Tax transparency is crucial for fighting offshore tax evasion and is an area where big leaps forward have been made, both on information exchange upon request and also more recently on automatic exchange of information pursuant to the OECD/G20 common reporting standard (CRS). It is also important for the corporate tax agenda, where greater transparency is playing a key role in closing tax loopholes and fighting base erosion and profit shifting (BEPS), as witnessed by the introduction of CbCR under OECD BEPS Action 13 and the exchange of information on tax rulings as part of BEPS Action 5.
Today, we are at a critical moment in the international tax transparency agenda as the universal policy consensus moves to global implementation, focusing on widespread, timely and effective implementation.
Offshore tax evasion
Where we are today
The first major step forward in tax transparency was taken in 2009 when the OECD/G20 adopted the tax transparency standard for exchange of information "on request" (EOIR) and established the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum), charged with monitoring the implementation of the EOIR standard.
Today, more than 130 jurisdictions participate in the Global Forum, all committed to the EOIR standard. An in-depth, two-phase peer review process monitors their progress in fulfilling their commitments to implement the tax transparency standard, delivering recommendations, as well as an overall rating against the EOIR Standard.
The Global Forum has just completed its first round of EOIR reviews and has assigned overall ratings to more than 120 jurisdictions. A second round of reviews has started under new and strengthened Terms of Reference. These include a requirement to ensure the availability of beneficial ownership information for all legal entities and arrangements and for tax authorities to have access to such information.
In 2014, responding to a G20 call to take the next step in tax transparency, the OECD developed the standard for automatic exchange of financial account information (also referred to as the common reporting standard or CRS). Endorsed by G20 Leaders in November 2014, the CRS is a game changer in terms of deterring and detecting tax evasion, allowing governments to trace funds held offshore that previously remained hidden from the tax authorities in the country of residence of the investors.
To date, 101 jurisdictions, including virtually all financial centres, are committed to implementing the CRS and to begin exchanging CRS information in 2017 or 2018 (see Figure 1). The United States is exchanging information pursuant to FATCA intergovernmental agreements (IGAs). The IGAs include a commitment to pursue equivalent levels of reciprocal automatic exchange by the United States, which would result in information exchange which is broadly similar to the CRS. While the US administration has repeatedly proposed providing such full reciprocity in recent budgets submitted to Congress, the Congress has so far not acted on the administration's legislative proposal.
Figure 1: The 101 jurisdictions committed to implementing the CRS |
Jurisdictions undertaking first exchanges by 2017 (54) |
Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom |
Jurisdictions undertaking first exchanges by 2018 (47) |
Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Naum, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu |
Now, just over two years after its adoption, jurisdictions have made much progress on the implementation of the CRS.
Virtually all jurisdictions starting first exchanges in 2017 have now adopted domestic implementing legislation to ensure the collection of the data by financial institutions. With respect to those commencing exchanges in 2018, good progress has been made but there is still work to do to deliver on the commitments made (see Figure 2). More detailed information about the current state of implementation of the CRS in all committed jurisdictions is available on the OECD's AEOI portal (see www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/crs-by-jurisdiction).
Figure 2: Status of domestic primary CRS implementing legislation in committed jurisdictions |
The international legal framework allowing the automatic exchange of CRS information between jurisdictions is gradually taking shape. With almost a year to go before the first exchanges of information, there are now more than 1,000 bilateral relationships in place across the globe. The exchange relationships established so far are based on a variety of legal instruments:
Exchanges between the 28 EU member states are based on Council Directive 2014/107/EU of December 9 2014;
In some instances, the exchanges are based on bilateral agreements (e.g. the agreements between the EU and Andorra, Liechtenstein, Monaco, San Marino and Switzerland or the agreements between the UK and its crown dependencies and overseas territories).
Most exchange relationships are based on the CRS Multilateral Competent Authority Agreement (MCAA), which is based on Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention). A particular bilateral relationship under the CRS MCAA becomes effective only if both jurisdictions have the Convention in effect, have signed the CRS MCAA, have filed all notifications required by the CRS MCAA and have listed each other as exchange partners. Today, 87 jurisdictions have signed the CRS MCAA and more than 100 jurisdictions participate in the Convention. The establishment of bilateral exchange relationships through the matching of jurisdictions' notifications is taking place through a staged process as jurisdictions are making progress on implementing the CRS. In October 2016, the first series of bilateral automatic exchange relationships were established among the first batch of jurisdictions committed to exchanging information automatically as of 2017. Many more jurisdictions will nominate the partners with which they will undertake automatic exchanges in the coming months.
The steps ahead
While much progress has been made, there are still challenges ahead, such as ensuring that all jurisdictions deliver on their commitments and preserving the integrity of the CRS.
It is essential that jurisdictions adequately and timely implement the global standard so that offshore tax evasion is comprehensively addressed rather than displaced from one jurisdiction to another. In this connection, with the establishment of the AEOI Standard in 2014, the Global Forum was charged with monitoring and reviewing its implementation and providing technical assistance where needed.
