In the global movement to stop tax avoidance and tax evasion, transparency has become the tool of choice. The world’s tax collectors have shared information about taxpayers for many years, and recent efforts are ramping up their ability to gather and interpret this data considerably.
From the work of the Organisation for Economic Co-operation and Development (OECD) and the adoption of the Common Reporting Standard (CRS) to the rising interactions between revenue authorities, a globally coordinated approach to information sharing is emerging. Global companies need to understand how to align their approach to tax reporting and documentation accordingly.
In a recent webcast, Sharon Katz-Pearlman led a panel discussion on the impact of this evolution with the Tax Dispute Resolution and Controversy Services leaders from KPMG International's network of firms in the United Kingdom, United States, Canada and France.
The latest developments related to tax information exchange in these countries are summarized below.
The UK's HM Revenue and Customs (HMRC) has been armed with strong information sharing abilities and uses them extensively in its tax enforcement activities. For HMRC, exchange of information occurs primarily in three ways: spontaneously, bilaterally and, more recently, multilaterally.
Under the UK's broad network of about 120 tax treaties and 39 tax information exchange agreements (TIEA), HMRC sends and receives about 1 million tax data records annually 1. This volume of data exchange is expected to increase over time.
Under these agreements, when HMRC or the other tax authority comes across data that may aid other tax authorities in their tax enforcement efforts, it is obliged to pass on the data to the other tax authority without request. HMRC makes about 6,000 of these spontaneous exchanges in the area of direct income tax per year. 2
The amount of spontaneous exchange of information will rise significantly with the advent of Common Reporting Standards (CRS) under the OECD's multilateral Convention on Mutual Administrative Assistance in Tax Matters. The United Kingdom is one of over 60 countries to have signed the convention, as are the United States, Canada and France.
CRS involves the systematic collection and transmission of taxpayers' offshore bank account data from the tax administration where the account is held to the tax administration where the taxpayer is resident so the resident tax administration can then verify whether the taxpayer has accurately reported their income.
The OECD's Aggressive Tax Planning Directory is a third mechanism that HMRC uses for spontaneous exchange of information. HMRC and other tax authorities contribute to this database of descriptions of tax avoidance arrangements in common use. The goal is to provide a tax inspection roadmap for other tax authorities.
Under the UK's tax treaties, HMRC sends and receives direct requests for specific taxpayer information. The application of many of the UK's anti-avoidance rules hinges on whether the taxpayer's motives in entering a transaction have a commercial purpose beyond reducing tax. Bilateral requests under treaties are often made to verify a transaction's intent and to test consistency of the taxpayer's reported facts and underlying explanations.
Increasingly, the exchange of information between HMRC and other tax authorities is occurring more collaboratively through multinational mechanisms. For example, HMRC actively participates in the European Union's joint audit program, in which multiple tax authorities collaborate on the tax audits of the same taxpayer and jointly agree on how transactions should be treated in each relevant jurisdiction.
The UK, together with the US, Canada and Australia, is a founding member of what is perhaps the most successful of these multilateral mechanisms: the Joint International Tax Shelter Information Center. Formed in 2004, JITSIC's membership has since expanded to include Japan, Korea, China, France and Germany.
Over the same period, JITSIC's original mandate of responding to specific abusive tax avoidance transactions has evolved into a more expansive collaboration, with tax authorities working side by side to understand tax arbitrage techniques and identify opportunities for remedial legislative or administrative change.
This evolution shows that effective, multilateral exchange of information has the power to not only address incidents of tax evasion but also to shape international tax policy more broadly. And the evolution continues: In October 2014, in what the OECD called "a significant step forward in global tax cooperation 3," a new JITSIC Network was opened for all members of the OECD Forum on Tax Administration to enhance collaboration on cross-border tax avoidance.
The United States has been one of the strongest voices in the global push for greater tax transparency. Politically, there has been a perception in the US that some taxpayers may be playing by a different set of rules where tax is concerned, and the US is expected to continue to pursue more tax transparency through both domestic reporting rules and international cooperation.
