In July Indian Finance Minister Nirmala Sitharaman issued a clarion call to her G-20 counterparts, urging them to devise a way to automatically exchange information on cryptoassets, much as they do with traditional financial accounts.
The Indian government has long been wary of cryptoassets and their attendant tax evasion risks. Although the country won’t legally recognize cryptoassets, it taxes them, and it taxes them heavily.
In this vein, it was unsurprising that Sitharaman asked the G-20 to take the automatic exchange of information (AEOI) framework — which was developed by the OECD years ago in response to a G-20 request — and apply it to cryptoassets.
When Sitharaman made her demand in July, she warned that countries must band together to curb growing digital forms of tax evasion. They should form a global regulatory standard, she said.
A few months later, Sitharaman’s wish was granted. In October the OECD announced that it had developed a new reporting framework for the AEOI on cryptoassets at the request of the G-20.
There’s lots to be done with this cryptoasset reporting framework to ensure that jurisdictions apply the rules in a harmonized fashion. The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, which oversees the AEOI standard, has been tasked with ensuring the implementation of this new framework, Zayda Manatta, head of the Global Forum secretariat, told Tax Notes.
Although it’s a big project, it’s not the only big-ticket agenda item for the Global Forum in the coming year. There are a few notable items on the group’s agenda, including an expansion of AEOI-related peer reviews on financial institutions, a continued focus on strengthening regional tax policy power, and new pilot projects and toolkits in development.
The Global Forum will also reevaluate its future processes, including the way it conducts peer reviews, Manatta told Tax Notes. However, she emphasized that the Global Forum does not plan to completely change the way it operates.
According to Manatta, the secretariat has reached a level of comfort that its exchange of information on request standard is being relatively well implemented in most of the Global Forum’s jurisdictions.
“So we are now discussing with our members how we can move to a new process,” Manatta said. “This is expected to be finalized next year. The discussion is how we should organize our working process and how we can ensure compliance in a manner that is less resource intensive but at the same time as effective as the current process.”
That streamlining of work will be important because the Global Forum’s other agenda points usher in a new, amplified period of activity for the group, which will need to strike a balance between scaling up these new initiatives while maintaining progress on its ongoing work.
Expanding and Refining AEOI
The G-20’s request for a cryptoasset AEOI framework suggests that AEOI is generally working as it should and is ready to be expanded to other realms.
According to the Global Forum’s 2022 annual report, over 110 Global Forum member jurisdictions, about two-thirds of the group’s 165 members, are automatically exchanging information on financial accounts and have been designated as “on track.”
On track means two things. First, it means that a jurisdiction has developed and started to implement a complete administrative compliance framework ensuring its domestic financial institutions are complying with AEOI due diligence and reporting obligations. It also means there are few indications that the jurisdiction’s framework will fail.
Second, it means that a jurisdiction’s exchanges are complying with the OECD’s technical requirements, are happening on time, and that issues are addressed in a timely manner as they arise.
The OECD developed AEOI in 2014 and asked Global Forum countries to start exchanging information by 2017 or 2018. By 2018, nearly 100 countries had begun doing so. The relatively quick adoption of AEOI by Global Forum member states is a point of pride for the OECD, but some countries — developing countries — still face considerable difficulties in implementing the standard.
How are developing countries faring with AEOI? In 2021 the OECD reported that 46 developing jurisdictions were carrying out AEOI or had committed to do so in the near future.
In 2022 the OECD reported that an almost equal number — 52 — are now receiving capacity-building support to implement AEOI. For these countries, ensuring that financial institutions comply with their due diligence and reporting obligations is an ongoing issue. In response, the OECD has developed a model administrative compliance framework along with training and tools for tax administrators.
However, ensuring that financial institutions comply with their AEOI obligations is an issue that cuts across the entire Global Forum membership. To address this issue, the Global Forum is instituting a new peer review framework to conduct a detailed assessment of its members’ administrative compliance frameworks to ensure that financial institutions are complying with AEOI standards.
“Commencing exchanges is not sufficient to ensure the AEOI standard is being implemented effectively in practice, including by the financial institutions that report the information,” according to the 2022 annual report.
What can Global Forum members and financial institutions expect moving forward? According to the report, the OECD will be conducting on-site country visits and meetings with member states’ financial sectors to ensure that their reporting financial institutions are correctly applying due diligence procedures.
Also, it will launch an annual feedback process for member states to raise issues they’re having with information exchanges, such as the preparation, validation, and transmission of information.
The OECD expects to conduct this enhanced peer review over the next two years for roughly 100 jurisdictions and expects to finish the work by 2025.
Tax collection in Africa, which has always trailed other regions, experienced a predictable drop as a result of the COVID-19 pandemic, largely stemming from reduced consumption tax collections.
One of the most pressing issues for African tax administrators is figuring out how their countries can increase personal income tax collections; another is taxing the informal economy.
This year’s latest Revenue Statistics in Africa report, which surveyed 31 African countries, offers a broader picture of the African tax landscape. In the decade leading up to the pandemic, African countries had made gains in personal income tax and VAT collections.
Across the continent, their average tax-to-GDP ratio increased by 1.6% between 2010 and 2020. But when COVID-19 came, collections on goods and services taxes and VAT declined.
African countries can’t afford this drop given their generally low tax-to-GDP ratios. In 2020 the average tax-to-GDP ratio for the group was 16%, far below the average 33.5% ratio for OECD member states.
The good news is that personal income tax collection remained stable across African countries, providing a platform to develop strategies to increase these numbers.
Pre-COVID-19, the Africa Initiative was already prioritizing the cross-border recovery of tax debts. In 2023 we should expect more movement on this, including a toolkit for member countries.