The peer review process for the CRS, which has already started, is following a staged approach, beginning by verifying capacity to maintain data confidentiality safeguards, followed by assessments of other essential components, including legislation and exchange partners, as countries move to put in place the various elements of the standard (see Figure 3). Full reviews of compliance with the standard will begin once the actual process of automatic exchange of financial account data between jurisdictions has begun. In the meantime, the staged approach that is now underway is complemented by a real time monitoring process to ensure that countries remain on track with their commitments and identify obstacles that members may be facing and for which they may need support to overcome.
Figure 3: The staged approach for monitoring effective implementation of the CRS |
The CRS was designed in a way to limit (as much as possible) the opportunities for taxpayers to circumvent reporting. It has a wide scope in terms of the financial institutions required to report, the financial information to be reported and the scope of account holders subject to reporting. It also requires that jurisdictions put in place anti-abuse rules to prevent any practices intended to circumvent the reporting and due diligence procedures. Nevertheless, as the implementation of the CRS progresses and governments and financial institutions gain more experience, continued efforts will be made to preserve the integrity and effectiveness of the Standard. In this regard, the OECD continues to provide guidance on key interpretation issues. Further, the OECD stands ready to review the CRS in the light of the experience gained and in consultation with stakeholders and to adopt modifications if and when required.
In addition to the implementation of the tax transparency standards, new and more enhanced forms of collaboration are being set up between tax administrations to tackle offshore tax evasion. The 'Panama Papers' revelations brought unprecedented media attention to the widespread promotion of structures involving offshore jurisdictions. In response to these revelations, government tax officials are working together in the context of the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), which brings together 37 of the world's national tax administrations, to explore possibilities of cooperation and information sharing, identifying tax compliance risks and agreeing collaborative action.
Impact of the new transparent environment on public revenues
Recognising the impact of the new transparent environment, taxpayers are moving quickly to bring their offshore tax affairs into compliance. Already, 30 countries have identified additional revenue totalling more than €50 billion ($54 billion) in the past seven years, from voluntary disclosures and other similar initiatives targeted at offshore evasion.
The OECD has supported tax administrations interested in putting in place effective voluntary disclosure initiatives. When appropriately designed, these programmes can benefit everyone involved – taxpayers making the disclosures, compliant taxpayers and the government. The OECD's most recent work in this area reflects the wealth of practical experience gained by 47 countries in relation to voluntary disclosure programmes and will continue to work with countries to ensure the right balance is struck as they put in place either temporary or permanent voluntary disclosure programmes.
Enhancing transparency to counter BEPS
Transparency is also playing an important role in closing tax loopholes and fighting BEPS, as reflected by the introduction of CbCR (BEPS Action 13) and the exchange of information on tax rulings (BEPS Action 5), both of which are part of the four minimum standards to be implemented by all jurisdictions that have joined the Inclusive Framework on BEPS (see Figure 4).
Figure 4: Countries and jurisdictions participating in the BEPS Inclusive Framework |
Country-by-Country Reporting
The agreement on Action 13
The annual automatic exchange of CbC reports is expected to have a significant impact in boosting international cooperation on corporate tax and transfer pricing issues, by enhancing the transparency of multinational enterprises' operations.
The government-to-government exchange of CbC reports, agreed as part of BEPS Action 13, is now in the midst of its implementation phase. In order to facilitate a coherent and swift implementation of CbCR around the globe, the OECD has developed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the "CbC MCAA"), which is based on Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters. The CbC MCAA will be the most important legal basis for putting in place the international legal framework for the automatic exchange of CbC information, with 50 jurisdictions having signed the CbC MCAA so far.
In line with the general tax exchange framework of the Convention, the CbC MCAA ensures that CbC reports can be exchanged between tax authorities in a confidential manner and will only be used for the agreed purposes, i.e. high-level transfer pricing risk assessments, the evaluation of other BEPS related risks and, where appropriate, economic and statistical analysis. These cannot be used as a substitute for a detailed transfer pricing analysis and no transfer pricing adjustments can be made on the basis of the CbC report itself.
Confidentiality of the exchanged tax information and the limitations on use set out above were crucial for getting the global agreement on CbCR as part of the BEPS project. An international exchange without these limits would not have obtained global consensus.
Through the international exchange network, based on the CbC MCAA, the Convention, as well as other bilateral agreements, tax administrations will be in a position to obtain a complete understanding of the way MNEs structure their operations, by giving them a single, global picture on key indicators of multinational businesses. In practical terms, CbCR will give tax administrations annual, aggregate information, starting with 2016 accounts, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group. It will also cover information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
The information will be collected by the country of residence of the parent entity (or another appointed reporting entity) of the MNE group, and will then be exchanged through the CbC MCAA, or other relevant international agreements.
First exchanges will start in mid-2018 with respect to 2016 information. In case information fails to be exchanged, the report on Action 13 provides for alternative filing to establish a level playing field.
Figure 5 shows a model timeline, with the first filing of CbC reports by MNE groups for the year 2016 taking place by the end of 2017, and first exchanges that will take place no later than June 2018.
Figure 5: Timeline for the implementation of CbCR |
Putting in place the global exchange network
In order to ensure that first exchanges between the signatories of the CbC MCAA will indeed happen from mid-2018, countries are now working to ensure that both the required domestic legislation and the international exchange framework on the basis of the CbC MCAA are being put in place in a timely manner (see Figure 6).
