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Focus on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters

By: The Treaty Pro Team
01 February, 2012


We’ve seen how, increasingly, double tax avoidance agreements have been negotiated to contain standard wording on the exchange of information for tax purposes, and tax information exchange agreements between offshore jurisdictions and major countries have mushroomed in the past two years; but governments also have another weapon in their armoury to combat international tax evasion – the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Developed jointly by the Organization for Economic Cooperation and Development (OECD) and the Council of Europe and opened for signature by member states on January 25, 1988, the Convention is designed to help governments enforce their tax laws by creating an international framework for cooperation among countries in countering international tax avoidance and evasion.

Until recently, the Convention was only open to members of the OECD and the European Union. However, at its London Summit in April 2009, the Group of 20 nations and the OECD renewed their offensive against tax avoidance, particularly of the offshore variety, in response to the financial crisis and the chaos this had caused for national budgets.

The G20 called, somewhat euphemistically, for action “to make it easier for developing countries to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information”. In practice, this meant expanding the geographical extent of Convention by allowing non-EU and OECD countries to join.

“Given its multilateral nature, the Convention is a unique instrument to counteract international tax avoidance and evasion,” OECD Secretary General Angel Gurría commented in April 2010, after the Council of Europe and the OECD agreed to update the treaty. “The OECD and the Council of Europe have agreed to improve international cooperation to combat tax evasion and the standards set by the convention are being updated to reflect this new consensus.”
Amendments to the Convention which opened it up to all countries duly took effect on June 1, 2011, an event which coincided with the Global Forum on Transparency and Information Exchange for Tax Purposes meeting in Bermuda. The updated Convention, which incorporates internationally agreed standards for exchange of information in tax matters, is described by the OECD as “the most comprehensive multilateral instrument available for tax co-operation” and it contains the same wide range of tools for cross-border tax co-operation as the original 1988 text.

At the time of writing, India was the last country to sign up to the Convention, on January 26, 2012. The other 31 signatories to the amended Convention are: Argentina, Australia, Belgium, Brazil, Canada, Denmark, Finland, France, Georgia, Germany, Iceland, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Moldova, Netherlands, Norway, Poland, Portugal, Russia, Slovenia, South Africa, Spain, Sweden, Turkey, Ukraine, the United Kingdom, and the United States.

Who Has Overall Responsibility For the Convention?

A co-ordinating body composed of representatives of the competent authorities of signatory countries monitors the implementation and development of the Convention, under the aegis of the OECD. The co-ordinating body is able to recommend any action likely to further the general aims of the Convention. In particular it acts as a forum for the study of new methods and procedures to increase international co-operation in tax matters and it may recommend revisions or amendments to the Convention. States which have signed but not yet ratified, accepted or approved the Convention are entitled to be represented at the meetings of the co-ordinating body as observers.

What Does the Convention Do?

In short, the Convention binds signatory countries to providing administrative assistance to each other in tax matters, including: exchange of information; simultaneous tax examinations and participation in tax examinations abroad; assistance in recovery, including measures of conservancy; and service of documents. Such assistance may be given by a judicial, as well as an administrative, body.

Under the Convention’s General Provisions, the parties shall exchange any information that is “foreseeably relevant for the administration or enforcement of their domestic laws” and the requested state is permitted to “take all relevant measures” to provide the applicant state with the information requested if the information available in the tax files of the requested state is not sufficient to enable it to comply with the request for information.

Under the Spontaneous exchange of information Article, a party to the Convention must, without prior request, forward to another party information of which it has knowledge in the following circumstances:

  • The first-mentioned Party has grounds for supposing that there may be a loss of tax in the other Party;
  • A person liable to tax obtains a reduction in or an exemption from tax in the first mentioned Party which would give rise to an increase in tax or to liability to tax in the other Party;
  • Business dealings between a person liable to tax in a Party and a person liable to tax in another Party are conducted through one or more countries in such a way that a saving in tax may result in one or the other Party or in both;
  • A Party has grounds for supposing that a saving of tax may result from artificial transfers of profits within groups of enterprises;
  • Information forwarded to the first-mentioned Party by the other Party has enabled information to be obtained which may be relevant in assessing liability to tax in the latter Party.

