The OECD Common Reporting Standard (CRS) which is designed to give effect to the new Automatic Exchange of Information (AEIO) standard is the latest addition to global co-ordination efforts to counter tax evasion; and builds on other information sharing mechanisms found in tax treaties, Tax Information Exchange Agreements (TIEAs), the OECD Multilateral Convention on Mutual Assistance in Tax Matters, FATCA and the EU Savings Directive.
It applies not only to income earned by corporate monoliths but also to individuals.
Since it is meant to implement the OECD AEIO standard it is broader in scope than information exchanges contemplated under FATCA.
Planned or existing FATCA compliance machinery in the private and public sector will not be sufficient to satisfy the CRS. What will be needed is a flexible approach which will meet the dictates of the existence compliance models while being capable of quickly and cost-effectively incorporating the expected changes, additions and modifications to global information sharing which will occur in the short to medium term.
Mauritius has just joined a list of 46 countries including the UK Overseas Territories and Crown Dependencies who have indicated that they will adopt the CRS by the 31st of December 2015. The list does not include the United States.
Banks are not the only entities who must comply with the CRS but the term financial institutions includes some entities that are excluded from FATCA Model 1 IGAs such as financial institutions with a local client base, local banks, certain retirement funds, financial institutions with a low-value accounts, sponsored investment vehicles, some investment advisors and investment managers and specified investment funds.
New ‘on-boarding’ procedures adopted by financial institutions will see some clients being dropped; and others will find it increasingly difficult to find a bank that will want to take them on as clients.
Not all financial institutions will survive the implementation of the CRS. The cost of compliance and the risks associated with non-compliance will be too high for some.
In like manner not all International Financial Centres will survive the global drive towards integrated mechanisms for information sharing.
No-one can be assured of confidentiality of the information transmitted. Already some some reports suggest that countries like the US will reserve the right not to exchange information if the confidentiality of their citizens cannot be adequately safeguarded by the state requesting the information.
What will happen to the mountain of information identified, collated, collected, verified, assimilated, transmitted and stored has to be determined at the firm level and the country level.
The IRS has announced that ‘FTCA-phishing’ has already stated; it will only be a matter of time before similar problems are faced under the the CRS.
The CRS has the potential to accelerate the purging of financial and quasi-financial institutions. For many OFCs –sooner rather than later- a decision about whether or not to continue to be involved in the competitive provision of financial services will have to be made as the cost of CRS implementation, compliance and monitoring; coupled with the emerging elements of the BEPS project; and pre-existing obligations under the transparency and information exchange protocols fast develop into a complex web of rights, roles, and responsibilities, the beginning the ending of which cannot, at this stage be determined with any certitude.
(IMF Chief Christine Lagarde)
Speaking at the end of the G20’s first meeting of 2014, Christine Lagarde, former French Finance Minister and now IMF chief backed OECD plans which would allow countries to ignore inter-company contracts aimed at channelling profits into tax havens.
She acknowledged that “governments have to invent new concepts just as quickly and as well as those companies are inventing their optimization schemes.”
(OECD Secretary-General, Angel Gurria)
According to OECD Secretary-General Angel Guerria, the proposed sweeping international tax reforms are not targeting multinationals but insisted that though they have a legitimate expectation of not being exposed to double taxation in the countries where they operate, “they have to contribute; their fair share has to be put on the table.”
(Australian PM Tony Abbott)
Also clear from the post-meeting briefings is that Aussie PM, Tony Abbott, is staking his country’s credibility on the successful implementation of an aggressive plan of international tax reform.
This should not come as a surprise since Australia is one of the most heavily reliant countries in the OECD on corporate tax receipts.
So fixed on the tax reform agenda is Australia, that,in response to a further comment from Lagarde that climate change should also be a G20 priority, PM Abbott warned against pursuing a ‘cluttered’ agenda.
Finance Minister Flaherty’s Federal budget predicts the current deficit in finances to continue until 2016 when he expects a surplus of 6.4 billion.
Like his counterparts around the world his February 11th budgetary statement focused on job creation, innovation and infrastructure.
As a member of the G8, G20 and the OECD, Flaherty also addressed international tax reform in the areas of tax transparency and the prevention of tax base erosion and profits shifting (BEPS).
It is for this reason that Canada’s 2014 budget merits more than a passing interest by treaty-based offshore financial centres (OFCs).
In this regard, Flaherty has called for comments from stakeholders on a series of questions designed to inform a national action plan to combat tax avoidance, including:
- What are the impacts of international tax planning by multinational enterprises on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
- Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
- What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
- What actions should the government take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors?
Following submissions on treaty shopping consultation paper,the budget confirmed that the government now believes that a treaty-based approach would not be as effective as a domestic law rule.
As a result the budget invites comment on what the general outline of such a domestic rule should look like.
Main Purpose Test
Minister Flaherty also confirmed that Canada has opted to use a “main purpose” approach to its treaty shopping rule, rather than the specific “limitation on benefits” approach favoured by the U.S in its treaties.
