More cooperation to fight against tax evasion

I intend to share with you some ideas regarding why cooperation between Tax Administrations (TA) is extremely important to fight against tax evasion.

Firstly, It is very important for every country to be aware of the causes of a phenomenon as complex as tax evasion, since it is the only way to find a strategy for combatting it.

The issue is extremely complex, but undoubtedly, it is an exercise, which all countries must undertake.

Today many of the causes of tax evasion are linked directly to the globalization of economic activities and new ways of doing business in the digital economy.

Among other causes, we highlighted the following:

• The presence of multinational companies with aggressive tax planning.

• The tax havens and/or jurisdictions of no or low taxation or uncooperative jurisdictions.

• The great weight of intangibles, making difficult to assign the true value of assets and the place of their generation.

• A sophisticated financial system with multiple figures that can mobilize money quickly and easily.

• The proliferation of special tax regimes to attract investment (e.g. tax rulings)

• The difficulty controlling transfer pricing of multinational companies linked together: today more than 60% of world trade is carried out by these companies, and 50% are intra-group operations.

• The digital economy: high technology development, e-commerce, collaborative platforms, digital currencies and new ways to market goods and services increase the difficulties of taxing and controlling taxes.

The problem es that in many countries there is no institutionalized and systematized estimation of evasion, with adequate periodicity and dissemination of the results.

With respect to the causes of evasion, it is usually said that there are as many causes, as authors who have written about the subject.

On the other hand, it is important to point out that the causes vary from one country to another and even, within the same country through time and moments of its history.

A paper written by Michel Jorratt[1] mentions the following variables that influence the complex evasion phenomenon. These are effectiveness of examination by the TA, the sanctions system, the simplicity of the tax structure and finally acceptance of the tax system.

The effectiveness of examination is related to the probability of detecting evasion.

As for the system of sanctions, one must analyze, among other things, the level of the sanctions, the juridical accuracy of the verdicts, the timeliness of their application and the effectiveness of the collection.

With respect to the simplicity of the tax structure, it is clear that complex tax systems favor evasion and avoidance, inasmuch as they create uncertainty with respect to scope of the tax regulations, increase the costs of examination and compliance and multiply the evasion and avoidance formulas or mechanisms.

No less important is the acceptance of the tax system because if a taxpayer perceives that the tax system is unfair, he will be less willing to comply.

The acceptance of the system depends, among other aspects, of the moderation of the tax burden, the equity of the tax structure, the use made of the collection, the compliance costs and taxpayer service.

Furthermore I believe that this issue of corruption illustrates most of the causes of evasion I have listed.

In a recent document entitled: “The Struggle against corruption in the State”,[2] it is said that no country is immune to corruption. Abuse of the public function for one’s own benefit reduces the people´s trust in the government and institutions, undermines the effectiveness and equity of the public policies, and misappropriates the taxpayers’ money, originally intended for schools, roads and hospitals.

Over 180 countries were analyzed and the interesting conclusion was that the most corrupt countries collect less taxes, because the people pay bribes to avoid them; for example, through tax gaps conceived in exchange for bribes. In addition, when the taxpayers believe that the State is corrupt, tax evasion becomes more probable.

The study states that, globally, less corrupt governments collect 4% more GDP in tax revenues than the countries having the same level of development with the highest levels of corruption.

I fully share this analysis noting that facing corruption is a challenge that requires perseverance in many fields, but which undoubtedly has enormous dividends logically beyond the tax sphere.

A key aspect stated is the political will, the continuous strengthening of the institutions to promote integrity, greater transparency, accountability and international cooperation.

Therefore, I am convinced that today more than ever, to combat fraud the TA must continue to progress in international cooperation.

I affirm it, while emphasizing the necessary internal cooperation that should exist not only between TAs themselves, but also among the various agencies of each state.

Today, the cooperation is driven by TAs and several international organizations; and regulated by international tax provisions. In this regard, The CIAT Model Tax Code (2015) considers in its Section 7 the issue of Mutual Administrative Assistance in Tax Matters. In that section, Article 101 specifies modern forms of mutual administrative assistance in tax matters.

Article 101 provides that the TA under International Tax Law Agreements may require or request:

·“Exchange of information actions, whether by request, automatic or spontaneous.

·Simultaneous controls by officials in another signatory country in accordance with Article 107.

·Assistance in the collection of the tax debt.

·Various actions or initiatives that are admitted or referred to in these Conventions.

A milestone in the field of cooperation of the TA, which is the BEPS Action Plan. These problems affect equally developed and developing countries; according to recent data collection, it is estimated that countries lose from 4 to 10% in income tax annually, which is around 100-240 billion dollars.

Following the publication of BEPS package in October 2015, the G20 leaders urged their implementation, and asked the OECD to develop a more inclusive framework with the involvement of interested countries nonmembers of the G20, and developing economies.

