The quick implementation of the global exchange of financial information for tax purposes has been described as “remarkable” and even “admirable”.
However, concerns remain about weaknesses in the legal framework and the ability of some jurisdictions to ensure taxpayer information is kept confidential and secure.
The Organisation for Economic Cooperation and Development (OECD), together with the G20 countries, started discussions in 2012 to prevent base erosion and profit shifting (Beps). It identified greater tax transparency on a global level as an important tool in the process.
By 2014 the OECD, with the help of the G20 and the European Union, had developed the Standard for Automatic Exchange of Financial Account Information in Tax Matters (Common Reporting Standard).
The standard aims to equip tax authorities with an effective tool to tackle offshore tax evasion through the exchange of information. The first exchanges took place in September last year (2017). At least 130 tax jurisdictions have committed to greater tax transparency.
The standard followed the principles of the US Foreign Account Tax Compliance Act (Fatca), which requires foreign financial institutions such as South African banks to report information about accounts held by US taxpayers to the US tax authority.
Andrew Knight, partner at Maitland Legal in Luxembourg, says the OECD has realised that putting a global system like the common reporting standard in place in such a short time is going to be challenging.
Marelize Loftie-Eaton, head of External Tax Reporting and Tax Administration Risk at FirstRand Group in South Africa, says the industry did not have sufficient time to run an intensive client communication programme.
She explains that in terms of the Financial Intelligence Centre Act, people had to provide specific documents before they could open a bank account.
In terms of the OECD’s reporting standard people are simply asked if they have “foreign tax liabilities”. This, she says, has been quite challenging to explain to people since the bulk of clients are ignorant about tax issues and concepts like “tax residency”.
She says most reporting entities and clients have not realised the magnitude of the implementation.
Knight says although the OECD has succeeded “admirably” in getting a framework in place, the devil is in the detail. He says in many respects the OECD seems to be behaving as if it is a lawmaker, which it is not.
The implementation handbook, the 50-odd pages of rules as well as the frequently-asked questions merely acts as guidance for countries committed to the exchange of information. It is not binding on any government, except the Cayman Islands which adopted the OECD rules directly into its legislation.
Knight says as more jurisdictions start to implement the exchange standard, the number of variations in the interpretation of the rules seem to increase.
Knight says there is a “constant process” where the OECD is providing additional guidance to how it thinks the rules should be interpreted.
One of the areas where these problems are most acute is with trusts. Because of the level of distrust against trusts the OECD and some member countries are adamant that trusts should be brought into the reporting regime.
In order to incorporate them they are now considered financial institutions, despite logic dictating otherwise, says Knight.
“So, in order to get them to be financial institutions it has been like hammering a square peg into a round hole – forcing the rules and massage them so that they apply to trusts,” says Knight.
Keith Engel, CEO of the South African Institute of Tax Professionals (Sait), says the trust issue is part of a larger problem that relates more to evasion by taxpayers involved in “Panama Papers structures”.
“At issue is the inability to easily trace ownership. Tracing ownership will be a continuing pressure point down the road,” he notes.
Aneria Bouwer, partner at law firm Bowmans in Cape Town, says some loopholes still appear to be exploited. This is almost to be expected with new anti-avoidance legislation, she says.
One way taxpayers are staying off the radar is by obtaining residence in a country which is not (yet) reporting in terms of the exchange standard.
“It is difficult to prevent this while there are still some non-reporting jurisdictions. The OECD is trying to clamp down on abuse by requiring participating jurisdictions to put in place anti-abuse rules to prevent any practices intended to circumvent the reporting and due diligence procedures.”
Data security remains another area of concern. One of the obligations a jurisdiction must meet in order to implement the automatic exchange of information, is the protection of information, says Bouwer.
According to the South African Revenue Service website, both the US tax authority and the OECD assessed the Sars and found it to be compliant with the international standards for the safeguarding of Fatca or CRS exchanged information.
Loftie-Eaton says stringent measures have been put in place by all participating countries to ensure that data exchanged is encrypted and that the channels used for reporting are secure.
“Reporting entities have not raised any concerns since implementation, and are comfortable with the security measurements,” she says.
However, Knight is concerned that some countries simply do not have the resources to do proper due diligence on the countries with whom they share information. There have been security breaches in the past, and there will be more in the future, he says.
The purpose of greater tax transparency is to ensure that countries receive their fair share of tax revenue and to detect money laundering and the financing of terror activities.
Knight says it is still too early to tell to what extend the exchange of information between tax authorities has delivered on these objectives.
However, the uptake of voluntary disclosure programmes, offered by tax authorities, can at least partly be attributed to the concern of taxpayers that secret offshore funds or structures will be exposed by the exchange of information, says Bouwer.
“There seems to be a realisation amongst taxpayers that their offshore structures should be able to survive disclosure to the relevant tax authorities.”