Taxation Law - Global Transparency: High Net Wealth Individuals, Tax Information Exchange Agreements and Multinationals: Country by Country Reporting - Part 2
Author(s):Tony Anamourlis B.A., LL.B., MTaxLaw, GradDipLegPrac, SJD Candidate (La Trobe); ATIA
Publish Date: January 18, 2010
Other articles in this series;
The Importance of Tax Information Exchange Agreements and the OECD
An attempt to overcome some of the limitations associated with s 264A notices is by the establishment of Tax Information Exchange agreements (TIEA) with countries, which have some history and exposure to tax haven transactions. On this matter the OECD has issued a number of reports, which focus on TIEA’s and their role in addressing the issue of tax havens, tax avoidance, abusive tax shelters and money laundering[1]. The OECD has indicated that there are a number of principles relating to the transparency and exchange of information, which are relevant for tax purposes they are;
- Existence of mechanisms for information exchange on request
- Exchange of information which is relevant to the operation of domestic law in regard to both civil and criminal matters
- Respect for appropriate safeguards and limitations
- Confidentiality in respect to any information exchanged.
- The availability of reliable information, power to obtain information in response to specific requests by appropriate authorities [2]
The importance of effective tax information exchange and effective transparency between countries are vital to a country’s well being and integrity of its tax system with inter country transactions.
The OECD considered the lack of information exchange in its 1998 report. It considered whether a country or its territories had in place laws, or the administrative practices, under which businesses and individuals could benefit from strict secrecy rules and other protections against scrutiny by tax authorities, thereby preventing effective exchange of information on taxpayers benefiting from low-tax jurisdictions[3].
The OECD’s main fear appeared to be the dearth of information exchange, which was one of the key factors that enabled taxpayers to hide activities from domestic tax authorities. In this respect it may be argued that any country that does not provide adequate information exchange could be regarded at risk as potentially facilitating (a) the avoidance of taxes or (ii) money laundering.
The OECD had further concerns insofar as , the absence of an effective information exchange could be justified by a country on the basis of its strict confidentiality laws that prohibit financial institutions from disclosing details of account holders Also an information exchange could also be absent because a country had not entered into a double taxation agreement.
However, the OCED has come a long way in promoting and implementing strategies to combat International Tax Evasion and other illegal activities. In a progress report in 2006[4], the OECD reported that of the 47 preferential tax regimes that had been identified as potentially harmful, 18 regimes had been abolished and 14 had been amended to remove their potentially harmful features and another 13 were found not be harmful on further analysis. However, notwithstanding Switzerland’s absence from the 1998 Report, according to the OCED[5], Switzerland was ready to agree on effective exchange of information, in the context of its bilateral tax treaties, with respect to its holding companies.
In order to overcome the problem concerning the exchange of information and transparency between countries, a major hurdle that a country faces in seeking information from a tax haven concerns the country’s banking secrecy laws. It is argued that it is only when a country lifts its banking secrecy laws, and facilitates the exchange of information by TIEA’s that the difficulties in relation to exchange of information and transparency can be overcome. For example countries like Switzerland, Panama, Luxemburg, Liechtenstein, Belgium and Austria have in place secrecy laws that prohibit its employees from divulging any tax information to outside tax jurisdictions[6]. Luxemburg, Belgium and Austria are high on the list with respect to tax havens which operate within the European Union (“EU”) and the non-EU countries being Liechtenstein and Switzerland. These countries observe strict banking secrecy and as a result are able to attract foreign capital via a range of loopholes which facilitates the use of tax havens.
Nothwithstanding the fact that bank secrecy is an international phenomenon in tackling anti-avoidance activity and tax evasion in tax havens, in an attempt to overcome these problems, there have been a number of recents trends and reports which call for in the United Kingdom Country by Country Reporting (“CBC”) for Multinationals and a report which has been recently released by the OECD on “Engaging with High Net Worth Individuals on Tax Compliance”[7]. Each of these topics will be dealt with separately.
- The objectives of CBC, if implemented, will be critical in preventing tax evasion and tax avoidance. However the drawbacks to all this, is, it will create new rules and laws and significantly increase compliance costs; and
- The purpose of the OECD report on High Net Wealth Individuals is to offer revenue authorities, including the Australian Tax Office (“ATO”) response strategies in targeting high net wealth individuals who use aggressive tax planning (“ATP”).
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[1] Tax Co-operation, Towards a Level Playing Field, 2008 Assessment by the Global Forum on Taxation, OECD, 2008.
[2] Also see “Tax Havens and Tax Administration” ATO December 2008. In this report the ATO indicates that there are currently 31 jurisdictions which are considered to be tax havens
[3] International Tax Avoidance and Evasion (OECD, 1987), four related studies No 1, at 22, although the 1987 OCED report had used a “reputation test” to identify classical tax havens, the report had stated that there is no single clear, objective test which permits the identification of a country as a tax haven, at 21 and had listed a number of characteristics of tax havens, including bank and commercial secrecy.
[6] Andre Rothenbuhler, “The European Banking Secrecy Cartel Under Swiss Cover” http://www.taxjustice.net/cms/upload/pdf/Europ_banking_secrecy_cartel.pdf. Also see The European Court of Justice has thrown out a case in which it was asked to judge whether there was a conflict between a Luxembourg law on banking secrecy and a Belgian one on giving evidence in criminal proceedings. The case (C-153/00) concerned two employees of a Luxembourg bank who are refusing to co-operate in an investigation by Belgian authorities into tax fraud. But in a judgement handed down on December 10, the Court seems to have washed its hands of the matter, arguing that it was not sufficiently informed of the either the facts or the legal background. http://www.highbeam.com/doc/1G1-95160891.html.
[7] OECD, “Enagaging with High Net Worth Inidivuals on Tax Compliance. 2009.
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