Tax disclosure: Getting to grips with the proliferation in information exchange
02 December, 2020
In October, the OECD Secretary General issued the latest tax report to G20 Finance Ministers and Central Bank Governors.
For those with an interest in tax, it was a highly anticipated report because of the scheduled progress update on ‘BEPS 2.0’ and particularly the Pillar 2 proposals designed to ensure internationally operating businesses pay at least a minimum level of tax through the introduction of four new cross-border tax rules.
With a large part of the Pillar 2 proposal having been leaked weeks earlier, the report itself didn’t provide much news on that front, but we expect further details in the first half of 2021 and will provide our comments on the relevance to the Channel Islands at that time.
Despite the slight anti-climax on Pillar 2, the report provided some food for thought on Exchange of Information (EOI). Having lived through the introduction or extension of TIEAs, FATCA, CRS, CbCR and several other acronyms over the past decade, we’ve all become familiar with the concepts and ongoing compliance. The report, however, helps provide some context around how far we’ve come and is a trigger to take a step back and consider whether action is required.
The OECD noted that, in 2008, there were 40 EoI relationships between ‘secretive jurisdictions’ and other countries. A little over a decade later, there are now over 8,500 such relationships and 2019 saw 6,100 bilateral automatic exchanges of information (AEOI) between 95 jurisdictions covering more than 84 million bank accounts totalling almost EUR 10 trillion.
Additionally, over 30,000 tax rulings have been exchanged since 2016 and 90 jurisdictions are engaged in CbCR reports on Multinational Entities.
Most businesses have built compliance with EOI into Business as Usual (BAU), but is there more we should be doing in light of the above statistics?
Transparency and co-operation are at the centre of the G20 and OECD’s drive to root out tax evasion and avoidance. The Channel Islands have been fully behind these moves; the numerous developments are summarised very nicely by this Jersey Finance infographic. Tax evasion has been a predicate offence under Jersey’s AML regime since 1999 and numerous peer reviews have found the islands to be compliant with international standards on AML and tax transparency. Additionally, we’re more than keeping up with international standards through compliance with the BEPS Minimum Standards, early adopters of CRS, CbCR and MDR.
Moreover, local firms have taken change in their stride, with very few EOI initiatives still sitting in project status. Despite the apparent transition to BAU, it is important we don’t rest on our laurels; taking a step back and considering how the numerous initiatives fit together, how they are being enforced and the risks presented to both financial service providers and their clients is an important next step.
Despite this, revenue authority requests and enquiries are increasing; enhanced information exchange provides authorities with significant insight into the cross-border financial activities and interests of their citizens and anomalies are proactively identified and challenged. The pressure to respond, particularly when thinking about the short turnaround times to deal with formal Tax Information Exchange Agreement (TIEA) notices, for example, can impact BAU, eat up resources for financial services businesses and heightens the risk of inaccurate responses where data sources are complex or inconsistent.
Dealing with the risks
Regulatory risk is now at the top of the boardroom agenda for financial services businesses. The introduction and enforcement of civil penalties and their expansion to regulated individuals further have sharpened this focus, together with high profile AML evaluations by MONEYVAL and the recently issued NRA.
Tax risk doesn’t always receive the same level of focus as regulatory risk, but it should do for the sake of businesses and their clients.
Financial services businesses are also facing greater scrutiny of the tax consequences of their client book and the risks associated with administering structures with unforeseen adverse tax consequences. Errors have the potential to see structures exposed to tax, interest and penalties, reputational damage for the business and the jurisdiction or even prosecution under the UK’s Corporate Criminal Offence (CCO) or local AML legislation.
We are seeing EOI audits commencing within the Channel Islands and, although not as high profile as regulatory failings, enforcement action is being taken against firms which have failed to meet their obligations, resulting in material penalties and significant time being invested in engaging with tax authorities and remediating accordingly.
Additionally, ensuring one’s reporting is accurate in the first place is crucial; multiple data points are being reported for clients under various EOI regimes and, if these aren’t consistent, the risk of enquiries is materially heightened. Whilst firms have transitioned most EOI projects into BAU, the next step is to review their cross-over to ensure consistent reporting from a single ‘source of truth’ and to continually test the effectiveness of policies and procedures and the accuracy of the reports themselves. Additionally, consolidation within the trust and funds sectors has meant some firms are running multiple programmes, policies and procedures to comply with each EOI initiative. This creates inefficiencies and complexities and heightens the risk of inaccurate reporting.
To move from the next stage of basic EOI compliance to a more efficient and lower risk model, there are a number of actions which should be under consideration:
- Make sure your policies and procedures are up to scratch
How robust are your EOI policies and procedures? This goes to both AEOI, with the vast amounts of data consolidated and reported each year as well as Exchange of Information on Request and normal tax authority enquiries.
If you’re an acquisitive business, does the initial tax due diligence and post-acquisition integration assess the effectiveness of EOI programmes and are you looking to consolidate the approach to maintain a simpler and lower risk overall framework?
It’s important to build processes and controls into BAU and ensure EOI is on your internal audit or compliance monitoring plans. You can support this through regular testing and internal or external independent reviews. - Approach tax risk as you do regulatory risk
Treat competent authority reviews like you would a regulatory review. This includes ensuring you have ready access to relevant information and your policies and procedures are in a fit state for sharing. Support a culture within firms that tax risk and the EOI process is critical to the business and its clients. Consider SME support in preparing the business for revenue authority audits, or if those audit discussions become contentious. - Develop an effective tax risk framework
To ensure you’re prepared for queries from domestic and foreign tax authorities, it’s crucial you’re comfortable with, and understand the consequences of, the business you’re servicing. Ensure your tax policies are up to date, covering the situations where tax advice is required and the frequency with which it needs to be refreshed.
It has been three years since the UK introduced its CCO legislation and there are currently 13 live cases (including some relating to financial services); have you refreshed policies, procedures and training on tax evasion?
A decade ago, many were speculating about where we would be by 2020. Now we’re here - and there still seems to be no slow down in sight - the numerous transparency initiatives are coming together like a particularly complex jigsaw and it’s crucial we all have confidence that the information being shared is timely, accurate and consistent.
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