A state’s ability to enforce its laws beyond its territory is, in its essence, a question of public international law. It is commonly accepted that jurisdiction to tax is a manifestation of sovereignty. There cannot be an extension further than sovereignty to bring about the enforcing of national tax legislation and consequent collection of taxes.
The Commission recently called for member states to revise their direct taxation and anti-abuse regulations- Sarah Scicluna
Against this backdrop, today’s possibilities of international tax avoidance and tax evasion have increased due to the continual growth in the international movement of people, capital, goods and services. Mutual assistance in taxation issues are being adopted through bilateral and multilateral instruments for the promotion of international cooperation in tax administration matters to protect tax revenues against avoidance and evasion.
Article 26 of the OECD Model Tax Convention on Income and on Capital – which has recently been updated and now explicitly allows for group requests – provides for exchange of information in the context of a comprehensive bilateral income tax treaty. The Convention on Mutual Administrative Assistance in Tax Matters is a unique multilateral free-standing instrument developed in the 1980s and providing for not only the facilitation of exchange of information for a wide range of taxes, but also other forms of mutual assistance like assistance in the recovery of taxes and the service of documents.
Additionally, the 2002 Model Agreement on Information Exchange on Tax Matters provides both a bilateral and multilateral model for exchange of information. The Committee on Fiscal Affairs examines best practices to improve the efficiency of the operation of the exchange of information. To update the Information Technology standards needed to automatically exchange data securely, the Committee continually seeks to develop technological improvements.
In a communication to the Council, the European Parliament and The European Economic and Social Committee, the Commission recently called for member states to revise their direct taxation and anti-abuse regulations. The communication was entitled ‘The application of anti-abuse measure in the area of direct taxation – within the EU and in relation to third countries’.
In the field of direct taxation, mutual assistance between the member states has been possible since 1977, in accordance with Council Directive 77/799/EC, eventually replaced by Council Directive 2011/16/EU. The recovery of tax claims arising in another member state is ensured through the Tax Collection Directive, formerly the Council Directive 2008/55/EC repealed by Council Directive 2010/24/EU.
In indirect taxation, the VAT Information Exchange System was set up as a control system to manage the VAT control of intra-community trade and regulated by Council Regulation 218/92/EC.
The Foreign Account Tax Compliance Act (FACTA) is an important development in the US’s efforts to improve tax compliance involving foreign financial assets and offshore accounts. FACTA’s motive is to raise revenue and its legislative intent is to ensure that the US Government is able to determine the ownership of US assets in foreign accounts.
Its impact is not limited to the systems of US companies but also extends to operations of non-US entities and might be seen as setting new standards resulting in somewhat unexpected repercussions and going a step further than originally planned.
Alongside the mechanisms in place for the enhancing of exchange of information, there necessarily has to be a balance between the interests of tax authorities to have access to suitable information and the need for the protection of the legitimate interests of taxpayers when it comes to privacy, with the guaranteeing of confidentiality of taxpayer information and the prohibition of ‘fishing expeditions’.
Dramatic strides towards greater transparency and exchange of information have been made in the international tax environment. The financial and economic crisis, the growing public deficits and the political support from G20 has increased these developments and expanded the demand for the improvement of tax compliance.
However, the achievement of the combating of offshore tax evasion and abusive international tax transactions, ultimately lies in coordinated action taken on a multilateral level – not in just cooperation and information exchanges. Action will improve compliance and service to taxpayers in concrete and significant ways.
This is a condensed version of an article first published in an international journal circulated to law firms.
Dr Scicluna is an associate with Fenech & Fenech Advocates, specialising in tax law, corporate and commercial law and financial services.