By Dr. Francesca Amaddeo, Researcher at the Tax Law Competence Centre (SUPSI) in Manno, Switzerland
Tuesday was a great day for OECD-led Global Forum on Transparency and Exchange of Information. More than 386 delegates (64 ministers) from more than 142 jurisdictions met in Paris for the Global Forum’s 10th anniversary.
OECD Secretary-General Angel Gurria opened the celebration, remembering when, in September 2009, the Global Forum met to discuss proposals for a new governance structure and working methods. The new direction adopted was like a hurricane in the world of taxation, enshrining the end of the bank secrecy for tax purposes and creating a leveling of the global playing field within the international community.
It could be defined as the Big Bang in taxation, Gurria said. As a reaction to the 2008 financial crisis, the international community said “bank secrecy is over”. Perhaps, at that time, it was too early, maybe a risky statement. Now, after eight years is possible to confirm that bank secrecy for tax purposes is definitely over, Gurria said.
As of 2018, more than 100 jurisdictions exchanged information and more than 50 million bank accounts have been exchanged. The results are tallied by the peer review process, already in place for the exchange of information on request and in progress for the automatic exchange of data.
Actually, the problem is no more the lack of information, but rather how to analyze the massive data held by tax administration (“a nicer problem to have, but still a problem”). Angel Gurria wishes the Tax Inspectors Without Borders initiative, led by OECD and United Nations Developing Program) will achieve similar success.
Lots of results; however, a lot of work still needs to be done.
The fall of bank secrecy: is this the beginning of a new era?
The event, made up of five sessions, covered a series of hot topics, from bank secrecy to the protection of taxpayers, multilateralism, and implementation of the OECD/G20 base erosion profit shifting (BEPS) project.
As the statistics reveal, the work of the Global Forum has led to a successful revolution: the walls of bank secrecy and opaque structures have seemed to fall, opening the road to transparency.
The adoption of this new approach has not been easy. Indeed, jurisdictions needed to change their attitude toward transparency and cooperation. Some, especially developing countries, are still facing the implementation of the international standards, recording good results in managing the exchange of information to combat tax evasion and tax avoidance phenomenon.
In contrast, some developed countries, especially those that had a strong financial market, reacted in the opposite manner. For countries, such as Luxembourg, where this issue has played a key role, transparency and exchange of information have had a huge impact.
To understand if how exchange of information affected industries’ and companies’ behavior and the existing loopholes, it is necessary to understand the new worldwide “push” approach.
In addressing the issue of transparency (in its broader sense), we need to understand the way of thinking of the players in the new level playing field (especially banks and MNEs).
As Pierre Gramegna, Minister of Finance in Luxembourg said at the Global Forum celebration, there are four key concepts that have led to this huge change.
First, history: the financial crisis of 2008 could be considered the starting point, the (in)direct spark which started the fire of transparency and cooperation.
Second, the multilateral cooperation between the G20 and OECD marked a new way of working together against the illicit tax phenomenon, yielding the correct assessment and collection of taxes.
Third, society and, finally, information technology, has completely changed cooperation and assures the effectiveness of the mechanism.
Another important aspect is ethics and, as a consequence, the so-called tax morale. This affects two main aspects which seem to be far from each other, but which are, in fact, strictly connected: taxation and climate change. In both areas it is not possible to continue acting as before, so, consistently with the civil society values, a change is needed.
When, for instance, the tax transparency revolution was proposed in Luxembourg, it was difficult to convince actors on the financial sector. The main arguments were the need to level playing field, but, moreover, reputation. Indeed, pursuing transparency meant changing the image of the country, especially for those who have always been considered as tax havens or offshore financial centres.
Of course, business tax planning takes into consideration this aspect: as a result, some businesses have left while others remained.
The Swiss approach has been different. They did not need to convince players to implement the new standard. With the application of article 26 of the OECD model tax treaty governing the exchange of information between the two contracting states and the alignment to the international community’s will, tax certainty, granted by a safe and healthy policy system, represents a determinant in characterizing Switzerland as a safe harbor.
Indeed, from the German perspective, industrialized societies have a problem with trust. They do not trust the tax system: taxes are always too much or too many. This is why the work of the Global Forum is essential to strengthening multilateral cooperation which is actually working and represents the new reality.
What’s going on for MNEs?
The meeting was colored by a flavor of reciprocal growth and collaboration.
It is undeniable that an international tax system inspired by transparency and cooperation represents a profound revolution in MNE tax planning. Not all pursue aggressive tax planning involving a base erosion and artificial shifting of profit: for some countries it is necessary to grant strong protection to taxpayers.
Session 4 and 5 of the Global Forum meeting concentrated on this issue. The question is, regarding digital financial assets, whether cooperation between tax administrations is needed to tackle this new challenge.
Even for MNEs, one key element is represented by trust in government and in the relationship with tax administrations. The government must manage information collected properly and also grant protection to taxpayers.
The idea is to enhance cooperation between tax administrations in approaching tax evasion and improving efficiency in collecting taxes. These elements are central also for private sector investors and international corporations.
It is worth noting that there is an outstanding issue: consumption taxes. They represent 20% of OECD country revenues and are still outside the scope of exchange of information. Surely, this will pose a new challenge for the global forum.
The digital economy creates big opportunities for people all around the world. The problem is that domestic tax administrations have to catch up with the rapid developments of this phenomenon. Indeed, in digitalization, there are no physical borders, which means that it is necessary to cooperate with each other.
Once again, the work of domestic tax administrations is the base and only starting from that it is possible to build a cooperative framework upon which jurisdiction shall rely. As a next step, the cooperation will move forward to cooperation in recovering taxes in a cross-border situation.
So, finally, will the work Global Forum continue?
In conclusion, the work of Global forum is really impressive. In the last ten years, principles and the way of thought have been completely changed. From the exchange of ideas during this meeting, arose a consensus that we will reach a fair taxation system where each taxpayer pays his or her fair share of taxes.
This scope will be surely be reached through enhancing trust in government and institutions that grant protection to taxpayers. Only acting in this way it could be possible to understand taxpayer needs and needs and encourage individuals, but also, and overall, companies and MNEs to change their view, establishing a transparent and reciprocally honest relationship with tax administrations.
Even if results achieved are remarkable, there are other challenges waiting for the attention of the Global Forum.
Indeed, in the near future, digital taxation, especially fintech and virtual currencies, will represent the new challenge for countries and central banks.
Another challenge is the fair taxation level playing field in transparency, which is a key agenda for sustainable development, consistent with a parallel development of climate change and social contributions.
Finally, the evolutional iter for developing countries. The Global Forum has made significant achievements, but it is not time to stop: we must continue to enhance cooperation.
Francesca Amaddeo
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