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International efforts to combat tax avoidance and evasion

Tax avoidance is a legal practice, and internationally involves tax planning and arbitrage across borders. Tax evasion is an illegal action that is, in most countries, characterized as a crime. To combat both tax avoidance and evasion, increasing the availability of information for tax administrations has been at the core of the recent initiatives in international tax cooperation.

Estimates of tax avoidance

There are few estimates for tax avoidance, which lack uniformity and comprehensiveness in the assessment. Measurement of tax gaps are not made in most countries. However, as more tax information becomes more available, countries will be better able to estimate tax avoidance and tax evasion. The table outlines some tax avoidance estimates. The diversity of estimates points to the lack of a uniform methodological approach.

Estimates on tax avoidance in the form of base erosion and profit shifting

Estimate provider

Date of estimates

Volume

Underlying data

G20/OECD BEPS Action 11 Report

2015

$100-240 billion annual revenue loss

Corporate financial information databases

UNCTAD

2015

$100 billion annual revenue loss

Locational data on FDI flows and MNE profitability reporting

IMF staff paper

2014

$123 billion in short run revenue loss

Macro-differences in statutory corporate income tax rates and effective tax rates

Transparency is one of the main tools to deal with tax avoidance and evasion. To the extent tax authorities are aware of the transactions effected by its tax residents, there is less margin or scope in which for MNEs to plan diverting those transactions through low income tax jurisdictions in order to avoid the payment of taxes either in the source or residence countries.

Exchange of information for tax purposes

Exchange of information has long been included as a feature of tax treaty models. By agreeing to exchange information with respect to taxpayers, countries can become more aware of the global activities taxpayers are engaging in and impose tax that should be due.

The upcoming 2017 revision of the United Nations Model Double Taxation Convention between Developed and Developing countries is expected to bring a new revised version of the exchange of information provision, following the approval of the new United Nations Code of Conduct. The Committee agreed in 2016 to a proposal for a United Nations Code of Conduct on Cooperation in Combating International Tax Evasion. This Code supports the automatic exchange of information for tax purposes as the way forward for countries generally, but recognizes that it is vital for developing countries to exchange information, even if they are not ready for automatic exchange. The Code of Conduct has been approved by the Committee of Experts in 2016, and set automatic exchange of information as the new universal standard after ECOSOC adopted the Code of Conduct in a Resolution in 2017, during the ECOSOC Special Meeting on International Cooperation on Tax Matters. .Furthermore, the OECD model convention and commentaries is expected to broaden the scope of the exchange of information article to allow triangular, or multi-party exchange of information requests.

The four main initiatives geared towards transparency and the development of multi-stakeholder reporting standards are as outlined in the figure and described below.

Multilateral tax information exchange initiatives based at the OECD

 

Multilateral tax information exchange initiatives

Note: the Inclusive Framework on BEPS Implementation will have some responsibility for the country-by-country reporting aspects
Source: IATF

 

Mutual administrative assistance in tax matters

The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMAATM) was jointly developed by the OECD and the Council of Europe in 1988 to cover all forms of co-operation to tackle tax evasion and avoidance. It was amended in 2010 to align it to the international standard on exchange of information on request and to open it to all countries, in particular to ensure that developing countries could benefit from the new more transparent environment. 108 jurisdictions currently participate in the Convention, including 15 jurisdictions covered by territorial extension. The Multilateral Competent Authority Agreement for CRS, discussed below, is based on Article 6 of the MCMAATM.

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The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MCMAATM) was jointly developed by the OECD and the council of Europe in 1988 and amended via a protocol in 2010. The Convention covers all forms of tax co-operation to tackle tax evasion and avoidance. The Convention was amended to respond to the call of the G20 at its 2009 London Summit to align it to the international standard on exchange of information on request and to open it to all countries, in particular to ensure that developing countries could benefit from the new more transparent environment. The amended convention was opened for signature on 1 June 2011. Since 2009, the G20 has consistently encouraged countries to sign the MCMAATM including most recently at the meeting of the G20 Finance Ministers and Central Bank Governors Meeting in February 2016 where the communique stated "We reiterate our call for all countries to join the Multilateral Convention on Mutual Administrative Assistance in Tax Matters [...]".

The amended convention facilitates international tax co-operation. It provides for all possible forms of administrative co-operation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. This co-operation ranges from exchange of information on request, automatically and spontaneously, to assistance in the recovery of foreign tax claims. 