Other noteworthy provisions of the Conventions include: under Article 18, which sets out the information to be provided by the applicant state, a request shall indicate the name, address, or any other particulars assisting in the identification of the person in respect of whom the request is made; and under Article 21 a requested State cannot decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.

What Taxes Are Covered?

Just about any tax you may care to think of – and then a few more! Indeed, the Convention covers a much wider range of taxes than is the case under traditional bilateral double tax avoidance agreements. These include: taxes on income and profits; taxes on capital gains imposed separately from taxes on income and profits; taxes on net wealth; compulsory social security contributions; estate, inheritance or gift taxes; taxes on immovable property; consumption taxes such as value-added or sales taxes; specific taxes on goods and services such as excise taxes; taxes on the ownership and use of motor vehicles; taxes on the ownership and use of other movable property; and (perhaps the draftsman’s quill was running dry at this point) “any other” taxes. So it’s safe to say that the list of taxes is pretty comprehensive!

What About Privacy?

According to the OECD, the Convention includes “very high standards of confidentiality and protection of personal data”, but serious questions have been raised over this claim.

The privacy safeguards are provided for in Article 22 of the Convention, and this states that any information obtained by a Party under this Convention shall be treated as secret and protected in the same manner as information obtained under the domestic law of that Party and, to the extent needed to ensure the necessary level of protection of personal data, in accordance with the safeguards which may be specified by the supplying Party as required under its domestic law.

The key phrase here, however, is “under domestic law”, and data protection and privacy standards are likely to vary widely between the signatory countries. As Ernst & Young observed in a taxpayer alert issued in June 2011, the confidentiality of taxpayer data “has always been a concern when that information is the subject of a treaty based exchange of information”, and in view of the fact that the new Convention is now open to so many parties, it questioned whether taxpayer privacy can really be guaranteed.

“Are the laws of the requesting country sufficient to prohibit the unauthorized disclosure of taxpayer data?” the firm asked. “As the Protocol can potentially triple the number of countries that will be able to access a taxpayer’s return information from another tax administration, taxpayers will need to increase both their awareness and diligence around requests for their tax data. Do the national laws of the countries in which they operate provide that they are notified before their tax data is shared with another country? Do the national laws protect the sharing of trade secrets? Will a taxpayer know they are under a Joint Audit?”

Impact on International Business

The broadening of the Convention has generally been seen in the context of the OECD’s and the G20’s crackdown on offshore. However, the inclusion of provisions facilitating joint audits is expected to greatly assist national tax administrations in their investigation of transfer pricing issues in particular, suggesting that international business is as much a target of the OECD as offshore jurisdictions.

While this could create yet new challenges for global business, E&Y suspects that these provisions could, on the other hand, “present significant opportunities and benefits if managed appropriately with the knowledge of available tools for issue resolution and appropriate communications and relationships with the tax authorities”.

“This is an approach that has been advanced by several tax administrators, tried by a few and will continue to grow as tax administrators leverage their tools and relationships to ‘go global’. This will apply primarily to the areas of transfer pricing and VAT,” the firm noted. “At a minimum, companies should be using this opportunity to ensure all pre-controversy strategy, processes and documentation procedures are in place and functioning as they should. And where this review is positive, companies who are looking for ways to achieve greater certainty may wish to consider the use of a joint audit as a possible means for obtaining bilateral and multilateral resolution of global issues, and volunteer.”

Conclusion

With national budgets under so much pressure in many parts of the world, cooperation between national tax authorities through initiatives like the Multilateral Convention and bilateral tax agreements is only likely to get closer, and therefore we can expect to see several more countries sign up to the amended pact in the near future.



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