Head of South Africa’s Revenue Service and chair of the OECD Global Forum on Transparency and Exchange of Information (Global Forum), Kosie Louw, speaking following the release of 11 new reports on the adequacy of the assessed countries information exchange in practice; and two Phase 1 reports on the adequacy of the legal and regulatory framework of for transparency and exchange of information, had this to say:
“The Global Forum is applying pressure on all jurisdictions to implement the standard and co-operate effectively in tax information exchange. The publication of the ratings later this year will be a crucial moment for all those committed to fighting cross-border tax evasion”
According to information on the OECD website, the Global Forum has reviewed 98 jurisdictions of which 50 will be assigned ratings in November for the individual elements of the international standard and an overall rating of compliant, largely compliant, partially compliant or non-compliant.”
The creation of the list was mandated by the G20 at meetings of its finance ministers and central bank governors. Moreover they also made the strong recommendation that countries sign on to or express an interest in the OECD’s Model Convention on Mutual Assistance in Tax Matters which in effect binds signatories to a new standard of information exchange based on automaticity.
It will be interesting to see how the ratings of the 50 countries will be affected by their acceptance (or otherwise) of the new standard expressed through signing up to the OECD Multilateral Convention.
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The 120 members of the OECD Global Forum on Tax and Exchange of Information for Tax Purposes (‘Global Forum’), should not make the mistake of assuming that because the OECD’s Progress Report to the G20 Finance Ministers and Central Bank Governors (‘G20′) was not as widely publicised as the group’s endorsement of the OECD’s Action Plan on Base Erosion and Profits Shifting (BEPS),important pronouncements on the future of the Global Forum’s work did not feature in the G20’s final communiqué.
Here’s what they said:
1. “We fully endorse the OECD proposal for a truly global model for multilateral and bilateral automatic exchange of information. We are committed to automatic exchange of information as the new, global standard and we fully support the OECD work with G20 countries aimed at setting such a new single global standard for automatic exchange of information.”
COMMENT: No surprise here; except perhaps to the Global Forum who for almost five years have been working on implementing the ‘on request’ standard through the conclusion of almost 800 bilateral tax information exchange agreements (TIEAs); as well as a number of tax treaties. This after a similar declaration made by the G20 at the end of their London Summit of the group’s endorsement of the OECD proposal that this should be the new ‘global’ standard.
To be fair members of the Global Forum should not be surprised by the modus operandi of the OECD in these matters. Of course one might have thought that with the existence of a re-constituted Global Forum , of which the OECD serves as Secretariat the OECD would have at least canvassed the views of the Global Forum on this new direction so that their report to the G20 would reflect their shared intent (or otherwise) on the move this new standard.
This lack of consultation by the OECD suggests that the role of the Global Forum is merely that of standard taker regardless of the characterisation of relationship between the two bodies. More importantly, it reinforces the widely held view that the OECD remains uninterested in the views of the non-G20 members of the Global Forum; and is content to rely on the G20 as the ‘enforcer’ of its global tax policy-making.
2. “We ask the OECD to prepare a progress report by our next meeting, including a timeline for completing this work in 2014. We call on all jurisdictions to commit to implement this standard. We are committed to making automatic exchange of information attainable by all countries, including low-income countries, and will seek to provide capacity building support for them.”
COMMENT: The aggressive time-frame for the OECD to complete work on automatic exchange of information (AIE) suggests that the plan is already at an advanced stage; and should confirm that the ‘on request’ standard was but an ‘interim’ one until the OECD could gain G20 endorsement of their ultimate ambition -universal adoption of the AIE standard using their Multilateral Convention on Mutual Assistance in Tax Matters. No doubt the success of the OECD/G20 partnership in compelling acceptance of the OECD’s model TIEA by the Global Forum has provided impetus for the move to the OECD’s ‘end game’.
3. “We call on all countries to join the Multilateral Convention on Mutual Administrative Assistance in Tax Matters without further delay. We look forward to the practical and full implementation of the new standard on a global scale.”
