Henry Brandts-Giesen
Since the 2008 Global Financial Crisis, various tax reporting and AML/CFT compliance regimes imposed on businesses have caused the basic human right to privacy to be challenged by the proposition that transparency in relation to private wealth is essential to social justice.
A recent report from the UN High-Level Panel on International Financial Accountability, Transparency and Integrity (the FACTI panel) provides some insights into future developments in this area.
The report is significant as it includes recommendations that could eventually lead to harmonised global tax rates, public registers of beneficial ownership, unitary taxation and a global tax authority.
This was once considered a utopian pipe dream of tax justice campaigners. It has implications for privacy rights and the sovereignty of nation states.
The FACTI panel was launched in March 2020 to study the impact of tax abuse, money laundering and illicit financial flows on the ability of states to meet the UN’s Sustainable Development Goals by 2030.
Its final report calls for powerful, specific policies to be implemented in respect of tax transparency and international tax rules, and for reforms to tax authority architecture.
Specifically, the report endorses:
- The automatic exchange of information to ensure tax authorities are aware of their tax residents’ offshore financial accounts.
This has been happening for several years through the Common Reporting Standard, now covering all major countries except the United States. It has a few other gaps, for which the report recommends corrective measures.
- Creating public registers of the people who ultimately own companies, trusts and foundations. About 80 countries now have registers for companies and others are likely to mandate such registers – and possibly expand the scope to other types of entities such as trusts.
- Country-by-country reporting to show the extent and nature of profit-shifting by multinational companies.
This is intended to prevent entities within the same multinational group from shifting profits to jurisdictions where tax will be low or zero, regardless of where the real economic activity takes place.
However, the report goes further and calls for:
- Unitary taxation, which is the taxation of multinational companies on the basis of their global group profits, apportioned between the countries where their real economic activity (sales and employment) takes place.
Currently, tax authorities typically apply the arm’s- length principle in corporate taxation and use comparable market prices to ‘correctly’ assess the value of trade and income of multinationals. But, there are perceived flaws in this approach as highlighted by recent media stories about some Big Tech firms’ offshoring profits.
- Global minimum tax rates to end the provision of low and zero effective tax rates. These provide the incentive for profit-shifting by multinational companies.
This harmonisation is intended to prevent arbitrage between the corporate tax rates of different countries by members of the same corporate group or related entities. However, this would also remove one of the levers that countries, particularly developing nations, use to attract capital.
- A set of reforms to the global architecture and the creation of a global tax authority to oversee the setting and enforcement of international tax rules.
This could be perceived as a direct challenge to the sovereignty of national parliaments to legislate for their own residents, although some might say the European Union, OECD and Financial Action Taskforce have been doing that for years.
The report is significant and warrants public debate, particularly given the implications for privacy rights and the sovereignty of nation states. However, if the history of the Foreign Accounts Tax Compliance Act (FATCA) and the Common Reporting Standard are anything to go by, discussion amongst law makers might be minimal, mainly because the issues and rules are so complex that few people can understand them.
The private sector (businesses and professionals) might need to lead this discussion. Otherwise, some of these recommendations could be upon us before we have time to prepare for compliance.
Henry Brandts-Giesen is a partner at Dentons Kensington Swan
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