our guard against all kinds of shenanigans," said Nick Shaxson, author of Treasure Islands.

Developing countries

The TJN’s primary concern is that there are no provisions in the OECD report that cater specifically to the needs of developing countries. Fuelling perceptions among activists that the OECD is a rich boys’ club, the standard requires poor countries to "jump through impractical and costly hoops if they want to benefit from automatic information exchange and obtain information from tax havens".

The TJN is concerned that the Common Reporting Standard requires developing countries to reciprocate by setting up complex systems to collect taxpayer information for exchanging with others, despite many lacking the administrative capacity to do so. Moreover, the TJN point out, almost no developing countries are tax havens: "dirty money generally flows from poor countries to financial centres in rich countries".

"On a technical level, the OECD has done a decent job," said Markus Meinzer of the TJN, and one of the paper’s authors. "The challenge now is to create robust commentary to achieve the full potential of the new standards and to allow for staged reciprocity for selected developing countries."

The OECD responded to this criticism by saying the Common Reporting Standard merely sets technical standards for participating countries.

"The specific needs of developing countries should not be addressed by lowering standards for them, but rather by helping them to meet the standards," Pascal Saint-Amans, head of tax policy and administration at the OECD, told International Tax Review. "The G20 has therefore mandated the Global Forum on Tax Transparency and Exchange of Information to help developing countries identify their needs for technical assistance and capacity building before engaging in AIE."

Saint-Amans points out a group has been set up which includes developing countries as a growing number of them have joined the Global Forum. They are expected to work on this in close cooperation with the OECD, the World Bank Group and the G20 Development Working Group.

"The Global Forum will look into the particular concerns of developing countries which have a right to benefit from transparency," Saint-Amans said. "I would like to add that our process also involves consultations with a broad group of stakeholders including NGOs."

Loopholes

The TJN also points out there are a number of loopholes in the OECD’s standard, despite the technical language overall being sound.

For instance, while the new standard requires some trusts to report about their relevant parties, the TJN notes this does not apply to trusts which are managed by individuals.

Meanwhile, there are thresholds below which reporting or due diligence checks are not required.

"It is easy to sidestep reporting by splitting accounts in order to fall below the thresholds, or emptying accounts just before the reporting dates, then refilling them afterwards," the TJN report states.

"While some of the identified problems could be remedied through the commentary, others appear more difficult to address such as the account threshold loophole and the lack of a viable option of staged reciprocity for selected developing countries," said Andres Knobel, another of TJN paper’s co-authors.

Another concern is that the OECD report refers to "controlling persons" behind structures such as trusts and secret companies. The TJN feel international best practice would see the broader term "beneficial owner" being used.

"It would be naïve to claim that no dedicated tax evader will ever find a way to circumvent the standard," Saint-Amans admits, "but it has certainly been designed to make this as difficult as possible."

Saint-Amans points out the standard has a broad scope across three dimensions:

1) The financial information to be reported includes all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets;

2) The financial institutions that are required to report do not only include banks and custodians but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies; and

3) Reportable accounts include accounts held by individuals and entities (which includes trusts and foundations), and the standard includes a requirement to look through passive entities to report on the individuals that ultimately control these entities.

"While the standard is based on FATCA, most de minimis thresholds available under FATCA were either removed or significantly lowered," Saint-Amans said. "All trusts are covered by the reporting regime including those managed by individual trustees. We will carefully monitor this and will fix issues when arising. I would like to emphasise that no compromise has been made on weakening the standard to reach an agreement. This is the mindset of the standard setters, which is absolutely necessary to move towards an efficient system."

Sanctions

The third area of criticism the TJN focuses on is over the lack of sanctions.

The TJN wants to see widespread participation in the process to prevent clandestine activity being displaced to jurisdictions that refuse to cooperate.

"Proposals for sanctions will be needed to pressure recalcitrant jurisdictions - but with appropriate allowances made for developing countries," the report states.

The TJN recommends sanctions for any jurisdiction with a substantial level of per capita cross-border financial services that reject AIE so they can attract illicit financial flows.

Sanctions could be based on the US Foreign Account Tax Compliance Act’s (FATCA) 30% withholding tax, which has ensured the effectiveness of the scheme.

Saint-Amans says, however, it is encouraging to see that the group of countries that is committing to early adoption of the standard is growing at a very fast pace and already includes more than 40 jurisdictions.

"Also the most recent G20 communique encourages all financial centres to adopt the standard," Saint-Amans said. "The question whether to impose sanctions on non-participating countries seems therefore premature and is in any event to be answered at the political level. However, we intend to provide the political masters with an objective assessment of where jurisdictions stand so that none would take advantage of non-participating to automatic exchange of information."

The OECD often meets with NGOs such as the TJN for briefing sessions, which Saint-Amans says makes the organisation "smarter". Without the campaigning and analysis done by the TJN and other NGOs on the weaknesses they identified in previous information exchange standards, the OECD may not have come forward with its Common Reporting Standard. As such, it will be paying close attention to the TJN’s latest report as it seeks to refine its standard on automatic information exchange.






International Correspondents