COMMENT: Except for the more insistent tone, this should not be a surprise to the Global Forum. The OECD’s Report to the G8 meeting last month referenced a similar exhortation by the G20 made at the end of the April meeting of its Finance Ministers and Central Bank Governors:
“In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress.
Signatories to the OECD Multilateral Convention are: Albania, Argentina, Australia, Austria, Belgium, Belize, Brazil, Canada, Colombia, Costa Rica, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Guatemala, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Nigeria, Norway, Poland, Portugal, Romania, Russian Federation, Saudia Arabia, Singapore, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, United Kingdom, and United States.
For the status of the Convention as of June 13, 2013 click here
4. “We are looking forward to the Global Forum establishing a mechanism to monitor and review the implementation of the global standard on automatic exchange of information.”
COMMENT : The G20 reinforces the view that the Global Forum has no say on the content or adoption of standards in the area transparency and tax information exchange; suggesting that by mere membership jurisdictions commit to the adoption and implementation of international tax rules crafted by the OECD and ratified by the G20. The clear mandate to the Global Forum is to ensure that its members are compliant. That the G20 members of the Global Forum are in the minority has little bearing on the matter.
(Prime Minister of Australia Kevin Rudd. Image: Zimbio)
5. “The Global Forum is to achieve the allocation of overall ratings regarding the effective implementation of information exchange upon request at its November meeting and report to us at our first meeting in 2014.”
COMMENT: This reinforces my view that by year end the OECD will have crafted a new blacklist of Global Forum members based on the Phase 2 Assessments which measures the ‘effectiveness’ of the practical implementation of the ‘on request’ standard.
In its April communigue the G20 had this to say:
“Moreover, we are looking forward to overall ratings to be allocated by year end to jurisdictions reviewed on their effective practice of information exchange and monitoring to be made on a continuous basis. In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress.
Australia takes over as chair of the G20 in 2014 and Heads of Government Summit is to be held between November 15-16.
Full Communique of G20 Meeting released Saturday July 20,2013 here: Final_Communique_FM_July_ENG
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On page 11 of the OECD report to the recently concluded G8 Summit titled “A Step Change in the Transparency Agenda” is the following footnote:
“In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress. See paragraph 14 of 19 April Communique of G20 Finance Ministers and Central Bank Governors.
Paragraph 14 of the 19 April Communique of the G20 Finance Ministers and Central Bank Governors reads as follows:
“More needs to be done to address the issues of international tax avoidance and evasion, in particular through tax havens, as well as non-cooperative jurisdictions. We welcome the Global Forum’s report on the effectiveness of information exchange. We commend the progress made by many jurisdictions, but urge all jurisdictions to quickly implement the recommendations made, in particular the 14 jurisdictions, where the legal framework fails to comply with the standard.
Moreover, we are looking forward to overall ratings to be allocated by year end to jurisdictions reviewed on their effective practice of information exchange and monitoring to be made on a continuous basis. In view of the next G20 Summit, we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress.
We welcome progress made towards automatic exchange of information which is expected to be the standard and urge all jurisdictions to move towards exchanging information automatically with their treaty partners, as appropriate.
We look forward to the OECD working with G20 countries to report back on the progress in developing of a new multilateral standard on automatic exchange of information, taking into account country-specific characteristics. The Global Forum will be in charge of monitoring. We welcome the progress made in the development of an action plan on tax base erosion and profit shifting by the OECD and look forward to a comprehensive proposal and a substantial discussion at our next meeting in July.”
The clear mandate from the G20 Finance Ministers and Central Bank Governors to the OECD is to create a ranking – a list – of jurisdictions based on their Phase 2 Assessment on the effectiveness of their legal regime for exchange of information ‘on request’, which is the standard that OECD Global Forum endorsed at its 2009 meeting in Los Cabos, Mexico.
In addition to that Assessment, jurisdictions who had unresolved issues from their Phase 1 Assessment, though given a ‘pass’ to Phase 2, committed to providing updates about their progress in changing certain determinations made about their legal regime supporting information exchange from ‘not in place’ or ‘in place but needs work’ to ‘in place’.