In 2004, the US helped found JITSIC, and the US has continued to press for more – and more effective – tax information exchange ever since. Among other things, the US has negotiated over 78 reciprocal agreements to exchange taxpayer information and over 100 bilateral intergovernmental agreements (IGA) to implement the US reporting and withholding provisions commonly known as the US Foreign Accounts Tax Compliance Act (FATCA).
The FATCA IGAs ultimately led to the OECD's multilateral Common Reporting Standard (CRS). Once CRS is implemented, starting with the first wave of implementing countries in 2016, it is expected to create a global web of information exchange that will make it much harder for taxpayers to hide money in offshore accounts. The US also takes part in the OECD's Action Plan on Base Erosion and Profit Shifting (BEPS), which is are also expected to greatly expand global reporting standards and exchange of information capabilities.
The US has led the campaign to induce bank secrecy regimes to develop effective exchange of information relationships with all relevant partners. As part of this development, the Global Forum on Transparency and Exchange of Information for Tax Purposes was reconstituted at the G-20's behest. The Global Forum has initiated a peer review process for ensuring implementing countries have in place measures to comply with the international standard for exchange upon request, including adequate measures to protect taxpayer confidentiality and proper information use. This resulted in an explosion of new agreements and additional impetus for countries to comply with the standard.
But keeping up with all of this activity is putting a strain on the Internal Revenue Service (IRS). Negotiating IGAs is resource-intensive, for example, and further requires the IRS to provide assurance that each IGA partner has robust systems in place for protecting the confidentiality and proper use of the information exchanged – a time-consuming but necessary process. New requirements for transfer pricing documentation and country-by-country tax reporting that are expected to arise from the OECD BEPS project would stretch IRS resources even further.
These new relationships and forms of international cooperation also highlighted issues related to the IRS' ability to obtain information domestically. For example, even with the increasing number of avenues for exchange of information, the US still had difficulty gathering data on disregarded limited liability companies having a single foreign owner and no U.S. income or operations. This led the US in January 2010 to revise the application for a US taxpayer identification number (required of all legal entities that open an account with a financial institution in the US to preclude the identification of a nominee individual, and instead to require the identification of a responsible party. Additionally, proposed US anti-money laundering rules would require the look-through of entities to their beneficial owner in a broader set of circumstances.
The IRS has also worked to streamline the process for obtaining information from taxpayers directly through changes to address the lengthy summons process and delays in securing bank account information. Among other things, the IRS has set strict new guidelines for responding to its information document requests, including tighter timeframes and more serious consequences for failure to respond.
These developments show that the United States' efforts to promote more exchange of tax information globally have strengthened the IRS's data-gathering capabilities internationally and also its ability to retrieve tax information within its own borders.
For US corporate groups, gathering and reporting information under new tax standards – in the US and in other jurisdictions – is expected to be difficult. Companies should be considering how they would capture the required data. As tax authorities increasingly collaborate and share information, companies should also consider how tax authorities might view this data and, where needed, take steps to ensure these perceptions would be in line with the company's objectives and risk profile.
Canada has a long history of exchanging information for tax purposes and has been at the forefront of the global movement toward broader information exchange. Recognizing the importance of having useful information in the first place, Canada has established a strong domestic framework to enable access to relevant taxpayer data.
The Canada Revenue Agency has sweeping powers to request information from taxpayers, as long as the data required is relevant for tax purposes. For domestic purposes Canada already gathers significant information regarding activities or transactions that may be relevant to other jurisdictions, including:
Canada also imposes withholding taxes (subject to treaty relief) and reporting for payments to non-residents, including for pensions, interest, dividends, rents and royalties. Withholding tax and reporting rules also apply to individuals and businesses performing services in Canada, even if treaty-exempt non-residents are providing the services.
Internationally, the CRA has authority to exchange information with other jurisdictions through its network of 92 bilateral tax treaties and 21 TIEAs currently in effect. For purposes of exchange of information under these agreements, no Canadian tax interest is required. Taxpayers should assume that any data they provide to the CRA could be shared with other tax authorities, regardless of the data's impact on Canadian taxes.
The CRA undertakes extensive automatic information exchange, primarily with the United States, on payments to non-residents. Under Canada's tax treaties, the CRA spontaneously transmits data that it presumes will interest another tax authority for its tax enforcement purposes.
