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The global trend towards transparency in tax

 

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Businesses are faced with greater demands for tax transparency. Are your policies and processes in place to manage the risks associated with this dynamic environment?

By Stephan Kuhn

Transparency may well be the watchword of our times. Leaders promise it; voters and shareholders demand it. Both the World Bank’s ease of doing business index and the World Economic Forum’s global competitiveness rankings take transparency into account in their calculations.

There is a global trend towards transparency in tax matters and, consequently, that is the focus of this issue. While tax authorities have long sought disclosure from taxpayers, the current push to greater tax transparency dates to the 1990s.

“Companies will have to start thinking now about how they will collect the data that may be required to be produced, and how they will explain it to tax officials.“


Tax transparency developments: from 1990 on

A project of the OECD targeting harmful tax practices that commenced in 1998 was refocused in 2001 on expanding and improving the exchange of tax-related information between jurisdictions. One outcome of this project was the 2002 OECD model agreement on Exchange of Information on Tax Matters.

Following a push by the G20 in 2009 when the global economy was suffering the effects of the global financial crisis and governments sought additional tax revenues, the number of Tax Information Exchange Agreements in place around the world increased markedly.

More transparency between taxpayers and tax authorities

The EU, with its Savings Taxation Directive, and more recently the U.S. with the Foreign Account Tax Compliance Act (FATCA) have sought to enhance intergovernmental information exchange between tax authorities.

FATCA also acted as a catalyst for the Common Reporting Standard released by the OECD in 2014. Now the OECD, through the country-by-country reporting proposals under the Base Erosion and Profit Shifting project, is seeking a fundamental change in the level of reporting by multinational enterprises to global tax authorities.

In addition, there have also been moves to increase the level of public disclosure of tax information. The 2010 Dodd-Frank Act in the United States, passed in the wake of the 2008 financial crisis which focused on financial institutions, also included a provision that requires public disclosure of tax information for elements of the extractive industries.

The EU, in its Capital Requirements Directive IV (CRD IV), has mandated public disclosure of certain tax and commercial information by affected financial institutions from 2015. The Commission will use private disclosures of this information made by institutions in 2014 under CRD IV to review whether such information should be made available to the general public going forward.

Demands for public disclosure of tax information present concerns for many. Such tax information is often complex, and therefore, could well be misinterpreted or misunderstood. Businesses are concerned about sensitive commercial information being released into the public domain.

The level of detail required would result in an increased cost burden to business. Making taxation information publically available will also not lead to enhanced tax ­compliance, in contrast to enhanced disclosure to tax authorities.

Initiatives seeking increased transparency between taxpayers and tax authorities derive their momentum from a number of factors that include development issues, ideas of fairness, government crackdowns on tax avoidance and advances in technology.

The complexities and questions involved are many: What exactly does transparency mean? What will a global standard look like? How will it be implemented? Who will receive the data, and how will they make sense of it? Is transparency an all or nothing proposition?

How can companies prepare?

Companies will have to start thinking now about how they will collect the data that may be required to be produced, and how they will explain it to tax officials.

A number of critical transparency initiatives, including the OECD’s proposal for country-by-country reporting, will only be finally agreed upon and implemented over the coming years through supra-national initiatives and national legislation.

The policy makers, legislators and administrators involved in implementing these initiatives will have to apply good judgment in balancing between the expected benefits from enhanced transparency and the associated increase in compliance costs, between defining principles and detailed rules, and between trust and excessive controls.

Businesses cannot ignore developments in tax transparency. They must be prepared to address these changes, and ensure policies and processes are in place to manage the risks associated with this dynamic environment.

Dialogue will also be required, not only with tax ­authorities but with other stakeholders demanding additional transparency.

This article is included in Tax Insights issue 12 (pdf, 3.26 MB).

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