Tax transparency: today and tomorrow

Global regulatory standards and processes have seen significant evolution and a number of reforms, especially in the area of international tax transparency. 

A number of reforms driven by governments across the world have looked at how they can bring in more tax revenue, or to be more precise, reduce tax leakage. A great deal of the focus has been on reducing the ‘tax gap’ by looking at ways of reducing illegal tax evasion across the global economy.

Although it is sometimes argued that efforts on reducing the tax gap might well be better spent on improving means of collecting tax in ‘shadow economies’ – where tax is not reported or recorded –governments and supranational bodies have looked at evasion overseas with particular vigour. 

1) Today: Regulatory change and its drivers 

One of the biggest global initiatives addressing tax evasion has been the Action Plan on Base Erosion and Profit Shifting (BEPS), launched by the OECD in 2013.

In the years since the last global financial crisis there has been a resurgence in the role of the OECD 

This comprises 15 actions aimed at tackling tax planning strategies used by large companies who use double tax agreements to shift profits from higher tax to lower tax jurisdictions.

Specifically in the UK, we’ve seen this manifest itself in a number of ways with house hold names such Starbucks and Amazon feeling the wrath of the Public Accounts Committee and prominent tax campaigners.

Another OECD initiative is the Common Reporting Standard (CRS), launched in 2014. The OECD called on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. 

Transfer of information has also moved up the agenda in the form of Tax Information Exchange Agreements (TIEAs), which are bilateral agreements under which territories agree to co-operate in tax matters by sharing information.

This enables governments to enforce their own tax laws by exchanging information relevant to a tax matter.

There are further examples beyond those listed here, but it gives a flavour of the activity underway around the world to clamp down on international tax evasion. 

In fact, in the years since the last global financial crisis there has been a resurgence in the role of the OECD and its Global Forum on Transparency and Exchange of Information for Tax Purposes.

The Global Forum’s numbers have swelled dramatically by 70 per cent and today it is comprised of 139 country members. 

This is just one sign of how countries across the world have risen to the challenge of regulatory shifts. Importantly however, it’s not just the largest economies that have responded. Smaller offshore financial centres, such as those in the Caribbean, are very much in lock step with the G20.

Indeed, more than half of Caribbean jurisdictions have been deemed largely complaint with the OECD’s tax transparency standards. This puts them on a par with the some of the world’s biggest economies, including the UK and the US. 

2) Tomorrow: The future of global tax transparency 

If that’s where we are today, what does the future look like?

Information exchange and co-operation is very much the crux of improving tax transparency and will be pivotal in the years ahead in cracking down on those that try to illegally evade paying tax. 

Furthermore, a great deal of attention will continue to focus on capturing reliable and accurate information detailing the ultimate beneficial owners of companies and trusts.

This has been a major focus of tax campaigners in recent times with many calling for a public register of beneficial ownership. 

Among much of the hubris about the future of tax transparency, the debate has yet to focus on the actual technological mechanisms which will be needed to provide accurate and up-to-date beneficial ownership information and that will actually help law enforcement agencies find financial criminals and bring them to justice. 

With huge amounts of information being stored and shifted around the world, data security is of paramount importance

After all, without access to reliable and useful information, law enforcement is somewhat toothless against tax evaders. This is part of the reason a public register is potentially meaningless – if the information is inaccurate, making it publicly available won’t make it any more valuable in the fight against tax evasion.

The technological mechanisms to enable better investigation are key. Governments, such as the UK, and their law enforcement agencies have been working hard to create solutions that are fast, efficient and allow the authorities to do their job. 

Of course, with huge amounts of information being stored and shifted around the world, data security is of paramount importance. Neither governments nor the private sector can have confidence in a data system if it does not come with the highest levels of encryption both for storage and sharing. 

What’s more, new systems will have to find a balance between transparency and privacy. As much as transparency is high on the international agenda – and rightly so – a level of privacy will always be needed if the business community is to be sure it can continue to operate effectively. 

A good example of these new information sharing technologies is the Beneficial Ownership Secure Search System or BOSSs, which is being developed in the British Virgin Islands.

It is a platform with a searchable portal that allows beneficial ownership information on any BVI company to be shared with law enforcement agencies within minutes. Specific beneficial ownership information will be managed within this system by the BVI corporate service providers – which must be kept up to date by law.

How it works

It works in practice as follows. Let’s say, for instance, HMRC wanted to request beneficial ownership information on a BVI company. BOSSs can be deployed immediately by the BVI authorities to find the relevant beneficial ownership information.

Once the search is complete, the BVI authority then shares the relevant information (within 60 minutes in urgent cases) to HMRC.

Without technological innovation, it’s doubtful that governments will be able to win the battle against tax evasion.

That’s not to ignore the role of regulation, particularly when developed on a global level, in moving the needle on tackling financial crime. Nor should the importance of co-operation between governments and their law enforcement agencies be underestimated. 

But the future lies as much with the harnessing of technology and innovative tools as it does with regulation. Above all, a focus on improving the means of sharing information between nations is crucial if we are to make an impact in the fight against the truly global challenge of tax evasion.

I am certainly proud of the progress  the BVI and indeed the wider Caribbean has made on both the regulatory and technological fronts - this will ensure the region is well-placed to meet the challenges of the future.

Lorna Smith OBE is interim director of BVI Finance