This call for transparency and effective exchange of information has a broad scope and is the result of different international organisations working towards developing global standards and parameters. It also represents a unique situation where tax matters and policy are intertwined, and in a lot of cases confused, with money laundering and related crimes. This unprecedented concerted international effort by various countries, group of countries and organisations has included the work of the Financial Action Task Force (FATF, the global watchdog against money laundering and terrorism financiering) on transparency regarding the ownership of legal persons and arrangements and ultimate beneficial ownership information.
The article focuses on the standards developed by the Global Forum on Transparency and Exchange of Information (GF), including other legal instruments complementing these standards, as well as the recommendations issued by the FATF.
The GF, which comprises 135 countries, is the most relevant international institution for the implementation and monitoring of transparency and the effective exchange of information for tax purposes. Its work began in the early 2000s and it has developed two standards of transparency and exchange of information: (i) the global standard known as the "exchange of information on request for tax purposes" (EOIR), and (ii) the newer global standard known as the "automatic exchange of financial information for tax matters" (AEOI).
Efforts to counter tax avoidance gained real momentum in 2009 as a result of the global financial crisis, with the call of the G20 leaders to implement a comprehensive peer review process to ensure the implementation of the EOIR standard. As a result thereof, the peer review group of the GF developed the 2010 terms of reference to monitor and review progress towards transparency and exchange of information for tax purposes.
These terms contain 10 essential elements grouped into three basic categories: (i) availability of information (e.g. banking information, ownership information on bearer shares, trust, foundations and corporations), (ii) appropriate access of information (i.e. powers to obtain and provide information subject to request under exchange of information arrangements) and (iii) existence of exchange information mechanisms (i.e. double tax conventions, tax information exchange agreements or any legal instrument to exchange information for tax purposes). These benchmarks are used in the peer review processes to assess and monitor the progress of a jurisdiction regarding its legal and administrative framework and actual implementation of the standard.
A jurisdiction will obtain a favourable result in a peer review assessment if it has established a solid domestic legal framework aligned with the three above-mentioned basic components.
According to the 2016 terms of reference, the scope of "availability of information" was broadened to include information regarding beneficial ownership aligned with the FATF recommendations. The EOIR standard will require that participating jurisdictions maintain local legislation in places that require stakeholders to ensure that legal and beneficial ownership information in relation to entities is available. This requirement was not taken into consideration for the peer review processes carried out before 2016, but it will be for the 2016-2020 reviews.
All Central American countries (Central America, for purposes of this article, refers to the region comprising Panama, Costa Rica, Nicaragua, El Salvador, Honduras, Guatemala and the Dominican Republic) have undergone the GF's peer review process and most of them are committed to implementing the international standard on transparency and exchange of information. Until now, the overall conclusion for the majority of these countries, with the exception of El Salvador that obtained a rating of "largely compliant", is that they are considered "non-compliant" or "partially compliant" with the standard of EOIR.
Central American countries have been pressured by OECD and G20 countries to change their domestic legislations to meet the EOIR standard, under threat of being included in a list of non-cooperative jurisdictions if they fail to take action. The first list of non-cooperative jurisdictions will be issued in 2017 and is not intended to include developing countries without financial centers. Inclusion on this type of list has a negative impact on any jurisdiction, primarily because of the tough sanctions and defensive measures applicable that affect the countries' commercial and financial interests (e.g. higher withholding tax rates or customs duties).
The list to be issued in 2017 will be based on criteria that were revealed in the OECD Secretary-General report to G20 Leaders in Chengdu, China in July 2016. To be removed from the list, a country will need to satisfy at least two of the three following requirements: (i) an overall rating of "largely compliant" with regards to the EOIR standard, (ii) a commitment to implement the AEOI standard and execute the first exchange in 2018 at the latest, and (iii) either be a signatory of the OECD's Convention on Mutual Administrative Assistance in Tax Matters (the Convention) or have a broad network of treaties that permit EOIR and AEOI. Notwithstanding the above, if a jurisdiction is rated as "non-compliant", or is blocked from moving past phase one in the peer review process with regards to the EOIR standard, then it will be considered as a non-cooperative jurisdiction even if it meets the last two requirements mentioned above.
Regarding the Convention, the trend seems to pressure jurisdictions to commit and sign it because of its broader scope for tax assistance and exchange of information modalities. The communiqués of April and July 2016 of the G20 Finance Ministers actually called upon all relevant countries to sign the Convention. By committing to the Convention, a jurisdiction's treaty network automatically expands with all jurisdictions that have already joined the Convention, thus avoiding the need to negotiate information exchange instruments on a bilateral basis that would provide for a narrower exchange of information.
