Moving Tax Transparency to a New Level

Moving Tax Transparency to a New Level

November 2014


As governments around the world work together to combat perceived offshore tax evasion, it is clear that through transparency, governments aim to achieve tax compliance.

This article first appeared in G20 The Australia Summit: Brisbane, November 2014. Published by Newsdesk Media Ltd. In cooperation with The G20 Research Group, Munk School of Global Affairs, University of Toronto.

As governments around the world work together to combat perceived offshore tax evasion, it is clear that through transparency, governments aim to achieve tax compliance.

The automatic exchange of taxpayer information is a vital component to assist governments to achieve transparency. Ensuring profits are taxed where they arise and relieved from double taxation where appropriate, however, also contributes to tax compliance.

As part of this work, the Organisation for Economic Co-operation and Development (OECD), commissioned by the G20 governments, has been working on a number of projects in the area of international taxation: these are the automatic exchange of information (AEOI), base erosion and profit shifting (BEPS) and treaty relief and compliance enhancement (TRACE).

Automatic Exchange of Information (AEOI)

The AEOI is an OECD initiative, which provides the global framework for automatic, systematic and periodic transmission of taxpayer information between countries to combat tax evasion.

In February 2014, with the formal endorsement of the G20 leaders, the OECD’s Model Competent Authority Agreement (CA A) and Common Reporting Standard (CRS) were unveiled. In March this year, following an OECD meeting to discuss the CRS project, more than 45 countries – the so-called Early Adopters Group – committed to adopting the CRS from 2016. Dealing with the numerous reporting systems being put in place represents challenges for both governments and the financial institutions that are being asked to report account holder information.

Helpfully, on 21 July this year the OECD published commentaries on the CRS and CA A models. These commentaries are designed to assist both governments and business to implement the standard consistently.

Finally, on 21 September 2014, the G20 published the CRS implementation plan, which demonstrates its commitment to swiftly implement the CRS and translate it into domestic legislation.

In what governments describe as an aggressive but realistic implementation timetable, the CRS is expected to go live on 1 January 2016, with the first report expected by 30 September 2017.

With the immense amount of current and proposed changes in relation to the transparency of investors, as well as ensuring that there are no abusive tax practices, it is clear that the OECD has much work ahead. It will continue to play a vital role in international tax matters.

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Base Erosion and Profit Shifting (BEPS)

The OECD’s BEPS project is broadly focused on multinationals utilising tax- planning strategies to exploit gaps and mismatches in overseas tax systems to mitigate their exposure to local corporation taxes. Produced at the request of the G20 and introduced in July 2013, the OECD’s Action Plan on BEPS identifies 15 specific actions aimed to provide governments with clear international solutions.

These 15 actions each have a different delivery timeline, starting from September 2014, with the project’s end date being December 2015. The final outcome is expected to be a combination of reports, recommendations and changes to existing rules.

Treaty Relief and Compliance Enhancement (TRACE)

TRACE is intended to improve cross- border tax-relief procedures by means of a standardised system for the claiming and reporting of withholding tax relief, under both a treaty and a source country’s domestic law reliefs.

TRACE envisages a system to be used by any country that implements the proposed authorised intermediary (AI) system, for claiming tax relief under tax treaties and under the domestic law of a source country. It allows for foreign financial institutions to enter into an agreement with the source country’s tax authority and claim tax relief for their customers on a ‘pooled’ basis. The system outlines the documentation and due diligence procedures that the financial institution must follow, and the information reporting that is required.

TRACE compliance is achieved through the automatic exchange of taxpayer information and notes that, to the extent that information is exchanged in a timely fashion, the residence country could quickly inform the source country of an investor who claims to be resident thereof, but is in fact not. It also argues that countries receiving detailed investor- specific information would be “equipped with additional tools to focus their enquiries on the specific taxpayers that may present issues”.

While the focus of the global tax system has historically been on the elimination of double taxation, the focus of the BEPS work has shifted to preventing instances of double non- taxation, and source country taxation. However, it was not generally considered to have an effect on cross-border portfolio investment. In particular, if the first action (neutralize the effects of hybrid mismatches) and the sixth action (prevent treaty abuse) of the Action Plan are implemented, collecting legitimate tax treaty entitlements would further be hampered, as they move away from the streamlined tax-relief-at-source system envisaged under TRACE.