Figure 6: Signatories of the CbC MCAA |
Similar to exchange relationships under the CRS MCAA, the CbC MCAA requires jurisdictions to file a set of notifications in order to activate the bilateral exchange relationships between each other. These notifications include details on the domestic legislation with respect to CbCR, the fact whether the jurisdiction will exchange on a reciprocal or a non-reciprocal basis, the transmission and encryption methods used and a confirmation that adequate measures to ensure the required confidentiality and data safeguards standards, as well as the appropriate use of CbC reports are in place.
In addition, each jurisdiction will need to notify its list of the other signatories with respect to which it intends to have the CbC MCAA in effect.
As for the CRS MCAA, this approach ensures that actual bilateral exchange relationships under the CbC MCAA, being a multilateral agreement, will only become activated when both jurisdictions have all pre-conditions in place and are willing to exchange with each other.
Next steps
Taking into account the current state of implementation of the domestic legislation for CbCR and the other pre-conditions in the jurisdictions that have signed the CbC MCAA, a large number of bilateral exchange relationships are expected to be activated by mid-2017, well ahead of the first filing deadline for the 2016 CbC reports on December 31 2017. These reports are then set to be exchanged by June 30 2018.
Ensuring that all countries, including developing countries, can practically implement the measures to counter BEPS is critical. Capacity-building support, including toolkits, is therefore a necessary element to guarantee effectiveness. The toolkits, mandated by the G20, will be key in this respect and are being developed via a platform of international organisations bringing together the OECD, United Nations, International Monetary Fund and World Bank Group, and regional tax organisations in cooperation with developing countries.
In parallel, work is also underway to set up a peer review process with respect to CbCR, which will focus on both the domestic implementation of the CbCR requirements and the functioning of the international exchange framework. The results of the peer review process will then feed into the general review of the effectiveness of the filing and dissemination mechanisms which is set to be undertaken by 2020. In the interests of consistent implementation and certainty for both tax administrations and taxpayers, the OECD is also issuing guidance on key interpretation issues.
Exchange on tax rulings
Besides CbCR, BEPS Action 5 on Harmful Tax Practices is one of the four BEPS minimum standards.
There are two aspects to the Action 5 minimum standard:
A process for reviewing preferential tax regimes to ensure they are not harmful; and
A transparency framework that applies to tax rulings ("the transparency framework").
The agreed transparency framework contemplates the spontaneous exchange on tax rulings that fall within one or more of the defined six categories. Without the exchange of information, such rulings could give rise to BEPS concerns.
The six agreed categories are:
1) Rulings relating to preferential regimes;
2) Unilateral advance pricing agreements (APAs) or other cross-border unilateral rulings in respect of transfer pricing;
3) Cross-border rulings providing for a downward adjustment of taxable profits;
4) Permanent establishment (PE) rulings;
5) Related party conduit rulings; and
6) Any other type of ruling agreed by the Forum on Harmful Tax Practices that in the absence of spontaneous information exchange gives rise to BEPS concerns.
The legal basis for the exchanges on rulings under the transparency framework is Article 7 of the Convention, or the corresponding provisions in bilateral double tax treaties or tax information exchange agreements. In order to support these exchanges, the OECD has developed a common xml-based IT-format, by which the required information on tax rulings can be exchanged.
Exchanges with respect to new rulings have already started earlier this year, with the deadline for the exchange of past rulings, as defined in the report on BEPS Action 5, being due by the end of 2016.
As for all minimum standards of the BEPS package, a peer review process is being put in place that will ensure coherent and effective implementation of the transparency framework in all countries and jurisdictions that have joined the BEPS Inclusive Framework.
Technical Support
Implementation of the new transparency standards requires a secure and efficient electronic communication channel for exchanging information between participating jurisdictions. Common standards are key in this regard, which is why tax administrations have come together within the framework of the OECD's Forum on Tax Administration and the Global Forum on Transparency and Exchange of Information to design a common system (CTS) for bilateral data transmissions.
The design of the CTS is now in its final stages, ensuring that the system can be built and tested in the first half of 2017 and be operational in time for the first exchanges of CRS information in September 2017.
Conclusion
The global tax transparency agenda has made great steps forward over the past couple of years, in particular in the policy arena, where new standards, such as the CRS, CbCR and the exchange on tax rulings were set.
Jurisdictions are now making significant efforts to ensure that the new transparency standards are being implemented in a timely, coherent and effective way, with a view to creating a new, global and transparent level playing field. These implementation efforts do not only focus on the domestic and international legal framework necessary for putting the transparency standards in place, but also focus heavily on the operational and IT aspects that are crucial for turning tax policy into reality and ensuring that tax transparency goes live around the world.
This article was written by Achim Pross, head of the international co-operation and tax administration division, Philip Kerfs, head of the international cooperation unit, Paul Hondius, adviser on information exchange (OECD) and Radhanath Housden, head of automatic exchange of information unit (Global Forum Secretariat). The views expressed in this article are the views of the authors and may not represent the views of the OECD or its members.
