STEP

Title Research

Force for change

  • Author : Pascal Saint-Amans
  • Date : April 2011
ABOUT THE AUTHOR: Pascal Saint-Amans is Head of the Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes

The year 2009 will remain special in the history of tax transparency: the year of the ‘Revolution in tax transparency’, as defined by Angel Gurría, Secretary-General of the Organisation for Economic Co-operation and Development (OECD). In the run-up to the G20 Leaders’ meeting held in London on 2 April 2009, major financial centres around the world decided to change their policy in the area of tax cooperation. In February, Hong-Kong announced that it would put an end to its domestic tax interest requirement. Singapore followed shortly after. On 13 March, the four OECD countries that still had strict bank secrecy rules lifted their reservation to Article 26 of the OECD Model Tax Convention, thus committing to full exchange of information in tax matters.

The process has not stopped at the commitments made on the edge of the London summit, but has been followed by the conclusion of an impressive number of bilateral agreements meeting the OECD standard, now recognised as the ‘internationally agreed standard on transparency and exchange of information for tax purposes’. To date, more than 600 agreements have been signed, which provide for information exchange on request, where the information is foreseeably relevant, regardless of the existence of bank secrecy rules or a domestic tax interest requirement. This includes a growing number of tax information exchange agreements, now popular even among those jurisdictions that in the past refused to conclude them. In addition, the Joint OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance has been updated and opened to non-members, with a strong call from the G20 for all jurisdictions to sign on this powerful instrument.

This chain of events has completely changed the tax environment, resulting in a levelling of the playing field that small jurisdictions identified as ‘tax havens’ have been calling on for years. Jurisdictions like The Bahamas, Bermuda and the Cayman Islands have quickly shown the way to other Caribbean, European or Pacific jurisdictions. The change has also translated into the restructuring of the Global Forum on Transparency and Exchange of Information for Tax Purposes, originally established by OECD member countries and certain participating partners in 2000. In September 2009, the OECD responded to the new environment establishing a new and enhanced Global Forum, with an open number of members participating on an equal footing and a self-standing dedicated Secretariat based within the OECD. Having the small jurisdictions, the major financial centres, the OECD economies as well as all the G20 countries sharing the same objective and agreeing to peer review the effective implementation of the standard was a breakthrough change.

Since September 2009, the Global Forum has thrived, producing within a short time a number of peer review reports but also establishing a dynamic arena where all stakeholders draw some benefits: tax administrations of high-tax countries or developing countries benefit from enhanced information exchange; financial centres benefit from the level playing field; and the smaller jurisdictions benefit from technical assistance programmes designed to help them fix the deficiencies in their legal and regulatory framework that may impede them to fully exchange tax information to the standard.

Beyond governments, this change in the tax environment has an impact on all practitioners involved in offshore business. Initially, some feared that the widespread adoption of the international standard of exchange of information for tax purposes would have a negative impact on their business; there is now growing awareness that this may rather be a unique opportunity to develop business in the area of compliance. The Society of Trust and Estate Practitioners (STEP) has been working closely with the Global Forum Secretariat over the past year and has expressed full support to its work while pointing to some outstanding issues such as the need for greater confidentiality or the necessity that all stakeholders – including civil-law jurisdictions – understand the specificities of trusts.

Within one year, the Global Forum has achieved results: 18 peer review reports have already been published and 50 reviews launched. The Group aims to complete around 60 reviews before the next G20 Leaders’ meeting. The reports adopted so far are based on an agreed ‘Methodology’ for conducting the reviews and ‘Terms of Reference’ to assess the jurisdictions’ level of compliance with the international standard. Both documents were adopted in February 2010 as the first step towards the country review and constitute the backbone of the Global Forum’s work. Based on experience gained, the Global Forum has recently revised the ‘Methodology’ and the structure of the Handbook used by assessors in conducting the peer reviews.

The peer reviews

The main mandate of the Global Forum is to carry out a review of the way the international standard for exchange of tax information is implemented by members, and by non-member jurisdictions that appear to be of relevance to the work of the Global Forum. This exercise is ‘peer driven’ and it is fair to acknowledge that member jurisdictions – especially the smaller ones – are very keen to make sure that no jurisdiction takes advantage of not being a Global Forum member. The Global Forum now includes almost 100 member jurisdictions and the membership is increasing rapidly, with another 20 jurisdictions expected to join in 2011.

The schedule of the reviews of all member jurisdictions was approved in 2010 and is periodically updated. Based on a two-phase model, each of the peer reviews includes an assessment of the jurisdiction’s legal and regulatory framework (Phase 1) as well as assessing the application of the standards in practice (Phase 2). The ‘Methodology’ provides for all the details of a review: it is carried out by an assessment team of three experts, two coming from peer jurisdictions and one from the Global Forum Secretariat. A draft report is written in consultation with the reviewed jurisdiction. The draft report is later sent to a Peer Review Group (PRG), whose 30 member jurisdictions meet quarterly to examine the reports. The discussion is normally held in the presence of the assessed jurisdiction and the assessment team. Once approved by the PRG, the reports are sent to the whole Global Forum membership for adoption, either through written procedure or at the next available meeting. A report is adopted by consensus, with the possibility for one jurisdiction to disagree (‘consensus minus one’ rule, which is customary in peer review exercises). The review must be transparent and fair: as soon as they are adopted, the reports are published. They can be freely consulted on the Global Forum website.

