Basis for a new tax system

Written by: Alberto Barreix, Jerónimo Roca and Fernando Velayos with the collaboration of Karla Hernández

We live at the dawn of the transparency era. It is not a simple temporary fashion in tax matters; until recently, concepts such as opacity, evasion, or tax haven were much more in use.

Why do we speak of an era of transparency? Because we are not only talking about a semantic change. It is a political change and a fundamental one. Until 2009, the global economy coexisted with a host of incentives and policies that gave protection – under the double key of banking secrecy and societies with shares at the bearer- to fortunes obtained sometimes through unlawful activities, and usually evading tax. Additionally, many jurisdictions established lax tax regimes to the benefit of schemes from multinational companies which, with fictitious sites in those territories, moved their profits to minimize their tax duties, lowering the thresholds of not only morality but also legality.

However, all this changed from 2009 under the impulse of the G20 and the technical leadership of the OECD. A concatenation of economic, political and social events tore down the banking secrecy. Shortly after, the bearer shares disappeared (or are in the process of doing so) and, under the project BEPS (Tax Base Erosion and Profit Shifting), the aggressive tax planning schemes of multinationals were addressed.

What was the cause? The financial crisis. On the verge of bankruptcy and in need of a huge injection of public aid, the financial sector in the developed world, in the middle of a recession and a fiscal crisis, could not keep playing the hypocritical game of banking secrecy. It had become socially and fiscally unacceptable. This started the end of the status quo. Along with this, we must also speak of immense political pressure from the G20 because of the mobilization of public opinion, outraged by the “double standard” of bailouts brought by the crisis: billions flowed to the global banking while populations suffered from unemployment, brutal cuts in wages and social programs in this great recession.

After the earthquake that caused the end of banking secrecy, a few years later came a reply, almost more violent: the FATCA Act (Foreign Account Tax Compliance Act) of the United States and the beginning of the automatic exchange of information of the Global Forum.

Why they were these changes so important? For several reasons:

• It was demonstrated that the automatic exchange of information is possible, both politically and technologically.
• It established some very high standards of data transmission, so much that today it is very difficult to escape from tax transparency (it is possible move assets and income, but it not is possible to hide them).
• In certain countries, that met with difficulty or did not fulfil the standards of transparency, it paved the road to take advantage of FATCA to improve their legal framework. FATCA was very relevant for its administrative update of our jurisdictions by its effect on waiving of the banking secrecy, that, in addition to supporting the effective collection of all the taxes, helped the governments of the region to comply with the standard of transparency even when facing powerful political internal pressures against it.
• It created a common technology standard of data transmission between tax administrations.

Finally, the BEPS action plan came. It was a concept originated by the OECD, impulsed by the G20-driven and implemented (or more correctly, in the process of being implemented) by almost all countries of the world. It makes difficult for some multinational groups to pursue their dishonest way of getting organized to save millions in taxes for their shareholders (in the slang is called “tax planning”), under the pretense of weak arguments of accounting and commercial difficulties.

Transparency challenges

However, this change is not without challenges. Among them, we can mention the difficulty to find the ultimate beneficial owner (UBO) of the complex organisational networks that hide large fortunes, a challenge in process of being resolved, forcing all companies to unveil their final beneficiaries – residents or non-residents – in each tax registry where they must register.

We can also mention the problems the countries will face to implement the BEPS Plan, because trying to remove the bad practices of a number of multinational and multi-regional and their accomplices, the large offices of global consultancy (see the lux leaks case), requires a fine scalpel and a very firm hand. In a world where there are reasonable sources of financing but insufficient business capacity, the existence of multinational firms is desirable. These operate with optimal technical quality and qualified human resources from various cultures; and in the future, they will probably operate without a state associated with them. However, although it seems logic that they seek to take market shares and profit, including the reduction of their tax obligations, it is not justified to let them apply abusive practices – of tax avoidance and evasion – based on the administrative inability of some jurisdictions and/or complicity of others using opacity gadgets (some were quasi secret decisions of tax authorities).

Some challenges are not easy to overcome. However, in general we can say that we are facing an historic change in taxation. An administrative change, yes, and therefore “exogenous” to those models considered by the tax policies; but our forecast is that the way of thinking taxes must change (if not doing so already), because the paradigm is now different, new, and far more favorable to compliance with the great principles of sufficiency, efficiency, fairness and neutrality.

In particular, this reality cannot disregard the income tax, which is already being changed by the automatic exchange of information and implementation of BEPS. For example, we have proposed a comprehensive personal income tax for all the revenues of the taxable person. This would be global and on an accrual basis, with the corporate income tax complementing it in its functions of policy instrument, tax control and advance payment of the accrual and comprehensive PIT (IRPF-CD). In our opinion, this architecture would increase revenue, efficiency, equity, simplicity and the “coordinating” of the tax with respect to existing designs.

Finally, and of transcendental importance, the global momentum for the pre-eminence of tax transparency, through the traceability of the flows of income and assets, will have crucial positive externalities in other aspects of the rule of law. For example, it will be increasingly easier to spot laundering of criminal activities (drug trafficking, human trafficking, etc.), personal and commercial fraud, or corruption in public procurement, among other crimes. There is already evidence of this success: thousands of cases pending from the unveiling of accounts in tax havens and financial centers and opaque jurisdictions, or the prosecution for unjustified enrichment and/or the use of proxies, which will be strengthened with the implementation of UBO. However, we must not forget that tax transparency and the other above-mentioned instruments may complement but do not substitute competent police entities and effective judicial systems.

This blog is based on a chapter of “Brief history of tax transparency”, included in “CIAT: Fifty years of taxation in Latin America, CIAT, 2017

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