Additional pressure derives from the practice, adopted by many jurisdictions, of establishing their own lists of non-cooperative jurisdictions with respect to tax transparency. Moreover, it is worth mentioning that some jurisdictions have even included the results of the peer review process of the GF in their local laws as a criterion for the inclusion of a jurisdiction in their list of non-cooperative jurisdictions.
For example, Chile published Circular Letter No. 34 on June 7 2016, which established that a jurisdiction that may be considered as a preferential tax regime if it does not obtain an overall rating of "compliant" or "largely compliant" on the peer review of the GF and hence subject it to adverse consequences.
This list of non-cooperative jurisdictions of the G20 and the OCED, as well as those adopted by specific countries or others in the making (e.g. the EU Commission's tax haven blacklist), is one of the most worrisome points of pressure that Central American countries face.
Impacts of the international tax transparency standards in Central America
While the situation in Central America is uneven and reflects different realities and circumstances, most countries in the region are moving towards the adoption of best practices in international tax transparency. The unfortunate consequence is how those standards are being politicised and used as excuses to push for ideologically charged tax reforms that are more focused on affecting certain productive sectors and property than ensuring enforcement against the true cases of tax evasion. It has also resulted in complete domestic confusion around the terms tax avoidance and tax evasion, where the former is now basically being immediately interpreted as a synonym of the latter.
Panama – Perception versus a commitment with global transparency and exchange of information
Panama generated an unprecedented level of international media coverage in the last few months in the context of the 'Panama Papers', which should actually be more accurately described as the 'BVI Papers' or as a minimum should have been labeled the 'Offshore Papers'. The leak on April 2016 of 11.5 million documents regarding offshore entities and transactions drew worldwide criticism and overexposure for Panama which was, in a lot of cases, unjustified.
Panama has in fact taken steps and made significant progress in aligning its legal framework to meet the international standards on transparency and exchange of information during the last few years. In February 2016, the FATF issued a statement saying that it "welcomes Panama's significant progress in improving its AML/CFT regime and notes that Panama has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified".
Panama adopted the FATF 40 recommendations, and enacted Law No. 23 of 2015 and Executive Decree No. 363 of 2015, which adopt measures to prevent money laundering, the financing of terrorism and the financing of the proliferation of mass destruction weapons along with know-your-client provisions (AML/KYC). By way of this legal instrument, measures regarding due diligence intended to complete KYC procedures was reinforced and a new supervisory body was created specifically in charge of the oversight and monitoring of the compliance of non-financial entities or individuals required to perform the due diligences.
Furthermore, other modifications were made to the local regulations to further enhance availability of information, such as the promulgation of Law No. 18 of 2015, which created a new custodial regime for bearer shares.
On April 27 2016, Panama signed the intergovernmental agreement with the US, and will perform the first report of information as of September 2017. On the other hand, regarding the AEOI standard, on May 9 2016 Panama expressed its commitment to implementing the common reporting standard (CRS) on a bilateral basis with its first automatic exchange of information by 2018. Moreover, the country has initiated the process to sign the Convention, which in turn will widen the country's tax network.
On September 7 2016, the Cabinet Council of the executive branch approved a draft biIl which establishes obligations for Panamanian financial institutions to report information to the tax administration in compliance with FATCA and CRS. According to this Bill, reporting due diligence procedures will be adopted by an executive decree once the bill is approved in the National Assembly.
Moreover, the Cabinet Council approved an additional draft bill regarding accounting registry, which establishes that offshore companies organised under the laws of Panama are obliged to keep accounting records at its disposal for a minimum period of five years. These records may be kept either at the office of the resident agent in Panama or anywhere outside of Panama, as long as the taxpayer complies with the requirements established under this law. This bill establishes additional provisions regarding the suspension of corporate rights of a legal entity by rule of law, similar to a striking off of the company register.
In light of the above, Panama's perceived lack of transparency is inconsistent with the changes implemented and those to come. International political interest has clouded the progress achieved by the country and the attention has been focused on cases such as the ones depicted in the badly-named Panama Papers, in which in the majority of circumstances did not even related to Panamanian companies. Together with Costa Rica, it is one of the two countries in the region that are the most advanced in terms of tax transparency.
Costa Rica – The controversial creation of a Beneficial Ownership Registry
Costa Rica is a member of the GF and it signed the Convention in 2012. It committed to implementing AEOI and the CRS. It will start exchanging information in 2018. It was rated "partially compliant" following the conclusion in October 2015 of the phase 2 of the peer review process.
Costa Rica has been in discussions to formally join the OECD since 2015 and is one of five traditional Latin American countries to pursue membership (Chile and Mexico are members, Colombia and Peru aspire to be members. Canada, occasionally considered a Latin American country by virtue of its French-speaking population, is also a member). The accession process creates a lot of pressure in the country for any recommendations from the OECD, the GF and the FATF.
