Tax transparency is seen by many as an overdue attempt by governments to ensure entities and individuals pay their ‘fair share’, and is firmly on the table for a wide number of institutions and investors.
The automatic exchange of information (AEOI) between governments under the OECD-led Common Reporting Standard (CRS) initiative and its efforts to coordinate a comprehensive harmonisation of the global tax framework – the Base Erosion and Profit Shifting (Beps) project – are among the most prominent and far-reaching of recent reforms. These are only the most high-profile examples of a broader shift toward a more ethical and transparent tax environment which will fundamentally change how financial institutions interact with their clients and the tax authorities. The shift will also alter the roles and responsibilities of tax professionals within those institutions.
CRS is the latest step toward greater information-sharing by tax authorities on an automatic basis, starting with the European Savings Directive (EUSD) in 2005 and more recently US and UK Foreign Account Tax Compliance Act (Fatca), but its potential scope is unprecedented. With more than 100 jurisdictions having signed up for AEOI, increased reporting requirements will ultimately lead to tax authorities having a more comprehensive view of an individual’s investments than that of the individual’s financial intermediaries or service providers. This will raise the bar considerably in terms of the due diligence and recordkeeping expected of institutions regarding the tax status of clients. Over time, tax authorities will likely ask more targeted questions of institutions about their clients, based on superior intelligence.
As financial institutions ramp up their data management and due diligence capabilities, there is concern that CRS is moving too fast for participating jurisdictions. The infrastructure and skills deficits could prevent tax authorities from exchanging sufficiently accurate information ahead of the first CRS date for information exchange in September 2017. For participating authorities, many issues need to be resolved at short notice, from different conventions for address names such as street and house numbers to peer reviews between jurisdictions to the resolution of data privacy and confidentiality issues. Going forwards, tax authorities will expect financial institutions to do likewise, requesting evidence of sound data management processes and governance.
Similar to CRS in motivation, Beps is even broader in its strategic and operational impacts for investment managers and institutional investors. It stems from a common desire by governments to close gaps in domestic and international tax laws that allow multinational entities to shelter profits in low-tax jurisdictions. The 15 ‘Beps actions’ – focused on three pillars: coherence, substance and transparency – could alter policies on location, structure and financing arrangements. Although not aimed primarily at the institutional investment sector, Beps could prompt further expenditure on data collection, analysis, storage and dissemination, as well as the introduction of new policies and controls to ensure local compliance and global coordination and oversight. Implementing the appropriate data governance model may be a huge challenge, but not the only one. Tax departments that were historically equipped for filing returns and planning may now need to acquire the skills and the technology to design and oversee automated onboarding processes and data management systems in order to comply with Beps without negatively impacting the customer.
CRS and Beps might be co-ordinated by the OECD, but many non-OECD member countries – specifically developing countries – have signed up too. At the same time, supra-national non-tax reforms, such as anti-money-laundering rules, are also aimed at increasing transparency and information sharing. Local legislature is also aimed at increasing transparency and information sharing. The UK’s incoming corporate criminal liability offence, which will punish failure to implement sufficiently robust anti-tax evasion policies, is being closely watched in other jurisdictions that may follow suit. It’s hard to avoid tax reform, so to speak.
Some commentators have questioned the extent to which future tax policy may change following the UK’s vote to leave the European Union (EU). Privacy laws and greater inter-jurisdictional transparency via the automatic exchange of information will continue to evolve, but it is too early to speculate about any potential impact of Brexit.
It is important to keep in mind that the tax transparency agenda targets global tax evasion and the OECD’s focus is not EU specific. Within the EU, the harmonisation of corporate and income tax rates has been looked at a number of times, but even here it is too early to comment on any effect Brexit may have.
What is clear is that the sheer scale of the tax changes being formulated is overwhelming and the outcome as yet unknown. But institutions and investors can breakdown the impacts of the reforms into manageable chunks to support their preparations. As Socrates said: “To move the world, we must first move ourselves.”
Lorraine White is global head of Securities Tax and Tax Technical Research at BNY Mellon