International Mutual Assistance in Tax Matters: A Helping Hand or a Noose Around Neck
In the wake of the financial crisis plaguing the world economy, countries came to the conclusion that new sources of income shall be opened as soon as possible, thus they focused their efforts on taxation, in particular on fighting against use of schemes of tax evasion. One of the critical elements of success in achieving the above goal is the ability of country to obtain information about taxpayers operating abroad.
One of the most common forms of international administrative cooperation in tax matters aimed at combating tax evasion and avoiding double taxation, which peaked at present, is exchange of information between foreign tax administrations.
The exchange of information is provided for by most double tax agreements (conventions) and is subject to the provisions of art. 26 of the Model Convention of the Organization for Economic Cooperation and Development related to taxes on income and capital and the UN Model Convention for the avoidance of double taxation between developed and developing countries. However, there are several legal instruments governing the exchange of information:
- Double tax agreements (conventions) on taxes on income and capital;
- Multilateral or bilateral agreements on exchange of information;
- Bilateral agreements on mutual assistance;
- The Council Directive 2011/16/EC of 15.02.2011 on administrative cooperation in the field of taxation;
- The Joint Convention of the Council of Europe and the OECD on mutual administrative assistance in tax matters;
- The Nordic Convention on mutual administrative assistance in tax matters;
- The EU Directive on the taxation of savings
The exchange of information is based on four basic principles that are recommended by the OECD and other international organizations. These principles are:
- The principle of “foreseeable relevance” – this principle clarifies to the countries-partners under agreement that the parties have no right to request information that is not relevant to the tax affairs of the audited taxpayer.
- The principle of “no fishing expedition“ – the competent tax authorities may request from the country-partner under agreement information concerning a particular taxpayer for the period covered by the tax audit and does not go beyond of a particular alleged tax offence;
- The principle of confidentiality – any information that a foreign country receives from its partner under agreement, shall be considered confidential and shall have a proper protection regime. Any information obtained may be provided only to “persons or authorities” (including courts and administrative bodies) related to the determination, collection, enforcement or execution of decisions on taxes”
- The principle of reciprocity – the base of the principle of reciprocity is the fact that the country that received information in response to a request sent earlier, upon receipt of such a request shall also provide the relevant information.
Currently the exchange of information on activity of taxpayer in different jurisdictions is becoming a norm amid growing number of joint tax audits, the main participants of which are the US Internal Revenue Service, the Inland Revenue Offices of the UK and Australia, the tax police of Canada. The objectives of the international tax exchange are the following:
- Addressing the negative effects of international double taxation for fiscal interests of the country;
- Prevention of conflicts between different national tax systems due to harmonization thereof;
- Increasing international commercial activity, increasing capital flows between countries;
- Development of a uniform conceptual apparatus, criteria of income origin and residency in the area of international taxation;
- Combating tax evasion in the international economic activity, ensuring tax sovereignty through the exchange of information between tax authorities.
At the international level over 800 international agreements on the exchange of information between tax authorities were signed and are regularly used. In 2011, after the G20 summit in Cannes, seven countries – Argentina, Colombia, Costa Rica, Ghana, Greece, India and Tunisia – signed an international tax agreement in the framework of the Organization for Economic Cooperation and Development. According to the data of early 2013, 37 countries joined this agreement.
In November 2011, participants to the sixth meeting of heads of state and governments “Big Twenty” held in Cannes actively discussed the issue of combating the international practice of tax evasion, where new methods of fighting against it were adopted. On 3 November 2011 representatives of Argentina, Australia, Brazil, Canada, China, Germany, India, Indonesia, Japan, Turkey, Saudi Arabia, SAR and Russia signed the text of the International Convention on Mutual Administrative Assistance in Tax Matters as developed by the Council of Europe and the Organisation for Economic Cooperation and Development.
The main purpose of the document is to define the core set of principles underlying the further international cooperation in the fight against tax fraud. Under the Convention the states-parties shall assume extended obligations on the exchange of tax information and shall establish mechanisms for joint conduct of tax audits, investigations, they are required to actively assist foreign partners in returning assets and capital hidden from national tax services.
