International Law and the Global Forum on Transparency and Exchange of Information for Tax Purposes

The first automatic exchanges of tax information took place in September 2017 and implementation will continue through 2018 based on Common Reporting Standards (CRS) among 102 countries and jurisdictions through the framework of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Forum).[1] The automatic exchange of information (AEOI) allows tax authorities to receive financial account information about their taxpayers from foreign authorities without having to send a specific request. It is expected to increase tax transparency in a significant manner by making it easier for states to obtain their tax information.

The Forum is a self-standing body, founded in 2000 by the Organisation for Economic Co-operation and Development (OECD) to accelerate information exchange between its member states and offshore financial centers (OFCs). OFCs are jurisdictions through which banks and other agents provide financial services to non-residents. Historically, OFCs have attracted foreign assets from developed states by lowering the tax rates and reducing transaction costs. Relying on banking secrecy laws that prohibits financial institutions from disclosing customer information to foreign authorities, OFCs are also used to mask the identity of beneficial owners.[2] In the late 1990s, OECD started to tackle the harmful tax activities of OFCs. The creation of the Forum was a part of this project.

In 2009, OECD decided to restructure this organization to systematically strengthen the information exchange mechanism in response to the demands of the Group of Twenty (G20) member states, in particular the United States and European Union (EU) members, to secure their tax revenues after the global financial crisis.[3] It encouraged OFCs to join the Forum, started to collaborate with other intergovernmental organizations, and adopted new rules for strengthened cooperation, as will be discussed below. This reorganization of the Forum and its standards regarding information exchange have raised a question of whether the Forum as an institution has changed the nature of international tax law practice. This Insight will provide a brief overview of the mechanisms of tax law cooperation, and then analyze the Forum’s unique structure, functions, and challenges.[4]

An Overview of the Development of International Tax Information Exchange

There is no international law that regulates substantive tax law because this area of law is incorporated into the fiscal policy of individual states and thus inherently unsuitable for harmonization.[5] In addition, states are often hesitant to strengthen inter-state cooperation on taxation because it might allow other states to interfere in domestic affairs. States nonetheless have cooperated with each other to obtain asset information for their taxpayers, which is indispensable for collecting tax revenues.

Conventionally, states have pursued information exchange on a reciprocal basis. Since the early 20th century, states have negotiated double tax agreements that require state parties to provide information related to taxation as long as it does not conflict with their domestic laws.[6] In the 1990s, states began to execute Tax Information Exchange Agreements (TIEAs), to secure their potential tax revenues by increasing the transparency of banking transactions.[7] The structure of the TIEAs remained the same as the double tax agreements.

Efforts were made to establish a comprehensive international regime for tax cooperation. The 1988 Convention on Mutual Administrative Assistance in Tax Matters[8] was the first major multilateral instrument in this field. The Convention provides various forms of assistance beyond the existing bilateral agreements, including AEOI, spontaneous exchange of information, and simultaneous tax examination.[9] However, the categories of cases where AEOI and its procedures should be done remained to be determined by mutual agreement of the state parties.

In 2003, the EU adopted the Savings Directive, which endorsed a multinational AEOI program for the first time.[10] While it applied exclusively to EU member states, the EU observed that these programs reduced the cost and the time of inter-state information exchange.

After the financial crisis of 2007 to 2009, as states began to seek more transparent financial systems to secure their tax revenues, the 2010 Protocol of the 1988 Convention was adopted in line with a request from the G20 states.[11]

At the same time that the Protocol was concluded, the United States enacted the Foreign Account Tax Compliance Act (FATCA). Under this Act, foreign financial institutions (FFIs), which are located outside of the United States, are required to report the account information of U.S. citizens to the Internal Revenue Service (IRS). Otherwise, they are subject to a 30 percent withholding tax on certain U.S.-source payments made to them.

After FATCA was enacted, concerned financial institutions raised the possibility of the emergence of a multitude of different and potentially conflicting reporting regimes arising under EU and U.S. transparency efforts.[12] They requested that OECD establish a single global reporting standard. This request coincided with the restructuring of the Forum. Using the requirements provided in the 2010 Protocol and the implementation standards of FATCA as baselines of the CRS, member states of the Forum agreed to strengthen inter-governmental cooperation on tax matters.[13]

Distinctive Features of the Global Forum

Two features distinguish the Forum’s efforts to promote information exchange from existing bilateral tax agreements.