The documents publicly available on the OED Global Forum (GF) website http://www.oecd.org/tax/transparency/provide no evidence that, at the last plenary session of the GF, held last year in South Africa, members agreed a ‘step change’ to the transparency agenda which has been the basis of their compliance activities since 2009.
Further, there has been no public information released to indicate that the GF will meet before September this year to consider what has emerged from the G8 meeting; and what will emerge from the next meeting of the G20 Finance Ministers and Central Bank Governors next month. GF Plenary sessions are held annually. This year if the meeting is held after September it means that GF members will have about 10 weeks to demonstrate satisfactory compliance under the Phase 1 & 2 Assessment criteria before the OECD is expected to produce its ‘rankings’. That is, of course,if GF members wait until the G20 confirms the expected move to ‘automaticity’.
Assuming therefore that, as was the case with the ‘on request’ transparency standard, recommended by the OECD, then accepted by the G8 and finally, confirmed by the G20 as the global standard; the new ‘automatic sharing’ standard, crafted by the OECD,now endorsed by the G8 ,will likely be confirmed by the G20 as the new standard this September.
As happened in 2009, by year-end the OECD may well produce a list of jurisdictions in ‘substantial compliance’ with the prevailing ‘on request’ standard. Given though that the 2012 ‘whitelist’ excludes only one member of the GF – Nauru – any adjustment to the ranking will likely be based on new information available since that table was published.
I suspect that the reason why the OECD, in its report to the G8, reiterated the recommendation by the G20 Finance Ministers and Central Bank Governors that all jurisdictions should sign up to the new ‘automatic’ standard, or at least express a willingness to do so, is to avoid GF members being ‘blacklisted as a ‘tax haven’ or an ‘uncooperative jurisdiction’.
The implication may be that even if a jurisdiction’s assessments are insufficient to justify a ‘pass’ under the old dispensation, this can be remedied by its early acceptance of the new ‘automatic’ standard, evidenced by signing or expressing an interest in signing the OECD Multilateral Convention on Mutual Assistance in Tax Matters.
Indeed, this may well explain the significant up-tick in interest from GF members in the OECD Multilateral Convention since the April meeting of the G20 Finance Ministers and Central Bank Governors.
My prediction, based on the above, is that the next OECD ranking of countries will include a category of jurisdictions who have indicated no interest in the new automatic exchange of information standard and have yet to receive a passing grade in either one or both of their assessments.
What do not know is whether a jurisdiction who is fully compliant with the elements in both assessments, if such a jurisdiction exists, will still be blacklisted by the OECD,if they too, express no interest in ‘automaticity’.
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1. Meeting from October 26-27 in Cape Town, South Africa, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes ( ‘The Global Forum’) welcomed 10 new members: Albania, Burkina Faso, Cameroon, Gabon, Kazakhstan, Latvia, Lithuania, Pakistan, Tunisia and Uganda. It also welcomed the Centre de rencontres et d’études des dirigeants des administrations fiscales (CREDAF) and the World Customs Organization (WCO) as new observers.
2. The Global Forum designated South Africa (Mr. Kosie Louw) as the new Chair to take over from Australia at the beginning of 2013 for a period of two years.
3. Three new members, Indonesia, Norway and Spain, were appointed to the Peer Review Group for a period of three years, replacing Australia, Denmark and Ireland. Existing members and the Chair and Vice-Chairs were re-appointed for one year. In addition, it was agreed that Global Forum members may attend PRG meetings as observers in certain circumstances.
4. The Global Forum adopted and published an additional 9 peer review reports (i.e. the combined reviews of Argentina and South Africa, and the Phase 1 reviews of Dominica, Marshall Islands, Niue, Russian Federation, Samoa, Sint Maarten and Slovenia. A further 3 supplementary reports – for Liechtenstein, Monaco and Uruguay – were adopted and published as well. As a result of the progress reflected in their supplementary reports, Liechtenstein and Uruguay, which earlier could not move to Phase 2, can now do so.
