A new global standard on the exchange of tax information intended to raise the bar on international cooperation will make it easier for the authorities to track down tax cheaters and fight tax evasion, says PwC. But the new standard also raises questions around privacy and cost implications, in particular for developing countries in Africa.
The Organisation for Economic Cooperation and Development (OECD) recently announced plans for a global common reporting standard for the automatic exchange of information between the tax authorities. The common reporting standard will require financial institutions and brokers to report information to the tax authorities in their own jurisdictions, which will in turn be shared with the tax authorities of other relevant countries.
This comes in the wake of a mandate from the G20 leaders to take action against tax avoidance and tax evasion, as well as to promote greater fairness and trust into the international tax system. The common reporting standard is expected to be adopted by all G20 countries, as well as other financial centres. To date 42 jurisdictions have committed to the new standard, including South Africa, Spain, France, the UK and the Isle of Man.
Elandre Brandt, PwC International Tax Partner and Head of the Africa Tax Desk based in Johannesburg, says: “The global standard does not replace existing exchange of information rules. It is intended to supplement current rules and measures.”
Banks from around the world will be required to trawl through the accounts of their customers, and then share that information with the various tax authorities.
The standard is far-reaching in that it is designed to catch a broad range of income, such as interest, dividends, and insurance policy pay-outs. The financial institutions required to report on information include banks, brokers, certain collective investment vehicles and some insurance companies.
One of the consequences of the recent economic uncertainty is that there has been a stronger focus on tax collection, compliance and international cooperation to increase revenue collections. The new standard builds on earlier initiatives within the European Union and globally. It is intended to run parallel with other rules and legislation, such as the US Foreign Account Tax Compliance Act (FATCA) and the EU Savings Tax Directive.
"Although the plan is positive, it has difficulties in that developing countries in Africa are likely to be excluded as they do not have the resources and capacity to set up the relevant structures to provide the authorities with the required information," says Brandt. Any illicit funds flowing from the developing countries to the tax havens are unlikely to be recorded. Furthermore, the standard does not make provision for any penalty for a non-compliant jurisdiction. There are also questions around the scope of privacy and the type of information that can be shared, he says.
South Africa fares well in terms of the exchange of tax information. South Africa is one of 18 jurisdictions that comply with global standards on the transparency and exchange of information, according to the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum is the multilateral framework within which work in the area of tax transparency and the exchange of information is carried out by over 100 jurisdictions which participate in the work of the Forum.
Brandt says that the authorities have a number of means at their disposal in which to exchange information, other than tax exchange information agreements. “These include multinational exchange agreements and double taxation agreements. South Africa has entered into various double taxation agreements with its trading partners, which usually contain a provision authorising the exchange of information between the countries.” Exchange of information agreements in other African countries are far and few.
“The global landscape is shifting significantly to one of transparency and the sharing of information. The OECD global common reporting standard may be the most significant international issue facing financial institutions today. More progress has been made in the last year than in the past decade with governments and authorities increasingly focused on countering evasive tax schemes, the use of tax havens and the ways that certain individuals exploit the tax system to reduce their overall tax burden,” concludes Brandt.