First, the Forum ensures that member states engage in cooperation based on common criteria adopted by the OECD Council.[14] Its core mission is to secure efficient mechanisms for exchange of information upon request (EOIR) in each domestic jurisdiction. Reliable information must be available and states must have the power to obtain and provide such information in response to a specific request in a timely manner. Enforcement of the tax law must respect the safeguards, limitations, and strict confidentiality rules that each state enacted in accordance with CRS.

The Forum also promotes AEOI in an integrated manner. The member states of the Forum may incorporate CRS in bilateral treaties or sign on to the CRS Multilateral Competent Authority Agreement, which is based upon Article 6 of the 2010 Protocol.[15] Once states and jurisdictions adopt this form of cooperation, they are to obtain tax information from financial institutions within their territory in accordance with the CRS and automatically exchange that information with relevant states on an annual basis. Information subject to this procedure includes account holders’ information, the account balance or value, and sales proceeds credited or paid with respect to the custodial account.[16]

The second distinctive feature of the Global Forum is the peer review, performed by a group of thirty countries and jurisdictions.[17] In the first phase, the group reviews each country’s laws. In the second, it assesses the effectiveness of information exchange. Its recommendations are not legally binding, but there is pressure to incorporate the recommendations into national laws.

The Forum now collaborates with the Financial Action Task Force (FATF), an intergovernmental body established in 1989 by the initiative of G7 to make recommendations on the regulation of money laundering and anti-terrorist financing. FATF is in charge of dealing with certain offenses, which states are obliged to regulate under multilateral conventions[18] and a series of Security Council resolutions.[19]  Notwithstanding the difference in their mandates and missions, improving financial transparency has been the top agenda of both organizations. This is why in 2016 the G20 Finance Ministers called on the two entities to propose new ways to implement FATF recommendations that address beneficial ownership requirements.[20] After FATF made its first report to G20 in October 2016, the Forum and FATF continued to work together closely.[21]

Challenges to the Due Process Requirements

The major challenge of this expansive exchange of tax information is safeguarding the privacy of individuals. OECD has recognized that taxpayers have the right to (1) be informed of an information request and its essential content, (2) participate in the process of gathering information, and (3) appeal the legitimacy of the request.[22] However, the existing information exchange agreements provide limited security against potential human rights violations. In general, the standard of the safeguard is that of the receiving state. In other words, the received information is to be treated in the same manner as information obtained under the domestic laws of the same state.[23] Concerns arise when the protection, in particular those designed to shield rights of privacy, differ from one state to another.

In addition, the tax information obtained may be used by the authorities of the receiving state to counteract crimes such as corruption, money laundering, and terrorism financing. The 1988 Convention prohibited this practice, but the 2010 Protocol eliminated the bar.[24] There remains the possibility of circumvention of due process because the collection of financial information through administrative procedures is often simpler than evidence gathering through criminal procedures. The use of the information in a criminal procedure is subject to certain conditions, namely (1) such information may be used for criminal purposes under the laws of both states and (2) the competent authority of the supplying state authorizes such use.[25] However, once the relevant states have agreed to exchange the information, there are few international venues for taxpayers to make claims.

It is of interest that recent cases have been brought before the European Court of Justice (ECJ) and European Court of Human Rights (ECHR) concerning the potential conflict between human rights and extensive tax information exchange.[26] Questions brought before the courts have included whether a taxpayer may claim that the tax authority must notify the taxpayer of the gathering of the information, the tax payer can put questions to witnesses and experts at the hearing or the on-the-spot investigation, and the tax payer may challenge the correctness of the information. The academic discussion addressing these issues are far from settled. Parties to the Forum should pay careful attention to the rulings in these cases, as they may later influence the scope of their law enforcement.

Concluding Remarks

The Forum has been successful in promoting a common standard that may end bank secrecy. However, it is evident that the Forum’s capacity to meet long-term expectations depends on the domestic laws and legally binding agreements for the implementation of the negotiated forum standards. In addition, as the volume of tax information exchanged grows, the framework that protects the rights of taxpayers and third parties will be crucial to sustain its legitimacy.

About the Author: Yurika Ishii, Ph.D, is Assistant Professor at National Defense Academy of Japan.