The Organisation for Economic Cooperation and Development (OECD) launched its report in June 2019,concerning tax transparency and exchange of information amongst countries for tax purposes, requiring entities to be taxed where their core financial activities occur. Loopholes in the international tax regime highlight that tax evasion is rampant through legal parking of profits in tax havens and actual beneficial ownership of assets by individuals and multinationals.
A decade ago, bank confidentiality and obscure firewalls forestalled efforts to detect concealed assets by tax authorities. Today, the major western financial centres are engaged in automatic exchange of financial information (vide OECD’s Common Reporting Standard CRS). In the decade ending in 2018,exchange of information agreements numbering 45,000were executed with 90 jurisdictions involving 47 million offshore accounts and transactions valuing around five trillion euros. Taxpayers disclosed previously concealed assets and income through voluntary compliance mechanism, with accumulated additional revenue streams of more then 95 billion euros.
On the economic side, bank deposits in international financial centres declined by 33percent over the past decade ($551 billion) attributable to the onset of automatic exchange of information (AEOI). Pakistan has not reaped this economic dividend so far.
Tax evasion and Corruption
Tax avoidance traversing different jurisdictions originates through Base Erosion and Profit Shifting (BEPF). A concern of OECD is that tax evasion is derived from corruption, money laundering, illicit drug traffic, human smuggling, and terrorist financing, and in line with OECD’s Oslo Dialogue, white-collar crimes are up for investigation. Japan has taken the lead incapacity building to detect tax evasion through founding of OECD’s Asia Pacific Academy for Tax and Financial Crime Investigation.
Preferential Tax Regimes and Transparency
The reports of OECD, entailing extensive, and at the same time, consistent information on the economic activities and income of multinational entities due to magnitude of cash flows, now provide access to across-the-border tax administrations. To level preferential tax regimes, previously facilitating multinationals, to avoid tax on their international activities contributing to BEPS over 250 regimes, have been reviewed in the last three years, and tax regimes recognised as detrimental have been amended or abolished. Preferential tax regimes, thus, can no longer be availed by countries to attract BEPS from other countries by targeting only non-residents and foreign income.
Treaty shopping centres have initialled the Multilateral Instrument, and tax administrations perceive better compliance amongst purchasers. It is essential that the Inclusive Framework possesses the capacity to benefit from the international standards essential to maintaining a global level playing field. The means to achieve this end are the Inclusive Framework and the Global Forum on Transparency and Exchange of Information demonstrated by OECD/UNDP Tax Inspectors Without Borders backed by the IMF, OECD, UN and the World Bank Group, ensuring that capacity building efforts are coordinated.
On reciprocity, Pakistan is bound to pass on banking information of its citizens to other OECD member countries
Digitalisation and Taxation
Tax challenges arising from digitalisation of economies remain focused on increasing digitalisation of business activities in different jurisdictions. The need of the hour is to tax the profits that multinational companies make from consumers located in such jurisdictions, particularly where these entities are not physically present in the markets. This year, 129 members of the Inclusive Framework of OECD proposed a policy memorandum, emphasising solutions based on two props, addressing the reallocation of taxing rights, and also a minimum tax, including nexus issues with three diverse proposals that would modify the existing rules grounded on the concepts of “user participation”, “marketing intangibles” and “significant economic presence”.
These propositions reallocate more taxing rights to the market jurisdictions. OECD also explores global BESP mechanism designed to tackle the unrelenting risk of profit shifting to entities exposed to none or negligible taxation, and to bring essential changes to the international tax framework. Tax administrations are enhancing their IT systems and gravitating towards consistency and tax certainty for both administrations and MNEs, through closer collaboration on manner and mode of assessment, identification and treating of tax risk.
Multinational and Preferential Tax Regimes
Preferential tax regimes allow multinationals to avoid tax on their international activities contributing to BESP. Since 2015, over 250 regimes have been reviewed, and virtually, all of the regimes that were identified as detrimental have been revised or rescinded. Countries now shy away from compromising regimes involving non-residents and foreign income.In addition, nominal or no tax jurisdictions had, in the past, scraped past scrutiny under the detrimental tax practice rules.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BESP of tax revenues enforceable sinceJuly1, 2018 extends to 88 jurisdictions, and will eventually influence over 1,500 tax agreements creating 600 fresh bilateral relationships.
Pakistan became a signatory to the Multilateral Convention on Mutual Administrative Assistance in tax matters in September 2016, and later, the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information on June 7, 2017 under the sponsorship of OECD. Pakistan, with a narrow tax base, relies extensively on corporate tax, hence country by country reporting of multinationals about their financial and economic particulars in the context of global allocation of their revenue streams will result in positive economic surpluses for Pakistan. On reciprocity, Pakistan is bound to pass banking information of its citizens to other OECD member countries, while ensuring confidentiality and secrecy of taxpayer data and information so that it is not accessible in the public domain.
Pakistan’s national tax administration will have to align with global financial system to inspire confidentiality, and to ensure a consistent and mutual flow of actionable tax relevant information with other OECD countries without discrimination.
Razeen Ahmed is a researcher in the areas of finance and energy Nadir Mumtaz research finance and energy