Is SARS fighting illicit financial flows or just checking up on you?

​​Under new OECD rules, South African residents with offshore bank accounts are required to provide information to their banks to enable the authoriti​es to check their tax compliance​

​​If you are fortunate enough to have an offshore bank account, and have received a questionnaire from that bank asking for information on your residency and tax reference numbers, the reason is simply that banks are now required to provide information relating to their account holders for tax purposes under the Common Reporting Standard (CRS).  Banks are now required to establish where their account holders are tax resident and, if you live outside the country where the account is held, the bank may be required to report on your tax residence and provide information on your accounts.  This is a requirement introduced by the OECD under the Automatic Exchange of Information proposals which have been adopted by all member countries and the majority of the G20 countries.  The new requirements stem from the Global Forum initiative to check the tide of perceived illicit financial flows (IFFs) and improve tax transparency and compliance globally.

Why and who?

As globalisation has allowed greater freedom for the movement of capital, it has created perceptions of hidden capital and a belief that owners of this perceived hidden capital are tax evaders.  Enter the Global Forum, part of the OECD Centre for Tax Policy and Administration.

The Global Forum has been around since 2000, but it was not until 2009 that it gained serious teeth in the fight against IFFs.  Rising from the ashes of several tax scandals and the global financial crisis, the G20 mandated the Global Forum to tackle IFFs.  Since then the forum’s membership has grown to 158 member countries, including a number of African countries.

The Global Forum operates under three pillars:

• Exchange of information requests (EOIR)
• Automatic exchange of information (AEOI)
• Technical assistance

The EOIR was the key means of sharing information between 2009 and 2017.  This was a request-based exchange, only initiated if a specific jurisdiction was undertaking an audit which suggested there was tax avoidance or evasion.  It is important to note that the EOIR program is only possible where the tax administration requesting the information has a Double Tax Agreement ("DTA") ¹ in place with the country from which it is making the request.  Article 26 of a DTA would permit the exchange of information, if requested.

The EOIR standard has been in place for many years and has been continuously reviewed by the Global Forum. It was subject to a round of peer reviews between 2010 and 2016.  The purpose of the peer reviews was to check the legal framework to protect the confidentiality and integrity of the information shared as well as the practical implementation.

While the EOIR enabled the recovery of EUR7.5 billion in additional tax revenue between 2009 and 2017, it has had varying degrees of success.  With a growing increase in requests, the gap between requests received and requests sent has become marked, with developed countries generally issuing the largest number of requests.  The time in which jurisdictions respond to such requests has improved over the 10-year period, with 92% of requests being answered and 70% within 180 days. ²

The introduction of the AEOI changed the playing field significantly.  The AEOI was developed in 2014 and all members of the Global Forum were requested to commit to the AEOI standard by 2018 at the latest.  Over 100 countries have now adopted it.  It is also subject to peer reviews, and the Global Forum has undertaken a review of the completeness of each country’s legal framework and effectiveness of its implementation.

"The implementation of the automatic exchange of information has become a real game-changer by providing tax authorities with a strong tool for detecting tax evasion in the cross border context. Multilateral cooperation, supported by the G20 and OECD and guided by the principle of the level playing field, have delivered a transformation which was unthinkable just a decade ago." ³

What is being exchanged?
Under the AEOI, information on financial accounts held by non-residents is exchanged under the CRS.  This includes information about the financial account (account number and balance), together with details of the account holder (name, address and tax identification number).  Jurisdictions are required to collect the information from financial institutions, banks, hedge funds and various investment trusts, and automatically exchange it with the jurisdiction in which the holder is tax resident.

Countries only share this information if they are signatories of the Convention on Mutual Administrative Assistance in Tax Matters ("Multilateral Convention").  The Multilateral Convention was finalised in 2010 and opened for members of the Global Forum to sign.  Today all OECD member countries and most G20 member countries have signed it.  The focus to date has been on sharing information on:

• Offshore bank accounts;
• Offshore ownership of bearer shares; and
• Offshore accounting records.

In 2017 information on more than 11 million financial accounts was exchanged, growing to 47 million in 2018 in 4,500 exchanges covering a total value of EUR4.9 trillion.  By 2019 the number of exchanges had reached 6,100. ⁴

To date, the combination of EOIR and AEOI has helped to identify EUR102 billion in additional tax revenues, arising from over 250,000 information requests and 100 jurisdictions exchanging information automatically. ⁵

The Base Erosion and Profit Shifting Final Report on Transfer Pricing Documentation (Action 13) was issued in 2015 and requires multinational enterprises (MNE's) to provide tax administrations with high-level information about their global business, their global allocation of income, economic activity and taxes paid among countries, according to a common template referred to as a Country by Country Report (CBCR). It also requires MNEs to report the number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities of each entity.  In line with the Multilateral Convention, a Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (the CbC MCAA) was developed.  The CbC MCAA allows automatic sharing of CBCRs under the AEOI standard.

This will provide tax administrations with a high-level view of the MNE's operation globally, allow a comparison of functionally similar entities within the group and help them to understand where significant value-add functions, such as research and development and sales and marketing, are undertaken. It also provides financial information allowing tax administrations to understand where revenue is generated and compare that with the relative tax paid in each jurisdiction.  The CBCR is intended as a risk assessment tool, so it should not be used by a tax administration to raise an assessment where it considers the entity in its location should be paying more tax.