110 jurisdictions currently participate in the Convention, including 15 jurisdictions covered by territorial extension. This represents a wide range of countries including all G20 countries, all OECD countries, and some developing countries.

The Multilateral Competent Authority Agreement for CRS, discussed below, is based on Article 6 of the MCMAATM.

Global Forum: exchange of information on request and automatic exchange of information

Exchange of information on request can be facilitated by bilateral tax treaties or exchange of information agreements. The G20/OECD Global Forum on Transparency and Exchange of Information for Tax Purposes is a multilateral framework for implementation of transparency and exchange of information for tax purposes. The Global Forum currently has 139 members who commit to implement an international standard on exchange of information on request. In 2016, eight new jurisdictions joined the Global Forum. The first round of peer reviews on the exchange of information on request standard was completed in November 2016. The Global Forum evaluates the compliance of its member jurisdiction to its international standard, labelling them “compliant”, “largely compliant”, “partially compliant” or “non-compliant”. Failure to implement the standard will result in being labelled “non-compliant”. This standard may have negative international repercussions. Out of the 139 members of the Global Forum, 5.4 per cent are non-compliant, 12.1 per cent are partially compliant, 77.7 per cent are largely compliant, and 22.2 per cent are compliant. Fast-track reviews are being conducted until June 2017, and a second round of peer reviews under a terms of reference agreed in 2016 is now underway.

The Multilateral Competent Authority Agreement for CRS (CRS Agreement) enables automatic exchange of information on financial account information. In total, 100 jurisdictions have agreed to start automatically exchanging financial account information in September 2017 and 2018 – 50 jurisdictions will be undertaking their first automatic exchanges in 2017, and 50 jurisdictions will be exchanging in 2018. The Global Forum is to oversee the implementation of this standard. New Terms of Reference are being developed in 2017 under the Global Forum, to account for the new standard of automatic exchange of information as per the CRS Agreement. It is a multilateral framework agreement, with the subsequent bilateral exchanges coming into effect only between those signatories that mutually notify their willingness to automatically exchange information. As of May 2017, there are over 1,800 bilateral exchange relationships activated with respect to more 50 jurisdictions committed to the CRS.

Exchange of country-by-country reports

Country-by-country reporting refers to an annual report by MNEs to the authorities in the jurisdiction where they are headquartered, showing a range of financial and other relevant data for the MNEs activities in each tax jurisdiction in which they do business. The G20 and OECD agreed to a template for country-by-country reporting in 2015 and in 2016 the OECD released a standard for the electronic exchange of such reports between jurisdictions. It requires only MNEs with income above 750 million euros (or the equivalent amount under domestic legislation), to produce the reports. More than 90 countries have signed up to implement such reporting.

The Multilateral Competent Authority Agreement to Exchange Country by Country Reports (CBCR Agreement) was developed to allow automatic exchange of country-by-country reports. It is set to enter into effect in most of the jurisdictions that have agreed to it in 2017. 57 jurisdictions have signed the CBCR Agreement to date. At regional level, the European Union issued a Directive for automatic exchange of information of CbC reports, which came into force on the first semester of 2016.

Beneficial ownership

To discourage hiding of income and wealth, countries are implementing stronger rules on the disclosure and exchange of beneficial ownership information. A beneficial owner of an entity is the natural person that ultimately controls or profits from that entity.

At international level, the G20 and OECD, through the Global Forum, have used a standard set out by the Financial Action Task Force, which calls for all jurisdictions to have access to information regarding the beneficial ownership of entities and legal arrangements operating in their jurisdictions (as defined by the FATF), and to allow for its international exchange for tax compliance purposes. The G20 requested FATF and the Global Forum to produce proposals on ways to improve the implementation international standards on the availability of beneficial ownership information and its international exchange.  These proposals were presented to the G20 in October 2016 and further progress will be reported to the G20 in 2017. As of December 2016, 54 countries and jurisdictions have committed to an initiative for the systematic sharing of beneficial ownership information.

UN Committee of Experts on International Cooperation in Tax Matters

The Addis Agenda included a commitment to strengthen the effectiveness and operational capacity of the United Nations Committee of Experts on International Cooperation in Tax Matters, which has a special role in producing guidance by and for developing countries. In 2016 the Committee held two meetings, implementing the commitment in the Addis Agenda for increasing the official days of work of the body to eight days spread out over two sessions. The engagement between the committee members and ECOSOC was strengthened by the holding of an ECOSOC special meeting on tax back-to-back with both the December 2016 and April 2017 meetings of the Committee held in New York.