In May 2012, the Organization for Economic Cooperation and Development came up with a new project “Tax Inspectors Without Borders” aimed at helping developing countries to improve their tax systems and efficiency of the fight against evasion from mandatory payments.
On 12 February 2013 the Organisation for Economic Cooperation and Development published the report on Base Erosion and Profits Shifting. This document covers the regulation of the global tax system and combating tax evasion. The basic idea is that adoption of modern international taxation standards remains behind the changes occurring in the multinational business and e-commerce development. The authors of the report proposed to develop a set of measures to eliminate uncertainty in the global tax system with non-members of the Organization for Economic Cooperation and Development, and the business community
It should be noted that recently the initiative of the Russian Ministry of Finance to improve the international exchange of information by signing bilateral agreements on the exchange of information with “low-tax” jurisdiction and the ratification by the RF of the multilateral Convention on Mutual Administrative Assistance in tax matters is actively discussed. This document was signed by our country back in 2011 and allows using in the future the automatic exchange of information with over 50 countries.
As for the bilateral agreements on the exchange of tax information, such agreements are signed in accordance with the model agreement approved by the Organization for Economic Cooperation and Development within the Global Forum on tax transparency.
The Global Forum, the membership of which is comprised of 121 countries, including many offshore zones, is the leading international body implementing the internationally agreed standards of transparency and exchange of information in the tax area. This is the continuation of the work started in the 2000s within the framework of the Organization for Economic Cooperation and Development. The Organization was reorganized in September 2009 in response to the call of G20 to strengthen international standards. In February 2014, the Organization for Economic Cooperation and Development presented at the Global Forum a new uniform standard for automatic exchange of information between tax authorities around the world.
At the EU level, the European Commission also seeks to establish a Europe-wide taxation information exchange system. Initiators thereof are the United Kingdom, Germany, France and Spain. In the latter two countries pilot tests are already performed. According to the European Commission President Jose Manuel Barroso, the information exchange system shall be created in the foreseeable future.
The implementation of the automatic exchange of information at all levels will contribute to the elimination of the institution of offshore jurisdictions in terms of avoidance schemes, rather than minimization of taxation. Consequently, the number of the most common schemes of profit shifting will decrease.
It is quite possible to expect tighter tax administration in Switzerland, Liechtenstein, Monaco, Andorra and San Marino. In this case, a compromise may be preservation of relatively low tax rates in these jurisdictions in exchange for greater transparency of the banking system and international transactions.
In the near future the European Commission may take the initiative for the countries outside the EU to be required to join any international agreement, other documents on tax administration standards. This will be a problem both for non-European offshore jurisdictions, as well as for ordinary trading counterparties. Particularly serious may be the issue of dependence of trading with a counterparty that is not member of the EU, on the availability of the relevant contract (agreement, etc.) with the country of its jurisdiction.
Today, Russia, as well as most other countries, faces tax evasion using low-tax (offshore) jurisdictions. One of such methods of evasion is consolidation of taxable income in such jurisdictions (offshore companies). In this case, the current international law does not provide for disclosure of information on non-resident income to tax authorities of other countries. However, transactions, as a result of which the income comes under the influence of low-tax jurisdictions, have maximum tax evasion risks.
Nowadays, tax authorities attach great importance to conclusion of agreements on the exchange of information with offshore jurisdictions. This is necessary to improve the efficiency of tax administration.
Annually the Ministry of Finance proposes to consider, and the Government of the Russian Federation approves the main directions of tax policy for the near future. The document itself is not a regulatory act, but it serves a base for bills and draft by-laws implementing government policy on taxes and duties. The Ministry of Finance posts on its website the Main Directions of Tax Policy for 2015 and the planning period for 2016 and 2017 as approved by the Russian Government on 01 July 2014. Here, on the website of financiers, the Government Resolution of 14 August 2014 No. 805 “On conclusion of agreements on the exchange of information on tax matters” is already available. All these documents are interrelated, and are based on the state tax policy.
