The Rules Of The Game Are Set To Change For Tax Advisers
In the battle against tax avoidance, not just evasion, a wider net is being cast to capture those who advise on complex structures designed to minimise tax burdens.
The European Commission recently proposed a set of draft rules that will require intermediaries such as tax advisers to report schemes designed to reduce their clients’ tax bill. The aim is to tackle tax abuse and ensure fairer taxation.
The OECD too proposed Model Rules that require tax advisers to report schemes that hide offshore assets and their owners. The proposed rules, if incorporated into domestic law by countries, will impact banks and financial institutions, lawyers, tax advisers and accountants.
These actions seek to introduce a new disclosure regime that, some say, may also make client confidentiality a thing of the past.
What Do The OECD & EC Want Tax Advisers To Disclose?
The Organisation for Economic Co-operation and Development, a global standards setting body, proposed the Model Rules as part of its base erosion and profit shifting or BEPS project. Over 100 countries are collaborating on the BEPS project to design measures against tax avoidance strategies that exploit gaps in tax rules to artificially shift profits to low- or no-tax locations.
India has been incorporating BEPS proposals in its law over the past four years. More recently it implemented the Common Reporting Standard that encourages automatic exchange of financial information between countries. The OECD’s Model Rules for tax advisers target arrangements designed to circumvent the Common Reporting Standard.
But the Model Rules leave it up to individual countries to determine what types of structures need to be reported, Mukesh Butani, managing partner at BMR Legal, explained.
We have legislation on place of effective management through which certain forms of income is taxed in India. But we don’t have any rules that impose an obligation on a resident to disclose if he is a beneficial owner of a foreign trust; this obligation is present under our exchange control laws but not our tax laws. India could draw empowerment from the recently released Model Rules to bring in some of these disclosure requirements in its legislation and place the obligation on tax intermediaries.Mukesh Butani, Managing Partner, BMR Legal
The European Commission too has issued similar rules. Reportable structures include cross-border payment to a recipient resident in a no-tax or almost no-tax country, transactions involving a jurisdiction with inadequate or weakly enforced anti-money laundering legislation, etc.
The OECD Model Rules and the European Commission’s draft directive are targeting different but related things, Philip Baker, Queen’s Counsel at Field Court Tax Chambers, pointed out. The OECD rules are concerned with schemes designed to avoid the impact of CRS and the European Commission’s draft directive is meant to target tax avoidance schemes, he said.
Fate Of Client Confidentiality?
The OECD Model Rules say that an intermediary must disclose an opaque offshore structure at the time the arrangement is first implemented or whenever an intermediary provides services in respect of the arrangement or structure. But it adds that an intermediary is not required to disclose information that is subject to obligatory professional secrecy rules.
The European Commission’s draft directive acknowledges national rules on professional privileges and secrecy. Under the directive the obligation to report no longer falls on the intermediary but shifts to the taxpayer.
Keeping that in mind, rules in each country will determine the transactions that intermediaries would need to disclose, Butani said.
Let me give you a simple example. If you’re a tax agent in India providing tax return preparation services, you’re expected to know that a resident Indian is supposed to disclose a foreign bank account. In such a case, you can hold a tax return agent responsible.Mukesh Butani, Managing Partner, BMR Legal
The Model Rules get around the confidentiality issue by saying that if the disclosure of the information is likely to breach legal professional privilege, then the obligation to disclose falls on the customer who has bought into the scheme, Baker pointed out. But there is an undermining of the concept of confidentiality, he added.
One of the concerns that I have with all these developments is that there is a right to take legal advice. I don’t believe that there are advisers sitting and designing non-reportable schemes; they may just be informing their clients that a certain kind of scheme is not reportable under CRS.Philip Baker, Queen’s Counsel, Field Court Tax Chambers
The other concern, Baker said, is that the OECD is using these Model Rules and the pursuant disclosure obligations to make up for poor drafting of the Common Reporting Standards.