5. The Global Forum members recognised the significance of Phase 2 reviews, which will eventually lead to ratings of jurisdictions on essential elements and an overall rating, and resolved to ensure that this sensitive exercise was conducted with equity, fairness and in a transparent manner.
6. The Global Forum was also pleased to note the interest shown by a range of jurisdictions in signing the OECD multilateral Convention on Mutual Administrative Assistance in Tax Matters, making it a key instrument for the exchange of tax information to the international standard.
7. At its meeting in Paris in October 2011, Global Forum members agreed to extend the mandate until the end of 2015. As the schedule of reviews currently does not go beyond the 1st half of 2014, a discussion on the future direction of the Global Forum’s work was held. It was agreed that there should be a continuing role for the Global Forum in providing an essential framework for work on transparency and exchange of information for tax purposes. The Global Forum should further develop its monitoring role to ensure that the international standard is applied to the full extent by all jurisdictions. Its core focus should continue to be on the exchange of information.
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Isn’t it odd that the poster-child of the G20/OECD tax information exchange agenda should now be subject to such staunch opposition? Stranger still that the proponents of exchange of tax information ‘on request’ as set out in various bilateral arrangements promoted by the OECD and endorsed by the G20 who both signalled its acceptance as the ‘end of secrecy’ should now be so equivocal in its defence.
How is it now that doubts about this ‘global’ standard for increased bilateral cooperation between states typified in the OECD Model Tax Information Exchange Agreement and Article 26 of the OECD Model Tax Treaty on Exchange of Information are being entertained by the very group that so successfully extolled its virtues?
Perhaps the answer lies in the motivation behind the promotion of the ‘on request’ model of tax information exchange in the first place. Is it possible that object of the TIEA exercise was not to promote this form of exchange at all but rather a means to another end?
Could it be that this was the first stage of a two step process to the multilateralisation of ‘automatic’ exchange using another OECD prototype – Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters?
Lately the head of the OECD Tax Policy Directorate – the department largely responsible for the Harmful Tax Competition exercise of the late 1990s and the convincing the G20 of its enduring relevance of this programme, albeit repacked for post-recession consumption – has admitted the short-comings of the ‘on request’ model.
In fact this department which is the driving force of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes has easily made the transition from a dialogue on the ‘request’ model to the ‘automatic’ version after four years of intense TIEA negotiation backed by threat of collective G20 sanction.
It seems perfectly reasonable to conclude that the ultimate ambition of the OECD is to see the disciplines of tax cooperation contained not in a series of bilateral agreements of which there are hundreds now in existence but in a proper multilateral agreement which codifies not only the automatic exchange of tax information but also the cooperation in the collection of taxes. Both of which are covered by an OECD model agreement.
Faced with the pre-recession apathetic response to this model agreement, the Convention on Mutual Administrative Assistance in Tax Matters, which did not change in the meetings of the G20 – it might have been best to ground the standard in the bilateral model which if sufficiently prolific could then naturally progress to the acceptance of the multilateral arrangement; especially in circumstances where the OECD Tax Policy department has started to voice doubts about the effectiveness of the bilateral mechanisms.
Some countries, like Guernsey, in anticipation of a second iteration of the global standard on tax information exchange being ‘automatic’ buttress as in the first iteration by the threat of G20 sanction have already indicated that they will adopt this form of exchange. Others like Colombia faced with unlikely progress through the Global Forum’s Phase 1 Peer Review Assessment on its legal reflecting the existing standard have already acquiesced to this variant by becoming signatories to the OECD Model Convention.
Yet others like Latvia have joined the Global Forum while simultaneously becoming parties to the Convention. In fact it is true to say that as the enforced popularity of TIEAs has grown so too has the subscription to the Convention.
Is this good strategic planning by these countries or is it the premature adoption of this standard which is yet to ‘unseat’ the international norm? In the case of Guernsey and other offshore financial centres who rely on the European Union for their fortunes it might well be a pragmatic response to the growing appetite in Europe for automacity in its dealings with each other in matters of tax information exchange and more particularly UK regulations under its Finance Act which classifies countries according to the anticipated ease of obtaining tax information about delinquent UK tax payers which promotes those countries with automatic exchange to the most-favoured category.