Recently, the CRA has exchanged information with other tax authorities on certain cross-border financing arrangements identified as part of the OECD BEPS project. No assessments appear to have been raised as a result of these exchanges, which might indicate that the exchange was part of the CRA's efforts to better understand the tax consequences of these transactions globally.
The CRA is also known to have spontaneously exchanged information about advance tax rulings where the CRA believed that the foreign tax authority might want to be aware of the series of transactions in question.
In its longstanding and expanding practices for exchange of tax information, France has forged reciprocal relationships with 150 jurisdictions through 114 tax treaties, 29 TIEAs and 1 multilateral mechanism.
Since 2008, France has put priority on negotiating TIEAs with low-tax countries, and the French Tax Authority (FTA) is increasingly taking advantage of these agreements in its international tax enforcement activities. Many low-tax jurisdictions have signed TIEAs to ensure they meet France's exchange of tax information standards and avoid being named on France's blacklist of Non-Cooperative Countries or Territories.
For companies in countries on the list, a punitive 75 percent withholding tax applies on payments from payers in France and additional transfer pricing obligations must be met. The threat of being listed has caused countries to not only negotiate TIEAs with France, but also to ensure they comply with requests under the agreements fully and in a timely fashion. Currently, the only countries listed are Botswana, the British Virgin Islands, Brunei, Guatemala, the Marshall Islands, Montserrat, Nauru and Niue.
Traditionally, the FTA employed exchange of information procedures in tax audits primarily as a way to crosscheck information already provided by the taxpayer. Recently, however, the FTA has been making more sophisticated use of information exchange, making requests on such issues as business substance, profit levels and foreign tax payments and headcounts in foreign locations, as well as the beneficial ownership of income.
The FTA is also spontaneously exchanging detailed taxpayer data with other tax authorities on the French and offshore tax planning arrangements of foreign-owned corporate groups, and other tax authorities are responding in kind. For example, the Belgian tax authorities recently disclosed to the FTA the amount of an individual's director's fees paid in Belgium that had not been reported for French tax purposes, and the FTA reassessed the individual as a result.
The FTA has been known to use the information exchange procedure to extend the statute of limitations. Once a foreign exchange of information request has been made, a recently introduced rule allows the FTA to extend the normal 3-year reassessment period by up to an additional 3 years.
Beyond regular tax audits, the FTA is using exchange of information to gather data needed to justify surprise tax raids of suspected tax evaders. Previously, such raids targeted cash businesses and money laundering operations. Now the FTA frequently conducts such raids on French subsidiaries of foreign international companies. Before raiding a taxpayer's premises, the tax authority must establish a presumption of fraud or hidden activity. Exchange of information requests often provide this grounds, for example, on the basis of profit levels or lack of business substance.
France is also working to further strengthen its international exchange of information powers by negotiating specific agreements with sensitive countries give the FTA broad powers to investigate potential tax evasion and avoidance. For example, under a new protocol to the France-Switzerland tax treaty signed on June 25, 2014 and expected to be in force in 2015, France can request information on individual taxpayers (including names and addresses) and also to make group requests. France can also ask the Swiss tax authority for a taxpayer's banking information without knowing the financial institution holding the account.
A primary question is how the FTA will manage and interpret the huge volume of information it will receive under these new agreements. But a bigger issue is how the FTA will ensure taxpayers' rights are respected. The FTA is not obliged to inform taxpayers about the specific data it receives from other tax authorities. The FTA only notifies the taxpayer that information has been received and that an assessment is being raised as a result. This leaves taxpayers with little scope to challenge the information without going to court and bearing the associated costs.
This issue could become more pronounced as the FTA acquires more capacity to exchange of information and improves its ability to manage this data. Companies doing business in France need to determine whether their tax positions are sufficiently supported and documented to withstand the heightened potential of an FTA challenge.
Here's a replay of the webcast held on 23 October 2014.
* FIDAL is an independent legal entity that is separate from KPMG International and KPMG member firms.
1 Source: HMRC
2 Source: HMRC
3 Source: http://www.oecd.org/ctp/administration/fta-2014-communique.pdf
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.