Standards of transparency and exchange of tax information: Advances in Latin America

Introduction

In 2009, the exchange of information in the tax field (EOI) began to take importance in international agendas. In that year and in a complicated context, resulting from the systemic crisis, the G-20 called to meet the first world’s standard, based on the exchange of information on request (EOIR), adopted by the Global Forum on Transparency and Exchange information in 2004, and the OECD assumed the assessment of compliance with the standard.

In 2010, the US approved the Foreign Account Tax Compliance Act, FATCA. Next, a group of European countries that had signed agreements in that framework, proposed their multilateral implementation, with some differences, which was developed by the OECD at the request of the G-20 as Common Reporting Standard, CRS), which is the second EOI standard.

In 2013 the Project Base Erosion and Profit Shifting, BEPS was launched, which in some of its actions contain measures on transparency and EOI. For example the AEOI “Country-by-Country Reports”, CBC reports driven by Action 13 and for Action 5, and spontaneous EOI agreements in tax matters between the Treasury and taxpayers, better known as “rulings“;.

In addition, the G20 called for closer cooperation between the Financial Action Task Force and the Global Forum to improve the implementation of standards, including the availability of information on beneficial owners and the possibility of exchanging it among Tax Administrations.

In this context, in July 2018, some updated criteria were presented to identify when a jurisdiction complies with international tax transparency, which will be the case if at least two of the following three criteria are verified:[1]

  • Minimum rating of “largely compliant” about the EOIR,

  • with respect to the AEOI , the necessary legislation is in force and exchanges began in late 2018; and all relevant partners will activate their agreements at the end of 2019; and

  • To have the OECD Multilateral Convention in force or a network of EOI bilateral agreements is sufficient.

In this context, the countries of Latin America (LA) have shown significant progress. Note the signing of the “Declaration of Punta del Este, a call to strengthen measures related to legal evasion and corruption” of 19/11/18, where the countries of the region committed to achieve full and effective implementation of standards of transparency, EOI and BEPS project. Argentina, Chile, Colombia, Ecuador, Panama, Paraguay, Peru and Uruguay have joined this declaration.

 

Need to improve the collection and progressivity of tax revenues in Latin America.

OXFAM and CEPAL (2016) exposed that in 2014, the richest 10% of the population of Latin America had captured 71% of the wealth and, if that trend continues, within 6 years the richest 1% of the region would have more wealth than the remaining 99%.

The Tax Policy and, specifically, taxation are not alien to it. LA- The region with the worst income distribution in the world has missed the potential that tax systems have to improve the income distribution.

In some countries, the wealthiest individuals pay 1% – 3% of gross income, while others pay a percentage of 10%. The difference is clear, when compared with the developed world. In the US, the contribution of the more affluent is 14.2%, and in some European nations, it exceeds 20%.

The EOI, and particularly the AEOI, are relevant instruments to increase tax revenues of the countries of the region by, in turn, making that the effect would be progressive.

In the future, the tax determinations of the Tax Administrations will be mostly on a reliable basis for concrete knowledge of the facts and not based on assumptions as it usually happens currently. This will entail greater certainty and less controversy.

Also noteworthy was the feasibility of using this information for purposes other than tax, with the appropriate authorization of the provider country, which also allows containing corrupt practices, illegal asset laundering and other economic and financial crimes.

 

Progress in Latin America

Representing LA, Argentina, Brazil and Mexico are members of the G-20. The countries of the OECD (with 36 member countries) are Chile and Mexico. Colombia will soon be the 37th member. Brazil is a country in adhesion and enhanced cooperation. Argentina is a member (not full) but joined the Committee of Fiscal Affairs.

With regard to the G-20 initiatives, OECD and the Global Forum include the Convention on Mutual Administrative Assistance in Tax Matters (129 subscribers) to support the CRS referred to the AEOI of Financial Accounts and CBC reports and, finally, spontaneous exchange of rulings, under the BEPS project. Countries that have signed are Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador (not yet in force), Guatemala, Mexico, Panama, Peru, Dominican Republic (not yet in force) and Uruguay.

