Mutual trust

  • Author : Aileen Barry
  • Date : April 2011
ABOUT THE AUTHOR: Aileen Barry TEP is Director of Tax Investigations at DLA Piper

The Organisation for Economic Co-operation and Development (OECD) published in February 2011 a report on the various strategies being undertaken by its member countries to counter tax avoidance, by requiring mandatory disclosure of certain tax planning.1 Over the past few years, Revenue authorities have also experimented with a number of alternative disclosure initiatives, to encourage taxpayers to declare and settle historic tax liabilities. The term ‘disclosure initiative’ has been used, therefore, both in respect of disclosure of tax planning and of disclosure of tax liability. This article reviews the activities undertaken by OECD member countries in both respects.

To put the concerns of the OECD member Revenue authorities in context, Revenue authorities acknowledge that the diminishing tax returns are chiefly a result of the global credit crunch. They need to actively encourage the revitalisation of their domestic economy and, at the same time, discourage the use of tax planning that mitigates payment of taxes. Further, they need to combat tax evasion, especially where this was facilitated by banking secrecy.

Greater intelligence

First steps are being taken to improve the scope and quality of intelligence shared by Revenue authorities in relation to their taxpayers ‘sheltering’ assessable income or gains in overseas accounts, using both the EU Savings Directive and member state internal legislation.

The EU Savings Directive initially required the reporting of savings income paid to individuals. Certain member states and other states supporting the Directive could apply a withholding tax instead of reporting. As the rate of tax has increased since 2005, concern has grown that individuals permitting the deduction are likely not to have properly reported either the income or the source of the funds giving rise to the income. Pressure is now being applied to withdraw the withholding tax option, and to extend reporting to persons other than individuals.

New rules will come into force in 2013 which will ensure that the OECD standard for the exchange of information on request is applied consistently throughout the EU, and cannot be refused by any member state on the grounds of banking secrecy. From 2015, information on employment income, pensions and certain capital assets will be exchanged automatically, in so far as the member state has the data available.

HM Revenue and Customs (HMRC) issued a consultation document in December 2010 preparatory to anticipated legislation enhancing their data-gathering powers. Significantly, one of the proposed amendments will be to enable HMRC to obtain information from third parties, in respect of a class of taxpayers whose individual identities are unknown, where it is believed that such persons may have failed to comply with any provision of the taxes acts leading to serious prejudice of the assessment or collection of tax, and where such tax is tax of another jurisdiction with whom the UK has a reciprocal agreement for the exchange of information. The US Internal Revenue Service (IRS) is seeking to introduce legislation enabling it to gather information on interest paid to non-US residents, in order to be able to offer reciprocity.

Voluntary disclosure initiatives

Anecdotal evidence suggests that, in the UK at least, large numbers of individuals have made voluntary disclosure of historic liabilities when they knew their details were being reported under the EU Savings Directive.

Even more dramatically, when the ‘high street’ banks were served with statutory notices to report details of UK-resident customers known to have accounts with overseas branches, significant numbers of those banks made similar voluntary disclosures. The success of the Offshore Disclosure Facility (ODF), which basically provided a capped penalty and immunity from prosecution, was greatly aided by the fact that the banks notified most of their customers affected by the notices that their details were being passed to HMRC and alerted them to the ODF.

When HMRC realised that many high street bank customers were reporting details of other overseas bank accounts under the ODF, they thought they could capitalise further on the changing climate of opinion; it was becoming socially unacceptable to evade UK taxes through simple non-disclosure of overseas income. Rather too hastily, HMRC issued statutory notices to over 300 UK banks or building societies, on all UK financial institutions whom they believed might be linked in any way to an overseas jurisdiction, whether or not that jurisdiction was regarded as a ‘tax haven’ and whether or not they knew that a UK taxpayer held an account overseas. Those financial institutions needing to comply with the second wave of notices were less likely to advise their clients of the fact and of the New Disclosure Opportunity (NDO), launched by HMRC (on broadly similar terms to the ODF) to coincide with the anticipated compliance by the financial institutions with the statutory notices. This was partly because a considerable number of financial institutions did not hold, and could not access, the requested details of those UK customers with overseas accounts, and partly because the timescale within which a person could take advantage of the NDO had expired before the financial institutions had divulged the customer details. The NDO cannot be regarded as a success in terms of the man hours expended, frustration within the banking industry, lack of awareness by the general public and poor returns financially.

