A positive borne out of the recent global crisis has revealed the level of interdependence among nations, risks of unregulated and indisciplined globalisation and a need for transparent governance for cross-border transcations. The revelation has laid out a path for renewed global mission to ensure transparency in tax matters lead by the Organization of Economic Co-operation & Development; an institution which traces its roots to the economic crisis post World War II period.
Given the spotlight recent developments have put on businesses in international financial centers and unaccounted wealth in offshore banks, the need for implementing stringent standards on exchange of information across nations has topped Governmental agenda for OECD and non-OECD nations alike.
Several governments, including India would ideally like to avail of the opportunity to cleanse the system by extracting unaccounted money, otherwise stashed in offshore banking institutions and consider deploying them for developmental purposes or otherwise tiding over the liquidity crisis.
What is TEIA??
Exchange of information between the tax administrations of two or more states can take place bilaterally or multilaterally. Bilateral exchange could either be under Agreements for Avoidance of Double Taxation (popularly called tax treaties) or by way of Tax Information Exchange Agreements (“TIEAs”).
Tax treaties are bilateral agreements which define and allocate taxing rights between nations and provide for prevention of economic double taxation of same international activity. The provision for exchange of information in OECD’s Model tax Convention has been considerably revised in the past decade given economic realities. A major improvement in 2005 version was to override banking secrecy and other confidentiality laws serving as reason for countries refusal to exchange information.
In response to G20 communiqué last year, certain jurisdictions (Switzerland, Liechtenstein) relaxed their banking secrecy norms to provide for exchange of tax information with administration of foreign jurisdictions. Chain of events in past year has dramatically threatened offshore banking secrecy including Obama administration’s steps to disclose identity of 52,000 Americans hiding behind the Swiss banking secrecy law. Governments continue to experience hurdles on gathering tax information. In most cases, reason cited being a fine distinction between Tax evasion and Tax fraud. Evasion entails deliberate concealment of income; fraud in addition to evasion entails lying on official documents. Whereas, both are criminal offences in most jurisdictions, offshore centres consider evasion as a civil offence. In addition, countries which historically enjoyed protection under banking secrecy laws have insisted, easing of access to tax information should not lead to "fishing expeditions" and the cooperation would be limited to serious frauds proven by foreign authorities.
It is clear that tax treaties would significantly hamper ability of nations to request exchange of information unless the relevance of requested information is adequately proven. TIEAs are intended for use where a tax treaty is considered inappropriate for facilitating exchange of information. TIEAs though narrower in scope than tax treaties are comprehensive on the subject and lay down detailed guidance.
OECD Model and India’s progress
The 2002 OECD Model Agreement on Exchange of Information on Tax Matters was a result of OECD’s Harmful Tax Practices Project. The model though not a binding instrument contains two versions - bilateral agreements and multilateral agreements. In 2009, pursuant to global crises, the model agreement was endorsed by most key jurisdictions including by nations who have traditionally sought waiver under banking secrecy norms and client confidentiality norms. In addition, the UN has incorporated the Model in its Model Tax Convention.
Recent report of OECD reveals that not only has the standard been universally endorsed, but it is now being implemented by over 400 information exchange agreements. In wake of the global movement for implementation of tax transparency standards, the Indian Government has notified ten states with which India shall sign limited tax treaties and Tax Information Exchange Agreements (TIEAs). Prime Minister Manmohan Singh announced the government’s intention for broad basing India’s TEIA network, starting with Bahamas and Bermuda.
Alternate procedures for information exchange
Three approaches are evaluated for exchange of information between governments: 1) exchange on request; 2) spontaneous exchange; and 3) automatic exchange. The first approach is premised on the fact that a request for information can not support fishing expedition by requesting state and the confidentiality laws of the other state would be respected in spirit.
Spontaneous exchange occurs when one government possesses information which it believes would be of interest to the other and it spontaneously provides such information. This is implemented for non-tax offences. The automatic exchange of information can be the most productive, but most difficult to administer and implement for three reasons: 1) need for specific agreement between governments to share relevant information automatically; 2) requirement for voluntary transmission of voluminous data in real time; and 3) treaty planning resorted to by taxpayers to get overcome applicability of relevant TEIAs.
While the OECD commentary refers to the automatic approach, it is not in vogue as yet. Having said that, I believe in the context of emerging economies including India, an approach for automatic exchange would be wishful thinking than a pragmatic approach to implement transparency standards.
Challenge for effective implementation
Given the importance of TEIAs in shaping the fortunes of post-crisis era, it is important to understand challenges for effective implementation of standards. The most obvious impediment could be tax administration’s reluctance to share resident taxpayers’ data with foreign governments. This is particularly relevant for international financial centers which attract investments on account of tax friendly regime, simplicity & ease in regulatory compliance and ensuring confidentiality. On the question of ‘de facto banking secrecy’, most governments as a practice do not allow access to information from their financial institutions and banks. Such hurdles shall surely limit governments’ ability to implement the standards. The most watched development in this space would be the outcome of US and Switzerland TEIA, which skeptics believe is eroding the confidence of offshore banking.
In the Indian context, besides the outcome of a petition in the Apex court on billions (allegedly belonging to Indians) lying in Swiss banks, effective exchange behaviour requires an attitudinal shift on administrations’ part and a need for calibrated policy endeavours. Whilst the OECD Forum on Transparency & Exchange of Information (TEIA) has mandated a periodic peer review for member countries, unilateral behavioral alignment would yield more effective results. Recent amendments to the Income-tax law empowering signing of agreements with non-sovereign states and move to rush signing of TEIA is suggestive of the pace of developments. However, hurdles to implementation of such bilateral agreements are yet to be witnessed.
(The author is a Partner with BMR, and was assisted by Sumit Singhania; views are entirely personal)