For others who sign up to the Convention it may be ancillary, their primary objective of forging a closer relationship with the OECD in an attempt to stave off sanction for failure to progress through the Peer Review Assessments on time in a ‘quid pro quo’ which might pre-empt sanction by the G20 in advance of this year’s Los Cabos Summit which ought to continue to the ‘name and shame’ practice started in 2009 in respect of those countries who have yet to satisfy the Global Forum of their credentials in this area of tax co-operation.
For those who have made no moves to automaticity two theories can be advanced to explain why this might be the case. First, their singular focus to conclude an acceptable number of agreements – TIEAs or tax treaties – which contain the 2008 standard with the right number of ‘relevant’ partners has meant that they have not sensed the change in the orientation of the OECD towards the existing standard. Indeed, the change is subtle as the mandate of the Global Forum is still based on their activity to advance information sharing ‘on request’ renewal of which is dependent on the successful multiplication of these arrangements.
Second, they have determined that the cost-benefit of ‘automaticity’ does not support its adoption and further they have recognised that even within the G20 there is still no agreement about ‘automaticity’ and as such there is no need to move prematurely replace the global standard with a new one. Indeed they may well be cognisant of the rule of public international law which warns of the creation of customary international law though the mere acquiescence by a number of states of a rule supported with statements of their intention to be bound by the rule.
Whatever the end game might be for the OECD in relation to the G20’s programme on tax information exchange, non OECD/G20 members the Global Forum must have their own agenda informed as it must by national considerations of economic development and the proper allocation of thin human and financial resources.
This was the case before the recession and after the recession has faded from memory will continue to be the case. For this reason the following points about the uptake (or otherwise) of ‘automaticity’ amongst G20/OECD members is instructive.
In the UK, although Her Majesty’s Revenue and Customs (HMRC) has expressed a preference for automaticity when compared to the ‘withholding’ method as a general proposition, that has not prevented the UK government from agreeing to the former method in respect of bank accounts and the extraction of ownership information from the authorities in Switzerland. Indeed the UK along with Austria and Luxembourg have proposed arrangements which do require any information exchange but rely instead on a receiving a share of the funds held abroad using the ‘withholding ‘method.
Within the European Union (EU) Luxembourg and Austria have blocked the attempts to plug the loopholes in the EU Savings Tax Directive which they believe to be an attempt to solidify ‘automaticity’ as the preferred means of tax information sharing because they rightly believe it needs wider dialogue before entrenched in EU law.
In the US the proposed changes to the tax law, which if successful will extend reporting by US banks to the Internal Revenue Service of information on interest bearing deposit accounts by all non-US accounts, does not mean that this automaticity between the IRS and the banks will extend to America’s TIEA partners. In the first place the authority to exchange taxpayer information is grounded not in US domestic statute but in bilateral treaties and secondly their stated concern about the confidentiality mechanisms in these countries also points to the fact that they may refuse to respond to ‘requests’ if they remain unsatisfied that the appropriate safeguards are in place.
The only country with which the US is minded to apply automaticity is Canada.
It is possible that ‘automacity’ may be the end game but we are not yet there and OFCs do well to remember that the flow of information will always be skewed in favour of the onshore jurisdictions whose residents are accessing the world-class competitive services that offshore financial centres offer.
Perhaps more importantly they should remember that the reason behind the tax information exchange agenda and the G20’s involvement was to place pressure on certain European financial centres indirectly under the guise of a universal agenda of TIEA affirmation which has not be successful because those countries have found other non-reciprocal ways of appeasing G20 members which are neither exchange based on ‘request’ nor on ‘automaticity ’.
In the circumstances it is perhaps useful to keep the focus of the OECD/G20 agenda on those recalcitrants at the epicentre of the global meltdown and allow those countries to be burdened with their fair share of the cost of re-building the economy in an open and cooperative way. In so doing the Global Forum had start the important work of bringing the economic dimension to the dialogue which so far has been marginalised as if the sustainability of the global agenda on tax cooperation is independent of the improved economic circumstances of OFCs.