On September 8 2016, the Costa Rican Congress took an important step towards approving in its first vote a bill Against Tax Fraud. The bill is now expected to be sent to the Supreme Court for constitutional review before being submitted for a second and final vote, which is expected to take place in the next two or three months.
This is an important piece of legislation that has been under a lot of debate for the past two years. It is intended to provide the tax administration with new mechanisms to fight tax fraud and would require the creation of a centralised registry of ultimate beneficiary owners for any legal entity within the country. The creation of this registry illustrates the growing influence of the OECD in the country. It has created a lot of controversy because it is an example of how these organisations sometimes "experiment" with policies that not even their full members have adopted. But it is also a perfect example of how a governments can use international organisations as excuses and justifications to push and impose domestic policies and reforms that are more aligned to an ideologically charged agenda than pure international tax policy.
For example, the Costa Rican Ministry of Treasury insisted during the parliamentary discussions that the OECD and the GF demanded the creation of a final beneficiaries registry centralized in a tax administration database, and further stressed that failure to do so would have a serious impact on the accession process to the OECD. The private sector strongly contested this assertion which has not real technical basis.
Subsequently, the Ministry of Treasury added to the debate anti-money laundering regulations and the compliance with FATF standards and recommendations, threatening that if the registry was not adopted, Costa Rica would be included in the FATF gray list. This strategy worked and the registry, which would be managed by the Central Bank, is about to be created.
However, the bill raises many issues including:
- Inadequate definitions: e.g. the definition of a final beneficiary, which does not necessarily reflect the definitions set out in international standards;
- The ownership threshold used in the beneficial owner definition can be set at the discretion of the Ministry of Treasury between 15 and 25%;
- The potential abusive use of this information by the Tax Authorities which could gain access not only for examination or tax audit procedures and international exchange of information (which are the two intended objectives), but also for purposes of tax "intelligence" which is a broad and very dangerous term that is basically an open door for fishing expeditions and taxpayer profiling;
- Leaks of information resulting from an inability of the authorities with access to the registry (i.e. tax authorities, and the Costa Rican narcotics institute) to keep data confidential; and
- Violations of fundamental rights such as privacy and safety.
It is worthwhile mentioning that there are no real precedents comparable to what Costa Rica is doing. Not even EU countries or the OECD members have established mechanisms to comply with the new standard that for the first time requires disclosure of final beneficiaries for tax purposes. Costa Rica ended up being the 'guinea pig' of the OECD's policies, but with all the risks which come with not having the framework and infrastructure to sustain the potential negative side effects of the experimentation.
Guatemala – Disclosure of financial information and the obligation for taxpayers to maintain a foreign and local bank accounts register
Guatemala is a member of the GF and it signed the Convention in 2012. Yet it has not officially committed to implementing AEOI.
Following unprecedented cases of corruption and massive tax fraud scandals, on August 23 2016 Guatemala's Congress approved a broad reform, which will enter into force on February 19 2017, of the Tax Administration Law, the Law on Banks and Financial Groups, the tax code and the Code of Commerce (Decree 37-2016).
This reform is intended to strengthen the tax administration with modern inspection tools, including cooperation and mutual assistance with other tax and customs administrations of other jurisdictions.
This reform also includes other relevant provisions and modifications on the disclosure of financial information held by third parties. The reform allows the tax administration to access taxpayers' financial information held by third parties during tax examinations, as long as there is prior authorisation granted by a competent judicial authority. Before this reform, access to this information was only permitted in cases that had moved from the administrative phase to the judicial level.
Through this reform, when tax administration has reasonable doubt of the existence of suspicious activities or transactions, it may request that financial institutions provide information on bank transactions, investments and assets available, as well as other transaction and services performed by any individual or legal entity.
It is also important to mention that this reform forces Guatemalan banks to keep information on their offshore activities to which the tax administration may have access as described above, thereby expanding the information available to the authorities. Additionally, taxpayers are also obligated to keep records of their bank accounts (with local and foreign institutions) and investments in their accounting records. Failure to comply with these obligations constitutes a crime of resistance to tax supervision.
Because the reforms originated as a response to major corruption cases, the unforeseen and negative side effect has been that these new policies have also being used as mechanisms to force 'witch hunts', which instead of focusing on the intended targets, which were the true tax criminals, have openly targetted almost any large company doing business in the country. With a strong ideological background, the authorities have taken a general position of presuming potential guilt across the board as the starting point of any investigation.
El Salvador – More transparency through transfer pricing regulations and amendments to the Salvadoran Criminal Code
El Salvador is a member of the GF and has signed the Convention in 2015. It is the only Central American country rated "largely compliant", following the conclusion in March 2016 of the phase 2 of the peer review process – although it has not yet officially committed to implementing AEOI.