The gathering of intelligence by Revenue authorities remained a top priority, however. When the IRS was able to pressurise the Swiss government to pass amending legislation enabling UBS to divulge details of around 5,000 US taxpayers believed to have been evading US tax through their Swiss accounts, there was a knock-on impact to other countries sharing information with the US. The information-sharing among Revenue authorities continued to grow, following a spate of data theft by ex-employees of Liechtenstein and Swiss banks.

Investigation and prosecution of tax evasion is time consuming; most Revenue authorities only choose to prosecute those cases that are high profile, or considered ‘heinous’, where the attendant publicity should encourage further disclosure. In the main, it is most cost-effective to encourage voluntary disclosure. The latest UK disclosure initiative, the Liechtenstein Disclosure Facility (LDF) is finally proving successful in terms of the number and value of disclosures.

A number of OECD members have launched initiatives offering different incentives over the past years to encourage disclosure by their taxpayers of undeclared overseas banking and other accounts, with varying degrees of success. In all cases immunity is offered. Some offer no penalties, others anonymity, others a ring-fenced period of liability. Revenue authorities are having to think more inventively as to the rationale for any further opportunities offered, such that the new ‘deal’ is not as good as earlier deals, but still a worthwhile incentive.

Disclosure of tax planning

Hand in hand with such incentives as regard uncovering past tax evasion, is the action being taken by OECD member states to gather intelligence regarding tax planning and combat what is seen as aggressive tax avoidance. The most important single aspect is the Disclosure of Tax Avoidance Schemes (DOTAS) requirement, adopted by the UK, Canada, Ireland, Portugal and the US, and under consideration by a number of other OECD member states. The mandatory disclosure regimes share certain common features, such as disclosure of planning where confidentiality is a feature, or where fees relate to the tax ‘saved’, or with regard to specific transactions such as loss schemes, the conversion of income into capital or income into gifts, or disguised remuneration. DOTAS reporting must be undertaken in advance of the filing of tax returns, indeed the Finance Act 2010 brought forward the date for disclosure by extending the definition of the promoter of the scheme to include a person who makes ‘a firm approach’ to another with a view to making the scheme available. ‘Firm approach’ includes a marketing contact. The five-day disclosure period runs from the time of the ‘firm approach’ rather than as previously, when the scheme was ‘available for implementation’.

The Finance Act 2010 also introduces other changes to strengthen HMRC’s hand. These are: the quarterly reporting of scheme users, to enable HMRC to gauge the value and number of users of any particular scheme (and those who have failed to self-report in their tax return); powers to enable HMRC to find who the promoter of a scheme is from someone they believe may be the introducer; and increased penalties – from the previous maximum of GBP5,000 in total to GBP6,000 per day, or ‘such amount not exceeding GBP1 million as appears appropriate’ to the tribunal, bearing in mind the anticipated fees and the value of any tax advantage sought or gained.

Other initiatives

In addition to the mandatory disclosure rules, the OECD report notes the value of additional reporting obligations, the use of questionnaires, the cooperative compliance programmes, advanced rulings mechanisms, and providing reduced penalties in the event of failure of a scheme if the scheme had been voluntarily notified in the absence of a mandatory disclosure regime.

Examples of additional reporting obligations include: the intention to claim a deduction for interest paid to a related party (the Netherlands); advance notification of capital losses (Italy and the US); and an explanation of significant differences between tax and financial accounting and regarding estimation uncertainties. New Zealand and Italy have mandatory questionnaires targeted at certain groups of taxpayers undertaking high-risk transactions. Many countries use questionnaires to identify suitable cases for audit, especially in areas such as Pay As You Earn (PAYE) and customer-reporting compliance.

Countries that seek to encourage greater compliance – through specific programmes with incentives such as swifter dispute resolution or real-time agreements – by their largest corporate taxpayers include: Ireland, Italy, the Netherlands, New Zealand, Spain, the UK and the US.

The advance ruling mechanisms can be seen as a progression from the compliance programmes, to offer valuable certainty to businesses in exchange for information, ‘all cards on the table face up’.

How successful are the initiatives?

Measuring the real success of any of the actions taken is difficult. While the number of schemes notified can readily be ascertained, it is not possible to know how much further tax is being paid by persons choosing not to take up an avoidance scheme.

Media interest in companies known to have benefited from tax planning and attendant publicity may be as likely or potentially more likely to give board directors pause for thought when certain tax schemes are being offered.

The OECD report concludes by observing that gathering information about tax planning and the potential for tax evasion can deter taxpayers from both activities. Equally important, it recognises that creating a climate of transparency and compliance requires mutual trust. We have some way to go to achieve that state, but hopefully it will not be forgotten by our respective Revenue authorities.

Tackling aggressive tax planning through improved transparency and disclosure, OECD, February 2011.


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