The Global Forum continues to grow, currently with 154 jurisdictions, including CIAT and other organizations. In LA, it is composed by: Argentina, Brazil, Chile, Costa Rica, Colombia, Ecuador, El Salvador, Haiti, Guatemala, Mexico, Panama, Paraguay, Peru, Dominican Republic and Uruguay.

Notably, Chile, Colombia and Mexico make up the group of 36 countries that form the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), which was established in 2004 to combat cross- border tax evasion, and thanks to its initial achievements, it was revived in 2014 with new members from the Tax Administration Forum.

Several countries in the region have been evaluated in the implementation of the standard referred to REOI:

  • First evaluation round: Colombia and Mexico obtained the highest rating (Fulfilled), then Argentina, Brazil, Chile, El Salvador and Uruguay the second best score (mostly fulfilled). Some also have this grade because of quick reviews that made possible to improve their previous rating: Costa Rica, Dominican Republic, Guatemala and Panama.

  • Second round of evaluation (with reference terms updated to 2016): Brazil had the second highest score (mostly compliant).

Moreover, 113 jurisdictions around the world have joined FATCA, highlighted by LA: Model 1, reciprocal: Brazil, Colombia, Costa Rica (not yet in force), Jamaica, Haiti (in substance, not yet signed but agreed), Honduras, Mexico, Panama, Peru and the Dominican Republic (not yet in force. Model 2 -Used when the country has some limited access to financial information-: Chile (not yet in force) and, with agreements in substance, Nicaragua and Paraguay. Argentina has signed an EOI agreement with the US, which is not yet in force. A FATCA agreement is in process of negotiation for the year’s end.

With respect to CRS, several Latin American countries have signed the respective Competent Authorities Multilateral Agreement. Regarding the Financial information of 2016 (whose exchange was conducted in 2017) participated Argentina, Colombia and Mexico. By 2017 data (exchanged in 2018): Brazil, Chile, Costa Rica, Panama, Peru and Uruguay.  Argentina sent information in 2018 to 56 country, Brazil to 56, Chile to 48, Colombia to 60, Costa Rica to 49, Mexico to 60, Panama to 32 and Uruguay to 59.

On the other hand, in LA, Argentina, Brazil, Chile, Colombia, Costa Rica, Haiti, Mexico, Panama, Paraguay, Peru, Dominican Republic and Uruguay have joined the comprehensive framework for the implementation of BEPS (currently 130 countries):

To increase transparency of multinational companies, 79 countries signed the Multilateral Agreement of Competent Authorities for the AEOI of the CbC reports. As for these reports, from the year beginning in 2016: Brazil, Chile, Colombia, and Mexico, and for the period starting in 2017: Argentina, Costa Rica, Peru and Uruguay.

With respect to spontaneous ROI rulings the following Latin American countries have been reviewed without comment on the legal and operational aspects: Argentina, Brazil, Chile, Colombia (with recommendations for improvement) and Mexico. Other countries in the region have a scheduled review: Costa Rica, Haiti, Panama, Paraguay, Peru and Uruguay.

Finally, other issues of the BEPS project include:

  • Action 5: Review of special tax regimes

    • For Argentina, Brazil, Chile, Colombia, Costa Rica, Haiti, Mexico, Panama, Peru and Uruguay: No abusive regimes were detected.

    • Under review: Paraguay.

    • Action 14: review of effective dispute resolution mechanisms between tax administration and taxpayers: only Mexico has been reviewed in phase 1 with recommendations.

    • Action 15: signing of the multilateral instrument to review and update the bilateral tax treaties (currently signed by 89 countries): Argentina, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay. Not yet in force in any of them.

    [1]However, it is considered that a jurisdiction fails if: a)” fails to comply” in general, for the implementation of EOIR; or b) with respect to the commitment to implement the AEOI in 2018, it has not complied. Do not comply: Antigua and Barbuda, Brunei Darussalam, Dominica, Israel, Montserrat, Niue, St. Vincent and the Grenadines, St. Martin, Trinidad and Tobago and Vanuatu.

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