In August 2016 the Ministry of Finance submitted two bills to Congress. The first of them is intended to incorporate a whole new regulation in the tax code on transfer pricing. Through this reform, the Salvadoran government expects to be able to offset tax avoidance and evasion behaviors from taxpayers and transactions made between related parties. Also, the bill includes amendments to the tax code to promote the strengthening of the tax authorities' powers with taxpayers that hinder tax examinations audits by not submitting information or accounting records.
The second reform submitted to Congress proposes amendments to the criminal code to close some loopholes and facilitate the prosecution of tax fraud cases.
Dominican Republic – On the path of tax transparency
Considerable progress has been made in the Dominican Republic since 2013 towards meeting tax transparency standards. It joined the GF and more recently signed the Convention (June 2016).
Last April, the Superintendence of Banks issued a due diligence guide as part of the forthcoming fourth round of mutual evaluation that the FATF will be carrying out in October 2016. The due diligence guide expands the requirements that financial intermediation entities have to perform in order to know, not only their clients, but also beneficial owners, politically exposed persons, non-profit organisations, non-governmental organisations and trusts, among others. This guide improved the legal framework on the prevention of money laundering and terrorist financing that has to be applied by the whole national financial system. It also expands the availability of information of clients, thus contributing to the prevention of financial crimes.
There are also proposed amendments to the tax code in order not only to raise the collection of taxes, but also to reduce informality, tax evasion and tax avoidance, and to increase tax transparency.
There is no official position vis-a-vis the adoption of the CRS. However, on August 31 2016, the head of the tax authorities said in a speech that the country would sign the Multilateral Competent Authority Agreement before 2020, which is a clear step towards the implementation of the CRS.
Honduras – Behind the curve of tax transparency but with significant changes in the making
Honduras is not a member of the GF. It has not signed the Convention and has not committed to implementing AEOI. Having said that, in July 2016 the Honduran government submitted to Congress a bill to substitute the current tax code. The most important change would be the proposed switch from a worldwide taxation regime to a tax system based on territoriality. Regarding tax transparency issues, the new tax code would include provisions on transfer pricing and exchanges of information. According to the bill, EOIR will be allowed with other jurisdictions under exchange of information agreements in force.
The bill also includes provisions in relation to mutual assistance between the Honduran tax authorities and their foreign counterparts. The bill empowers the tax authorities to subscribe inter-institutional agreements to implement exchanges of information.
This is taking place in a context where the tax authorities were entirely changed on March 16 2016 in the mist of major corruption scandals. The tax authorities in their previous form and name (i.e. Dirección de Ingresos, known as the DEI) completely ceased to exist. A new administrative authority was created and it has a new name (Servicios de Administración de Rentas; SAR), new powers were granted and it is in the process of contracting its employees. This transition period is creating some uncertainties and significant changes should be anticipated including in the space of tax transparency.
Nicaragua – Behind the curve of tax transparency
Nicaragua is not a member of the GF. It has not signed the Convention and has not committed to implementing AEOI.
Central American countries are embracing tax transparency standards but at different speeds. Tax reforms have been implemented and new ones are in the making but each country has its specifics. Agendas are not necessarily being driven by international standards but mainly by domestic ones which in some cases use foreign policy as justification or even 'smokescreens' to support reforms which would have otherwise not been supported locally.
At a high level, Panama and Costa Rica can be viewed as trailblazers. On the other hand, countries such as Guatemala, El Salvador and the Dominican Republic have responded to the demands for international tax transparency, but to a lesser extent and more slowly than Costa Rica and Panama. Honduras, up to now, is behind the curve but we would expect changes to occur and that it will soon catch up with its neighbours.
This global impetus for a transparent environment will certainly have unintended consequences in Central America that will raise legal uncertainty and in some cases even constitutional rights issues. The Panama Papers have turned the issue of beneficial ownership into the main concern at a global level. That has resulted in aggressive and risky experiments like the new registry of final beneficial owners in Costa Rica, where the standards were quickly used by the current government to push their own ideological agenda. The registry is the first of its kind in Central America, and the world for that matter.
Local governments are realising that the increase in tax transparency can generate a lot of information and evidence for the local tax authorities which are as a result likely to become much more aggressive with noncompliant taxpayers. In other words, the bullying of taxpayers we have observed in the past few years across the region could be on the rise. The big unanswered question which remains is how are these countries, which in general have demonstrated to have limited technical capacity and infrastructure, are going to deal with the massive amounts of complex data they will start accumulating.
These developments on tax transparency cannot be ignored by Central American taxpayers, who must be ready to address all the challenges entailed, and be prepared to experience a major increase in the scrutiny of their personal situations and business affairs.
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