CRS deals with residence country taxation and TRACE deals with source country taxation and tax treaty relief.

The many benefits that both initiatives bring to governments and business alike are indisputable. With regard to transparency, for example, it can:

  • Provide timely information on non- compliance where tax has been evaded on either an investment return or the underlying capital
  • Help detect cases of non-tax compliance where previously tax authorities have not had any indication of non-tax compliance
  • Increase voluntary compliance, encouraging taxpayers to report all relevant information
  • Help with educating taxpayers in their reporting obligations, increasing tax revenues and helping to ensure the fair share of tax is paid in the right place at the right time
  • Conceptually, some countries may be able to integrate the information received automatically with their own systems, leading to pre-filled tax returns

Each of the projects mentioned above share a key feature, which requires domestic financial institutions to routinely provide cross-border administrative assistance to a government outside the country in which it is located.

With the immense amount of current and proposed changes in relation to the transparency of investors, as well as ensuring that there are no abusive tax practices, it is clear that the OECD has much work ahead. It will continue to play a vital role in international tax matters.

While the OECD understands the synergies between TRACE, CRS and, to a lesser extent, BEPS, it is important that all involved understand where synergies arise and that they are leveraged to limit the duplication of effort.

The introduction of a more streamlined and cost-effective tax- relief-at-source process is a long-held goal of the EU Commission, the OECD and the wider financial community. To help achieve this goal, some bold steps from governments are required. Specifically, governments must recognize that cross-border investment is commonplace. Source country taxation is applied anonymously to income paid to the end investors, who, due to the costs associated with claiming it, may not claim tax relief.

This can adversely affect not only source countries that otherwise may be unable to attract cross-border investment, but also residence countries due to the lack of information about the income of their residents or the excessive foreign tax credits they may end up having to give.

Simplifying Tax Compliance

Significant efficiencies can be achieved for businesses and governments by aligning implementation covering both AEOI and TRACE simultaneously. The simplification benefits deriving from TRACE implementation would not only offset many of the additional compliance costs associated with new information- reporting requirements in AEOI, but would reduce many of the administrative burdens governments currently face in running tax-relief systems.

Overall, these tax initiatives of AEOI, TRACE and BEPS are fundamentally connected and will undoubtedly move tax data transparency to the next level.


About the Authors

Miriano Giralt

Mariano Giralt
Managing Director, Head of EMEA Tax Services

Mariano Giralt is the Head of Tax Services for Europe, Middle East and Africa, Managing Director and member of the BNY Mellon EMEA Operating Committee.
In this role, Mariano is responsible for providing tax services strategy and development, market intelligence, sales and client facing support.

Before joining BNY Mellon, Mariano worked as Executive Director at JPMorgan Chase Treasury & Securities Services. Prior to this, Mariano was a Senior Lawyer at Cuatrecasas Law Firm in Barcelona. Mariano holds a Masters in Finance at the London School of Economics; a Masters in Laws at Georgetown University, Washington, DC; a Degree in Research in International Taxation from the University of Barcelona; a Degree in Tax Consultancy and Management at ESADE Law School Barcelona; and a Law Degree from the University of Zaragoza. Mariano is member of a number of relevant industry associations, is a frequent speaker at leading industry conferences and events and has compiled a number of thought leadership papers and publications.


Lorraine White

Lorraine White
Managing Director, Head of EMEA Securities Tax and U.S. Tax Services

Lorraine White works for the BNY Mellon as Managing Director, Head of Europe, Middle East and Africa Securities Tax and U.S. Tax Services where she provides custody tax technical support to the Banks Asset Servicing groups and clients in the EMEA region. Key to this is ensuring consistent tax servicing policy and integration of tax risk into the banks wider business agenda.

With an extensive career in Asset Servicing, primarily focusing on custody tax matters, Lorraine is an active participant in global initiatives focusing on simplification and harmonization of tax relief and tax compliance procedures for cross border portfolio investors, including the work of the EU Commission and the OECDs TRACE Group. She is current chair of the BBAs International Custodian Tax Liaison Group and an active member of the Association of Global Custodians Tax Issues Committee, both groups work regularly with tax authorities to eliminate or minimize existing discrepancies in the current tax relief processes and regimes from jurisdiction to jurisdiction.

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