Consequently, the OECD established the inclusive framework of BEPS in January 2016 to modernize international tax rules and resolve the issues of BEPS. In 2019, almost 130 countries and jurisdictions have joined equally to the development of BEPS-related standards, and are monitoring their uniform implementation.

One of the most important aspects that currently reflects the international cooperation between TA is the exchange of information.

In this sense, the 2019 OECD Global Forum on Transparency and Exchange of Information[3] groups about 154 countries: it has effectively promoted the exchange of information on request.

In 2014, the G20 created the automatic exchange of financial information, called Common Reporting Standard (CRS). Until today, more than 100 countries are automatically exchanging financial information for tax purposes.

On this topic, a recent OECD report[4] notes that more than 90 jurisdictions are participating in a global transparency initiative under the Common Reporting Standard (CRS) of the OECD. From 2018 until now, they have exchanged information on 47 million accounts abroad, with a total value of about 4.9 trillion euros.

The initiative of automatic exchange of information (AEOI) activated by 4,500 bilateral relations, marks the biggest tax information exchange in history and the culmination of more than two decades of international efforts to counter the tax evasion.

Voluntary disclosure of offshore accounts, financial assets and income in the period prior to the full implementation of the AEOI initiative generated more than 95,000 million euros in additional revenue (taxes, interest and penalties) for the OECD countries and the G20 during the 2009-2019 period. This accumulated amount has increased by 2,000 million euros since the last OECD report in November 2018.

Moreover, a form of cooperation that we want to highlight is the Tax Inspectors without Borders (TIWB)[5] program, which is a joint initiative of the OECD and the United Nations Development Program (UNDP) designed to help countries upon request to develop their existing skills and acquire new ones on tax audit and tax inspection.

The aim is to allow the exchange of knowledge and expertise on tax audit with the TA of developing countries based on a perspective of “practical learning” in real time. The selected experts will work directly with the TA officials in ongoing audits and other inherent issues in international taxation related matters, and share the general practices in the field of auditing applied to specific cases. In this case, the assistance in tax audit and tax inspection is part of a specialized field as it focuses on solving real cases in process.

The objective of the audit assistance programs framed under TIWB is to increase and improve the skills of the TA in the developing country concerned (Host Administration) to undertake, in practice, tax inspections. This will improve the quality, rigor and compliance audits and tax inspections, ensuring, in turn, greater legal certainty and a potentially higher volume of tax revenues.

This initiative continues to thrive, with a growing number of experts deployed, South- South collaboration and increased tax revenues.

The TIWB initiative has grown considerably, with 67 programs completed or underway in 36 countries around the world, and 26 other programs in preparation.

The TAs supported by the program reflect a variety of positive results, among others, additional revenues of more than $ 480 million.

The revenue obtained was about 100 times higher than the costs of the program, which means that for every dollar invested, it contributes to 100 in tax collection.

There are currently several forums and/or TA agencies that act as mechanisms for the exchange of specialized information. They vary in the number of members, their condition, their activity level, their language and culture and operating history as an organization. These forums and/or organizations offer diverse and abundant experiences in dealing with tax administration topics.

The following table shows[6] the main forums and/ or organizations:

Tax Administration Forums and/or organizations

I am convinced that developing strong relationships with forums and/or TA organizations will yield key benefits. Among others, the following:

· Fast, efficient and inexpensive medium for the exchange of information and best practices in the field.

· A means of achieving consensus on issues of strategic importance to the TAs, globally.

· The possibility of applying best management practices in the field.

· Opportunities to work in areas of mutual interest, thus exploiting synergies and minimizing duplication of efforts.

In this commentary, we highlight just some of the forms of collaboration between the TA, with concrete results in many of them.

Finally, I want to say that I think that despite its growing importance and attention to be paid to cooperation and administrative assistance between tax administrations, there is still a long way to go before we can achieve optimal cooperation at international level, as well as internally for each country.

The road is not easy, but certainly, we have to go through it, because the fruits can be observed in many of the issues discussed in this post.

[1] Tax Evasion: causes, measurement and strategies for facing it. Michel Jorratt

[2] Vitor Gaspar, Paolo Mauro and Paulo Medas https://blog-dialogoafondo.imf.org/?p=10957

[3] To monitor compliance with the international commitments of fiscal transparency, the Global Forum is responsible for assessing countries through the peer review mechanism and providing effective mechanisms for the implementation of standards for the exchange of tax information, both on request and automatically.

[4] http://www.oecd.org/tax/exchange-of-tax-information/implementation-of-tax-transparency-initiative-delivering-concrete-and-impressive-results.htm

[5] http://www.tiwb.org/en/

[6] Taken from Lesson 6 of the CIAT Tax Administration Diploma in Taxation Module - 7 - Edition 2019.

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