Under such a provision, a benefit would not be provided under a tax treaty to a person in respect of an amount of income, profit or gain if it is reasonable to conclude that one of the main purposes for undertaking a transaction – or a transaction that is part of a series of transactions or events – that results in the benefit, was for the person to obtain the benefit.
Presumption of ‘Conduit’
Furthermore, in the absence of proof to the contrary, it will be presumed, that one of the main purposes for undertaking a transaction was to obtain a benefit under a tax treaty if the relevant treaty income is primarily used to pay, distribute or otherwise transfer an amount to another person that would not have been entitled to an equivalent, or more favourable benefit, had the other person received the relevant treaty income directly.
Safe Harbour Presumption
Under a safe harbour presumption, and subject to the conduit presumption, it would be presumed, in the absence of proof to the contrary, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if one of the following conditions is met:
- The person carries on an active business in the state with which Canada has concluded the tax treaty and, where the relevant treaty income is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada giving rise to the relevant treaty income;
- The person is not controlled, directly or indirectly in any manner whatever, by another person that would not have been entitled to an equivalent or more favourable benefit had the other person received the relevant treaty income directly; or
- The person is a corporation or a trust the shares or units of which are regularly traded on a recognized stock exchange.
The proposed treaty shopping rules would apply to all of Canada’s tax treaties through inclusion in Canada’s Income Tax Convention Interpretation Act.
It is interesting to note that the new anti-treaty-shopping measures announced in this year’s budget are illustrated using the following examples well-known to onshore and offshore financial centres:
- sub-licensing of royalty income through a favourable treaty jurisdiction,
- payment of dividends through a holding company located in a favourable treaty jurisdiction; and
- the continuation of a company into a more favourable treaty jurisdiction prior to the realization of a capital gain.
To the extent that Canada has rejected a treaty-based approach to treaty-shopping in favour of a domestic route, its OFC tax treaty-partners will want to monitor the continuing national dialogue on how transitional relief and coming-into-force measures could apply.
Amazon, bEPS, Delaware, Dubai, ethical investment, EU Savings Directive, FATCA, FATCA IGA, HMRC, llc, Luxembourg, Merkel, Obama, OECD, OECD Global Forum on Tax, receipt-lottery, shell companies, tax avoidance, tax evasion, tax haven, trust, windfall tax
Your summary of the biggest tax, trade and investment headlines affecting International Business and Financial Services.
France Attacks US Tech Firms.
U.S and Listed Multinationals in Mexico Tax Avoidance Probe.
Obama Rhetoric on Offshore Profits Criticised.
Ethical Fund Manager Pulls Amazon Investment.
New Pay-Up First Tax Avoidance Plan Criticised.
EU Parliament Urged to Ban Shell Companies
HMRC Gives Cayman Islands Account Holders 30 Days to Disclose Affairs.
Merkel’s Party Treasurer Quits Over Bahamas Trust.
Cayman Islands Gearing Up for OECD BEPS Programme.
OECD Releases New Draft on Transfer-Pricing Documentation.
Americans Renouncing Citizenship up 221%.
Ghana Suspends Windfall Tax; Some Aren’t Happy.
US – New Zealand FATCA Talks Underway.
Delaware LLC Bill Does Nothing for Transparency.
Dubai International Financial Centre Records 14% Growth in Company Formations.
Foreign Affairs Minister Insists Luxembourg Not a Tax Haven.
Luxembourg Won’t Block Expansion of EU Savings Directive
Portugal’s Receipt-Lottery to Fight Tax Evasion.
(Here’s What You Missed Last Week and a Look Ahead.)
Your Summary of the biggest tax, trade and investment headlines affecting International Business and Financial Services
Safe Havens Regain Appeal.
EU’s New Plan for Safer Banks.
Obama Renews Corporate Tax Reforms
Fear Be Dammed: Why It is Time to Invest in Emerging Markets.
State Bank of India Turning to Facebook and Twitter for New Customers.
Nigeria Seals Off 23 Companies for Non-Remmittance of Employee Taxes
A View from Budapest: Tax Dodgers Always Ahead of the Game
Why Where You Trade is Everybody’s Business
HMRC Claims £100M Victory in Tax Evasion Case.
FATCA Fuels IRS Amnesty, But Advocate Calls it Harsh
Slovenia Initials FATCA Agreement with US
UN Says Top Tax Haven in 2013 Received More Investment Than Brazil and India.
How Panama Can Become the ‘Singapore’ of the Americas.
What Hosting the G-20 Means for Australia.
Australia Announces Offshore Banking Reforms.
The Irish Times Examines the Rise of Jersey as an Offshore Giant.
Africa Told to Seize the Opportunities from Global tax Reform.
Hungary Rejects OECD Advise to Tax Wealth.
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British Virgin Islands’ Minister of Finance believes that competition and the dictates of the global tax transparency agenda continue to have a negative impact on the territory’s principal money earner – financial services.
The significance of this activity cannot be overstated as its contribution to government earnings is estimated at 93.7%.
Finance Minister Orlando Smith is right to be concerned because the close of 2013 saw the BVI blacklisted by France amid a storm of controversy about that territory’s ability to effectively fulfil its treaty obligations to France under their 2010 Tax Information Exchange Agreement. More here.