The Committee has approved, and in 2017 will be issuing, the following new products: (i) a new revised United Nations Model Convention and Commentaries (for launch in October) with a new provision on fees for technical services; (ii) a revised version of the Transfer Pricing Manual (digitally launched in April; official launch to follow in October), reflecting and giving guidance on transfer pricing practices of developing countries; and (iii) a new handbook on selected issues in the taxation of extractive industries by developing countries (for launch in October). The draft versions of these documents, and past versions used for discussion by the Committee members can be found in the webpage.

As 2017 is the last year of the fourth composition of the Committee, the United Nations Secretary-General will appoint a new group of tax experts as members of the Committee, in consultation with the Member States, for a new term starting in July 2017. Member States, in particular developing countries, should consider nominating qualified tax experts, with nominations of female experts particularly encouraged.

For further consideration by the fifth membership of the Committee, are two products on dispute resolution: (i) the updated version of the Guide on Mutual Agreement Procedure; and (ii) the United Nations Handbook on Dispute Resolution. Both products had their contents and outlines approved by the membership occupying the fourth mandate of the Committee, but are subject to further development by the next membership.

These documents are expected to provide further guidance to developing countries when drafting their domestic tax policies and accounting for MNE taxation in complex transactions, such as those involving the exploration of natural resources, and the application of an arm’s length price to a cross border transaction between related parties. The objective of the Model, Manual, and Handbook referred to above, is to build capacity in often underfunded tax administrations, so that they may raise revenues that will spur development in the long term.

During the 14th Session of the Committee of Experts, the Committee reviewed and suggested a provisional agenda, with key subjects that should be considered by the next membership of the Committee. Of particular importance are: (i) environmental tax issues of relevance to developing countries; and (ii) the taxation of the digitalized economy: issues for developing countries. 

Trust Fund for International Cooperation in Tax Matters

The Addis Agenda urged Member States to support the Committee and its subsidiary bodies through the voluntary trust fund, to enable the Committee to fulfil its mandate; including supporting the increased participation of developing country experts, at subcommittee meetings, where the inter- sessional work of the Committee is achieved; and increasing the participation of Least Developed Countries in the work of the Committee.

Despite the increase in the number of days in which the Committee meets, and the broadening of the Committee’s activities through the institutionalization of many of the subcommittees, there has as of yet been no additional funding to assist the secretariat serving the Committee which in 2016, is composed of three people, one of which only works half time for the Committee. Of the two permanent secretariat, only one is tax technical.

The Trust Fund in Tax Matters has never received any donations from any of the Member States, despite the many calls made by ECOSOC, although some donor agencies and bodies have voluntarily sponsored some of the Committee’s activities directly throughout its life.

Other measures to combat tax avoidance and evasion

In November 2016 more than 100 countries concluded negotiations, held under the auspices of the OECD, on a Multilateral Instrument (MLI) designed to implement relevant parts of the BEPS Action Plan. The MLI will open for signature by interested countries in June 2017, and on 7 June a signing ceremony will take place at the OECD. The MLI is a flexible instrument that gives choices to Signatories and may be adopted in total or in part. Thus pairs of signatories will need to work out bilaterally which treaty provisions are to be changed.  The instrument includes provisions to counter tax avoidance through treaty abuse and to enhance dispute resolution in cross-border tax matters.

The OECD report on BEPS Action 5 developed a framework covering the exchange of information on tax rulings issued by tax authorities to taxpayers that could give rise to tax avoidance concerns. A tax ruling is a written statement sought by a taxpayer from the tax authorities about the tax implications of a transaction. This framework is especially relevant for pairs of countries where there is no automatic exchange of information. For countries which have the necessary legal basis, exchange of information under this framework started taking place from 1 April 2016 for future rulings and the exchange of certain past rulings started being implemented on the 31st December 2016.

In June 2016 the OECD created a mechanism for peer review of the implementation of the BEPS Action Plan and monitoring of the impact of BEPS measures, which it has called “an inclusive framework for BEPS. The inclusive framework is thus responsible for the development of standards on BEPS related issues and reviewing and monitoring the implementation of the whole BEPS Package. Over 100 countries and jurisdictions have joined the inclusive framework. Regional tax organisations including ATAF, CREDAF and CIAT are observer members and are partners in a new series of regional meetings to facilitate developing country inclusion.