The August RF Government Resolution No. 805 was developed by the Ministry of Finance pursuant to the instructions of the Government on the basis of a model agreement of the Organization for Economic Cooperation and Development. This Resolution of the Government will help increasing the transparency of financial flows between Russian tax residents and offshore zones. The document approved as a basis for further negotiations a Model intergovernmental agreement on the exchange of information on tax matters.
As part of the main directions of tax policy and the course of the authorities to deoffshorization of economy, Russia intends to hold negotiations with all offshore zones and low-tax jurisdictions to enter into intergovernmental agreements on the exchange of tax information to combat tax avoidance schemes. According to the estimates of the Ministry of Finance annually about 50 billion US dollars flows out from Russia to Cyprus and Netherlands only. About half of this amount is income that belongs to the Russian tax residents.
According to the Model Agreement the main tool that the FTS of Russia will be able to use on the basis of signed agreements, is sending request for information on tax dispute directly to the fiscal agency of the offshore zone, which will have to provide information to the FTS of Russia to the extent allowed by the current legislation.
Sending a request the FTS of Russia may expect to receive information not only on the owners of companies making transactions using offshore zones, but also about their entire chain. For example, as for trusts, information about their founders, trustees and beneficiaries would be obtained, and as for funds – information on their founders, members of the board of trustees and beneficiaries.
In the case of a signed agreement the party receiving a request guarantees provision of information held by banks, other financial institutions, nominees, trustees and other similar entities as well. The opposite party will have to submit the requested information no later than 90 days from the date of receipt of the request. This term shall be reduced to 60 days if the requesting party already has the necessary information.
To obtain tax information, the requesting party shall confirm that the request is based on all statutory reasons. In particular, the tax authorities will be required to report to the party the purpose of the request, information about the inspected person and specify the period for which the information is requested. In addition, they will have to explain why they believe that the required information is namely in this state, and confirm that in their country they used all possibilities to obtain it, except for those that will entail disparate difficulties.
Nevertheless, even if an agreement is signed under the approved form, the FTS of Russia does not receive unlimited powers to obtain information from an offshore zone.
The agreement allows not providing information about the activity of public companies, mutual funds or collective investment schemes, “if receipt of such information will result in emergence of disparate problems”.
The agreement allows the party to reject the received request, for example, in cases where information containing trade, business, industrial, commercial, professional or state secret, as well as the secret of relationships between client and lawyer is requested.
However the request can not be rejected, referring only to the fact that the tax claim, which was reason for the request, is disputed.
Another feature of the Model Agreement is the possibility of tax authorities of one country to be present during the inquiry or the audit of documents in another country if they receive the relevant permission from the foreign country, in which the tax audit shall be carried out.
All decisions on tax audit are made by the auditing country. Thus, the officers of the FTS of Russia will be able to personally attend the appropriate audit measures in the offshore zone.
Agreements are designed to help increasing transparency of financial flows between the Russian tax residents and offshore jurisdictions, to increase efficiency of tax administration.
The FTS of Russia reports on its official website that today a significant part of foreign trading (both exports and imports) is carried out by Russian companies through low-tax jurisdictions. So far, the receipt of the necessary information about residents of low-tax or offshore jurisdictions was limited or impossible.
It is obvious that the Russian Government will soon take steps to conclude agreements under approved model with the governments of offshore zones. In this regard, the companies making transactions through areas with preferential tax regime should take into account the relevant tax risks associated with possible enhanced control of the FTS of Russia.
To avoid the need to ratify each agreement on tax information exchange with offshore zones and low-tax jurisdictions the Russian Ministry of Finance plans to amend the Tax Code of the Russian Federation as to the possibility of participation of representatives of foreign tax authorities in audits in Russia, if it is stipulated by the relevant international agreement.
For the Russian Federation the effective exchange of information in tax matters is a very important and necessary tool to ensure its taxpayers complying with and implementing its tax legislation. Since a growing number of taxpayers are constantly involved in the cross-border activity, and only due to the tax information provided by partners under the double taxation agreements (conventions), the Russian Federation can verify the correctness of implementation by taxpayers of their obligations to pay taxes and fees.
So far, in the Russian law tax residency of a legal entity was determined either by the place of its state registration (incorporation), or by availability of permanent establishment of the entity.
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