BVI’s competitiors for business – Jersey and Bermuda – were also blacklisted by France but received a much welcomed ‘gift’ as they were removed from the list days before Christmas.
Despite assurances by Finance Minister Smith that France is satisfied with the process it has in place to deal with information requests under the treaty, so far no such indication has been given by France.
As a result, investors with assets in the BVI remain exposed to the application by France of a 75 percent withholding tax.
It is little wonder then that in his January 14, 2014 Budget Speech Minister Smith referred to the territory’s International Tax Authority, which he said has “made significant inroads in the management and fulfilment of the BVI’s international tax obligations.” He went on to say that he expects the unit to produce a “paradigm shift in the manner in which the BVI deals with its international tax obligations.” More here.
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angel gurria, Brussels, European Union, Frank Barry, harmful tax competition, Ireland, Netherlands, Offshore financial centre, Organisation for Economic Co-operation and Development, Tax competition, tax haven, Trinity College Dublin
Ireland is not a tax haven and has never been one!
So says the secretary-general of the Organization for Economic Co-operation and Development (OECD), Dr Angel Gurria.
Dr Gurria was responding to an announcement made in Brussels that investigations into the tax systems of Ireland, the Netherlands and Luxembourg are to be carried out at the request of the European Union.
Frank Barry, professor of international business and development at Trinity College Dublin, also declared recently that Ireland is not a tax haven during a speech to the Joint Oireachtas Subcommittee on Global Taxation.
Ireland agreed with plans discussed in the June G8 Summit in Co Fermanagh regarding cracking down on international tax evasion.
I however beg to differ. Here’s why
With such well placed ‘protectors’ you have to wonder if non-European Offshore Financial Centres patterned after the ‘Irish’ model can expect such robust defense.
It is worth recalling the 1998 OECD Harmful Taxation Initiative when the OECD described European low tax, treaty-based financial centres as ‘preferential’ jurisdictions and non-European OFCs and ‘tax havens’.
Funny how the more things change the more things remain the same!
The BIG question is why the rush to defend Ireland’s sovereign right to attract investment through competitive taxation?
Central Bank, China, G-20 major economies, G20 2013 Summit, G20 g20Russia, OECD, OECD BEPS, Organisation for Economic Co-operation and Development, Saint Petersburg, tax avoidance, tax evasion, tax haven, Vladimir Putin
G20 Leaders will tomorrow send a clear signal about their commitment to combat corporate tax avoidance.
Chairman of the Group, Russian President Vladimir Putin has already made this intention clear in his August 28, 2013 Address in advance of this week’s G20 Summit of Heads of Government.
Outlining what he considers to be the accomplishments of the G20 under his leadership, he stated:
“Another major accomplishment includes the work undertaken on reforming tax regulation fighting tax evasion. The G20 Action Plan on Base Erosion and Profit Shifting developed with the support of the OECD can be by all means considered the most prominent step towards modernization and coordination of our countries’ tax policies in a hundred years.”
It is interesting to note less than a month after the G20 Meeting of Finance Ministers and Central Bank Governors endorsed the OECD Action Plan on Base Erosion and Profit Shifting (BEPS); the Plan has been recast as a G20 Action Plan without an alterations or amendments. This despite widespread concerns about the Plan from civil society and the international business community.
The key elements of the G20 BEPS Action Plan are as follows:
- A crackdown on tax regimes found to have too soft an approach to multinationals deploying overseas finance subsidiaries through establishing a new international benchmark for appropriate taxation of controlled foreign companies.
- New mechanisms to fast-track the introduction of OECD recommendations rapidly around the world. And a new approach to measuring the extent to which national tax coffers are being drained by multinationals artificially shifting their profits internationally to lower their tax bills.
- Wider measures to combat predatory tax competition policies emerging in some financially stretched countries, risking a “race to the bottom” climate on tax. The UK’s new so-called “patent box” tax break for intellectual property companies will come under scrutiny.
- A raft of treaty updates to neutralise the tax advantages of complex financial instruments, schemes and structures, including hybrid capital, interest payment deductions and over-capitalisation.
- Tougher rules to block transfers of high-value and mobile “intangible” assets, such as brands and intellectual property rights, to tax havens where there is little or no associated business activity.
- On-line multinationals with extensive warehouse operations in an overseas country, such as Amazon, to be required to pay local tax on any profits arising from sales in that country.
- Multinationals to be forced to disclose to every tax authority a country-by-country breakdown of profits, sales, tax and other measures of economic activity such as headcount.
- A requirement on multinationals to disclose the most aggressive “tax planning” structures to the authorities otherwise often relying on limited, local data that does not show the impact of transnational schemes to lower tax.
It is also expected that the G20 Leaders will formally signal the abandonment of the ‘on request’ standard for exchanging confidential taxpayer information in favour of a new model of international tax co-operation based on automatic exchange of information in accordance with the OECD Multilateral Convention on Mutual assistance in Tax Matters.
Although not yet ratified by the G20, last week China signed the OECD Convention ensuring that at the end of the Summit, President Putin can state that the G20 has accepted the OECD Convention as the exclusive means of ensuring compliance with the new global standard.