Fairness and transparency are the hallmarks of a new globally coordinated approach towards tax regulation, says Jo Huxtable, Tax Partner, Deloitte Guernsey. But there are questions about whether the changes are adequately resourced and aligned to principles of data privacy
The past decade has seen significant, dynamic changes in global tax policy. This has been driven to an extent by the financial crisis and austerity, which have led governments, the media and therefore the general public to raise questions about large multinationals and high-net-worth individuals and whether they are paying their ‘fair share’ of tax.
The result has been a global tax reset, driven predominantly by the Organisation for Economic Cooperation and Development (OECD), which has taken the key role in setting the new direction for tax policy across the world.
The OECD/G20 Base Erosion and Profit Shifting (BEPS) project was the first phase, culminating in the 15 action reports published in October 2015, which focused on addressing perceived inequities and inconsistencies in the global tax landscape.
The second phase, the Programme of Work on the Tax Challenges Arising from the Digitisation of the Economy, concerns how tax should be distributed between governments depending on the activities of taxpayers. It includes proposals that could have a significant effect on countries with low effective rates of tax. It is not limited to the taxation of the digital economy.
These discussions are still in progress, and it will be important for the Channel Islands to remain engaged.
Transparency and reporting
Equally important, and still evolving, is the drive towards greater transparency. The aim is to minimise, or even extinguish, the opportunity for income and profits not to be declared and taxed, and to restore faith in the international tax system. Due to the global nature of businesses, families and wealth management, this is best addressed through global standards, which bring consistency and minimise loopholes between countries.
Regimes such as the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS) and Country-by-Country Reporting (CBCR) are all in force. FATCA and CRS require financial institutions to report information relating to clients’ financial accounts to tax authorities, enabling them to check that income and profits are being reported on the tax returns of individuals.
CBCR is aimed at large multinationals, which must report information about the profits, people and activities of the group, which tax authorities can use to undertake high-level transfer pricing and BEPS risk assessments.
What lies ahead
In the meantime, however, there are new tax disclosure rules just around the corner. BEPS Action 12 set out specific Mandatory Disclosure Rules (MDR), which would require service providers and intermediaries to disclose certain cross-border arrangements that result in non-reporting for CRS purposes or that could mean the non-disclosure of beneficial ownership information.
The EU has decided to introduce its own version of MDR in the form of DAC6. The EU adopted DAC6 on 25 May 2018 and EU member states are required to introduce legislation by 31 December 2019. The new rules will require EU service providers, intermediaries and taxpayers to report details of cross-border arrangements where they have certain hallmarks and, in some but not all cases, where there is a tax benefit.
The Channel Islands are not bound to introduce DAC6, but as part of the commitments made to the EU Code of Conduct, the islands have agreed to introduce some form of mandatory disclosure rules as part of ongoing obligations to maintain high standards of tax transparency.
Rather than DAC6, the Channel Islands may decide to introduce the original OECD version of MDR, where the focus is on arrangements that undermine reporting obligations under CRS or where the use of an opaque vehicle could result in non-disclosure of beneficiary information to tax authorities.
With the rules on tax transparency casting an ever wider net, the obvious questions are whether tax authorities are realistically going to be able to process the information and, if so, whether they will be resourced to follow up the many queries and anomalies that will inevitably arise.
There is also another fundamental question about how this constant strive towards obtaining information conflicts with principles of data privacy. Tax professionals will need to be prepared to deal with the fallout on both fronts.