It is concerning that the exchange of CBCRs is being grouped with the EOIR and AEOI relating to "hidden" financial assets associated with tax evasion.  The AEOI, which allows the exchange of financial accounts of non-residents, is intended to allow tax administrations to check that offshore account information is being disclosed by the account holders with the sole intention of finding "hidden" accounts and curbing tax evasion.  The CBCR, on the other hand, is a compliance tool illustrating the group operations and financial summaries for the group entities. Coupling the two under the AEOI implies that transfer pricing is a path to tax evasion.  While transaction mispricing is arguably a means to shift profits within a MNE, transfer pricing itself is a commercial practice used to price the transfer of goods and services, not only between entities within a MNE but between third parties.  Tax administrations typically legislate transfer pricing anti-avoidance provisions to ensure that transfer prices adhere to the arm's length principle⁶ to ensure there is no mispricing.  We hope that the tax administrations remember this and do not regard the review of CBCRs as a means to seek out tax evasion.

In June 2019, the OECD further extended the AEOI to include mandatory disclosure rules on avoidance arrangements and opaque tax structures. ⁷

“Automatic exchange of information is a game changer,” OECD Secretary-General Angel Gurría said on the eve of a plenary meeting of the OECD/G20 Inclusive Framework on BEPS. “This system of multilateral exchange created by the OECD and managed by the Global Forum is providing countries around the world, including many developing countries, with a wealth of new information, empowering their tax administrations to ensure that offshore accounts are being properly declared. Countries are going to raise much needed revenue, especially critical now in light of the current COVID-19 crisis, while moving closer to a world where there is nowhere left to hide.”

Exchange of information in Africa

The Africa initiative was created by the Global Forum with members from the continent and regional and international sponsors.  These include the Africa Tax Administration Forum ("ATAF"), the African Union and the Africa Development Bank, among others.

It was initially set up for a period of three years in 2015, and subsequently renewed. It currently has 32 African member countries. 

The Tax Transparency in Africa 2020 report⁸ illustrates Africa's ongoing commitment to fight illicit IFFs from the continent.  It is the second report commissioned by the Global Forum focusing on the loss of revenue from perceived IFFs across the African continent and it demonstrates Africa’s continued commitment to stem this.

The Africa initiative has two pillars: it seeks to raise political awareness and develop capacities in Africa in tax transparency and exchange of information.  The 2020 report noted an expansion of exchange information networks among African countries of up to 3,262 in 2019 compared with 2,523 in 2018.  It was also noted that progress in using the mechanisms for transparency and exchange of information is patchy.  Not all countries have managed to establish an Exchange of Information Unit ("EOU") to analyse both the information requested and received as well as the implementation of the EOIR and AEOI standards. 
The report notes that the increase in exchange of information in Africa has translated into an additional US$12 million in tax revenue in 2019 for five countries and additional tax revenue of US$189 million for eight African countries between 2014 and 2019.

Peer reviews show that not all African countries are compliant yet in legislative framework and implementation steps for the EOIR and AEOI standards.  Interestingly, the report also comments on the success of Voluntary Disclosure Programs which have been run across a number of African countries, including South Africa, which facilitated the recovery of US$296 million in the program run between 1 October 2016 and 31 August 2017 and a further US$213 million between 1 April 2018 and 31 March 2019.
The report focuses on IFFs, specifically defining these as "money that is illegally earned, used or moved and which crosses an international border".  This again suggests the focus is on illegal tax evasion, rather than legal tax avoidance and transfer pricing practices.  Identifying trade mis-invoicing as one of the main categories puts this in the same group as the drug trade, human trafficking, illegal arms dealing and smuggling.  This seems a little harsh for the reasons cited earlier.  Sometimes MNEs simply get it wrong without intending to evade taxes.  Do revenue authorities in Africa view these transgressions in the same light as drug dealing?

Corruption is also cited as a key area of IFF.  Africa is not without problems when it comes to corruption, and South Africa has certainly had its fair share, but it would be challenging to quantify  IFFs from corruption.  Furthermore, corruption’s political connection often makes enforcement by the revenue bodies problematic.  The report concludes that sub-Saharan Africa suffered a financial loss as a result of IFFs of an average of 6.1% of GDP compared with a global average of 4%, amounting to more than US$50 million annually and increasing.  The Global Financial Integrity ("GFI") identified trade mis-invoicing as the largest form of IFF from Africa, accounting for 83.4% (2015).

Through the EOIR and AEOI standards, Africa has been successful in targeting elements of these IFFs, however the report identified two key barriers to the successful implementation of the standards. These were a lack of political awareness and limited capacity.  To achieve effective capability in combating IFFs by 2030, African countries need to increase public expenditure by 30% of GDP to meet the sustainable development goals set.  The African Development Bank identified the following key areas which need to be addressed to achieve this:

• ​Developing capacity and capability to tackle tax evasion;
• Support to tax administrations to improve transparency;
• Establish well equipped transfer pricing units;
• Technical support for audit teams;
• Cross-border co-operation through the use of exchange of information;
• Increased disclosure of beneficial ownership; and
• Greater collaboration with international bodies, including ATAF and the Global Forum.

All this predates the impact of Covid-19.  The impact of Covid-19 on the economies of Africa is still to be determined but without doubt these projections will be vastly increased.

ATAF has been instrumental in assisting tax administrations across Africa.  It created the Agreement on Mutual Assistance in Tax Matters (AMATM) specifically for sharing information between African countries.  There are nine signatories to these agreements, including South Africa.  In addition, 18 African countries have signed the Multilateral Convention for the AEOI, including South Africa.   Between 2018 and 2019, the number of EOIRs sent increased by 48%.  The AEOI for financial accounts is seen as a big opportunity to generate additional revenue in Africa.  It is estimated that 44% of all Africa's financial wealth is held offshore, accounting for about EUR17 billion lost in revenue.  South Africa was one of the first African countries to adopt the AEOI in 2017 and received information relating to offshore balances of over EUR17 billion in 2018 from 63 partners.

So if you are one of those wealthy individuals who has received a questionnaire from your offshore bank, be sure you are declaring your assets and paying tax on the income it generates!