Will new tax reporting standards create shifting alliances?

What do Al Capone and the famous boxer Joe Louis have in common? They were both hunted, and convicted, by the US authorities on charges of income tax evasion. Tax evasion is a significant global problem which slows down the growth of many countries as tax revenue is a major source of income which is used to fund government programmes and create employment.

One of the most challenging aspects of tax evasion is combatting it when one does not know the true extent of the problem. This is surely the case in South Africa where only 8% of the population is expected to front the income tax revenue for the whole country.

In an effort to combat this, a new global standard on the exchange of tax information, which is intended to raise the bar on international cooperation, will make it easier for the authorities to track down tax cheaters and fight tax evasion. Auditing giant PriceWaterhouse Coopers reports that the new standard also raises questions around privacy and cost implications; in particular for developing countries in Africa.

You can run, but you can't hide

The new standard of reporting has been introduced by the Organisation for Economic Cooperation and Development (OECD) who recently announced plans for a global common reporting standard for the automatic exchange of information between the tax authorities.

The common reporting standard will require financial institutions and industry participants to report information to the tax authorities in their own jurisdictions, which will in turn be shared with the tax authorities of other relevant countries.

This comes after a mandate from the G20 leaders was released to take action against tax avoidance and tax evasion, as well as to promote greater fairness and trust into the international tax system.

The common reporting standard is expected to be adopted by all G20 countries, as well as other financial centres. To date 42 jurisdictions have committed to the new standard, including South Africa, Spain, France, the UK and the Isle of Man.

What effects will this have on society?

This standard has the potential to have a significant impact in South Africa and may rock the very foundation of the country's tax system. Government has been struggling for a number of years on how it can increase its tax revenue collection.

Elandre Brandt, PwC International Tax Partner and Head of the Africa Tax Desk, says that the global standard does not replace existing exchange of information rules. It is intended to supplement current rules and measures.

Banks from around the world will be required to trawl through the accounts of their customers, and then share that information with the various tax authorities. While this is the only logical way to approach this, ethical questions need to be asked. Where does one draw the line between privacy and the free sharing of information between clients and their banks? With the imminent introduction of the Protection of Private Information (POPI) Act, banks will need to tread a fine line and be very clear about the type of information that they will be sharing or else they will be finding themselves fighting significant POPI related law suits. As of the fines imposed on some of the banks, by the Reserve Bank last week, for FICA related offences have not caused enough of a stir in the banks.

Brandt points out that the standard is far-reaching in that it is designed to catch a broad range of income, such as interest, dividends, and insurance policy pay-outs. The financial institutions required to report on information include banks, stock brokers, certain collective investment vehicles and some insurance companies.

Getting serious on revenue collection

The world is steadily digging itself out of the hole that the 2009 financial crisis put many economies in. One of the consequences of the recent economic uncertainty is that there has been a stronger focus on tax collection, compliance and international cooperation to increase revenue collections.

Brand points out that the new standard builds on earlier initiatives within the European Union and globally. It is intended to run parallel with other rules and legislation, such as the US Foreign Account Tax Compliance Act (FATCA) and the EU Savings Tax Directive.

"Although the plan is positive, it has difficulties in that developing countries in Africa are likely to be excluded as they do not have the resources and capacity to set up the relevant structures to provide the authorities with the required information,” says Brandt. Any illicit funds flowing from developing countries to the tax havens are unlikely to be recorded.

Furthermore, the standard does not make provision for any penalty for a non-compliant jurisdiction. There are also questions around the scope of privacy and the type of information that can be shared, he says.

South Africa fares well in terms of the exchange of tax information, and is one of 18 jurisdictions that comply with global standards on the transparency and exchange of information, according to the Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum is the multilateral framework within which work in the area of tax transparency and the exchange of information is carried out by over 100 jurisdictions which participate in the work of the Forum.

Caught between a rock and a hard place

While these standards will be welcome in society and will go a long way in resolving the issues around tax collection which has been plaguing the world for many years, one has to wonder if the standard is creating a very unsavoury situation for banks and financial institutions.

Banks and financial institutions will be compelled to share sensitive information with tax authorities as part of this standard, but they are also compelled to treat the information of their clients as private and confidential. Where does the greater responsibility lie? While there are no firm statistics to prove this, one would assume that the portion of the public trying to evade tax authorities is minute when compared to those who are open and honest when it comes to tax collection.

There is also the issue of the approach of the South African Revenue Service (SARS) when it comes to tax collection. We have reported in the past that SARS has been accused of employing the tactic of targeting high net worth individuals and large corporates when it comes to tax collection. Will this reporting unearth new targets who were previously able to fly below the radar undetected?

If authorities are not careful, this new standard of information sharing will land them in serious legal trouble. And the public now has protection against this in the form of the newly formed Tax Ombudsman and POPI.

Editor's Thoughts:
It will be interesting to see what the results of this new standardisation will be. Will it increase revenue collection which would ultimately be used by governments to benefit the public? Or will it place financial service providers in a compromising position where they have to decide where their loyalties lie? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.