As mentioned, prior to launching the reviews the Global Forum adopted ‘Terms of Reference’, which spell out the standard as contained in the OECD and UN Model Tax Conventions (Article 26) and in the 2002 Model Tax Information Exchange Agreement. The standard is broken down into ten essential elements against which the jurisdictions are reviewed. The essential elements themselves are further broken down into 31 enumerated aspects. The ‘Terms of Reference’ are used by assessment teams as the key elements against which jurisdictions’ legal and regulatory frameworks and actual implementation of the standards are assessed.

The ten essential elements of transparency and exchange of information for tax purposes
A. Availability of information
  • A.1. Jurisdictions should ensure that ownership and identity information for all relevant entities and arrangements is available to their competent authorities.
  • A.2. Jurisdictions should ensure that reliable accounting records are kept for all relevant entities and arrangements.
  • A.3. Banking information should be available for all account-holders.
B. Access to information
  • B.1. Competent authorities should have the power to obtain and provide information that is the subject of a request under an exchange of information agreement from any person within their territorial jurisdiction who is in possession or control of such information.
  • B.2. The rights and safeguards that apply to persons in the requested jurisdiction should be compatible with effective exchange of information.
C. Exchanging information
  • C.1. Exchange of information mechanisms should provide for effective exchange of information.
  • C.2. The jurisdictions’ network of information exchange mechanisms should cover all relevant partners.
  • C.3. The jurisdictions’ mechanisms for exchange of information should have adequate provisions to ensure the confidentiality of information received.
  • C.4. The exchange of information mechanisms should respect the rights and safeguards of taxpayers and third parties.
  • C.5. The jurisdiction should provide information under its network of agreements in a timely manner.

Each of the essential elements receives a determination for a Phase 1 review. The determinations are three-tier: ‘The element is in place’; ‘The element is in place but certain aspects of the framework need improvement’; or ‘The element is not in place’. In cases where key elements or too many of them are not in place, the jurisdiction will be considered as not able to move to a Phase 2 review. So far, six jurisdictions have been considered unable to move to a Phase 2 review until important steps are taken to bring them into compliance. Phase 2 review determinations are similar to FATF 4-tier ratings, from ‘Compliant’ to ‘Non Compliant’. The Global Forum, however, agreed to attribute an overall rating to each jurisdiction.

The first set of peer reviews commenced in March 2010. The reports describe each jurisdiction’s rules for ensuring that information is available, how it can be accessed by government authorities, and the mechanisms in place to exchange the information with foreign tax authorities. The reports include recommendations on how the jurisdictions can improve their cooperation in international tax matters. The deficiencies identified to date have commonly related to lack of information concerning nominees and trusts and the need to maintain complete accounting records. Regardless of whether a jurisdiction is able to move to the Phase 2 review, its efforts to remedy the identified deficiencies will be closely monitored.

Issues related to trusts

Issues related to trusts are of a recurrent nature. The relevant section in the ‘Terms of Reference’ provides for very ambitious requirements: ‘[j]urisdictions should take all reasonable measures to ensure that information is available to their competent authorities that identifies the settlor, trustee, beneficiaries of express trusts (i) created under the laws of that jurisdiction, (ii) administered in that jurisdiction or (iii) in respect of which a trustee is resident in that jurisdiction (Element A.1.4.)’ and to ‘ensure that reliable accounting records are kept (Element A.2.)’. In this regard, the legal obligations on trustees and trust service providers in both common and civil-law jurisdictions are being reviewed.

Obviously, the issue of trusts is not an easy one and the Global Forum has already acknowledged that further efforts would be necessary to properly assess the implementation of the standard in this area. As a result, the Global Forum agreed to further work on clarifying what measures or combination of measures need to be in place, and what form those measures need to take, to comply with the requirements pertaining to trusts set out by the ‘Terms of Reference’. To this end, STEP has been consulted and was given the opportunity to make a presentation at the last PRG meeting in February.

Further information

The changes in the international tax environment that have occurred over the past two years are impressive; at present, the common goal adopted by all Global Forum members is no longer controversial. Some practitioners may be wary of the changes; some others may see this as an opportunity to better focus their advice strategies and ensure improved compliance. In a remarkably short time, the Global Forum has been able to develop new instruments, agree on a specific set of ‘Terms of Reference’ and produce a number of reports (18). All these documents are a precious source of information for practitioners, who are strongly invited to contribute to their improvement by providing comments and practical feedback: the Global Forum’s goal is to produce documents that can make a difference in day-to-day practice. Collaboration with STEP is very much appreciated by the Global Forum Secretariat but also by all the members. As much more needs to be achieved in this area, this collaboration will clearly be long standing.

More information on the work of the Global Forum can be found in the ‘Background Information Brief’ on the Global Forum website: www.oecd.org/tax/transparency. As the Global Forum moves forward with its work, information will be available on this site on the outcome of the peer reviews and on relevant new developments in each of the Global Forum member jurisdictions.


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© 2011 Society of Trust & Estate Practitioners