Why is cross-border recovery a priority issue? Because African tax administrations are generally not engaging in this kind of cross-border collection activity, although the tools to do so are there. Tax information exchange agreements are an option. So is the OECD’s Convention on Mutual Administrative Assistance in Tax Matters (MAAC), which has been joined by 22 of the Africa Initiative’s 34 members.
However, the OECD found that adoption has been slow. Between 2018 and 2020, only five countries sent a total of 13 requests. According to the OECD, this is the case because tax administrators generally have limited knowledge about the cross-border recovery opportunities these instruments provide.
The knowledge gap is not only problematic from a quantity perspective but also from a qualitative perspective. Lack of knowledge about the process means that requests aren’t always as robust or thorough as they could be.
To address these issues, the Africa Initiative established a working group of tax professionals from 12 African countries and has committed to developing a toolkit to help countries that want to create or strengthen their cross-border tax recovery activity, which will be further developed in the coming year.
Latin America Initiative
Perhaps the most interesting development to emerge from the Latin America Initiative is a pilot project for a wider use of treaty-exchanged tax information to fight illicit financial flows.
Information exchange data is supposed to be solely used for tax, but increasingly, it’s being used to fight illicit financial flows and boost domestic resource mobilization.
Using information exchange data for nontax purposes (which the Latin America Initiative calls “wider use of treaty-exchanged information”) is largely uncharted territory in Latin America but is a key goal of the Punta del Este Declaration. That declaration, signed by members of the Latin America Initiative, is a commitment to fight tax evasion and other illicit financial flows through international tax transparency standards.
It is also legally allowed because the MAAC and article 26 of both the OECD and U.N. model double tax treaties allow recipient countries to use information exchange data for purposes other than tax if two conditions are met:
- both jurisdictions must allow that kind of use; and
- the sending jurisdiction must authorize the usage.
Mutual legal assistance treaties, like the Inter-American Convention on Mutual Assistance in Criminal Matters (which has an optional protocol concerning tax requests), also provide another avenue.
Latin America Initiative members largely have the domestic and international legal infrastructure in place to use tax information in this manner, according to the 2022 Punta del Este Declaration progress report.
All but one are MAAC signatories and, as such, have an international legal basis for using information exchange data for nontax purposes. The majority have legal frameworks to share domestic tax information with law enforcement for anti-money-laundering, crime prevention, and anti-corruption activities.
The majority also have safeguards to protect the confidentiality of information exchanged via treaties or handled by law enforcement authorities.
Over the coming year, three Latin America Initiative countries — Costa Rica, Argentina, and Paraguay — will embark on a pilot project to share information exchanged under tax treaties with law enforcement agencies targeting nontax financial crimes.
Argentina has broad goals for this; in September, an Argentine official said the country wants to be a regional leader on consolidating and sharing beneficial ownership information for tax and other purposes.
In furtherance of this, the country’s government sent a bill to the National Congress seeking to unify Argentina’s beneficial ownership registry so tax authorities can collect information in a central registry that would be open to other government agencies as needed.
Crypto Transparency for All
Now that the Global Forum will help implement the cryptoasset reporting framework, there are several questions and issues it will need to address. It will be vital that developing countries be able to fully take advantage of this framework, given their reliance on cryptoassets.
Cryptocurrencies are gaining deep traction in developing countries, where they are used for routine, everyday transactions. They are being used by taxpayers for overseas remittances and as an inflation hedge. But they’re also being used by governments for investment purposes.
In this environment, developing countries’ ongoing issues in implementing AEOI could become magnified, and the gulf between AEOI adopters and those struggling to use the framework could widen without specially tailored support.
A Word on Hub and Spoke
In Kenya, President William Ruto has commanded the Kenya Revenue Authority to double its revenue collection numbers by 2027. It’s a staggeringly ambitious five-year plan, but these are not normal times for Kenya, which can barely keep its head above historically high debt.
In June the country’s debt hit KSH 8.58 trillion ($70.8 billion), which is nearly 68% of Kenya’s GDP, according to the country’s National Treasury. It’s unclear whether this figure will be the peak point in a yearslong problem; Kenya’s debt load has increased fourfold within the past eight years.
Ruto is concerned about tax evasion from high-net-worth taxpayers and is mulling a wealth tax, although soaking the rich to dig the country out of its deep debt crisis is a very tall order.
“We are over-taxing trade and under-taxing wealth. We will be proposing tax measures that begin to move us in the right direction,” Ruto said, according to a report from Kenyan business publication Business Daily.
The question is: How will this be executed? Kenya launched a three-year voluntary tax disclosure program in 2021, but the country may need to adopt a stiffer enforcement approach to meet Ruto’s goals.
Meanwhile, in South Africa, tax revenue collection numbers are looking positive. During the 2021-2022 financial year, the South African Revenue Service collected ZAR 1.56 trillion, which is a 25% year-on-year increase compared to the 2020-2021 financial year.
Of course, there’s always room for improvement, and the agency has been instructed to collect more taxes. In October it announced that it will need to increase its next revenue targets by 5% at the instruction of Minister of Finance Enoch Godongwana.
The agency said it is committed to achieving this higher tax target, but it failed to shed light on where this tax revenue will come from and how it plans to achieve the target.
At the Global Forum, the Africa Initiative is encouraging African countries to link voluntary disclosure programs (VDPs) to their AEOI frameworks, noting in its 2022 progress report that Nigeria and South Africa have done so in the past.
According to the Africa Initiative, AEOI newcomers (those who have committed to AEOI or are about to launch their first automatic exchanges) can maximize their returns on AEOI by establishing VDPs before their automatic exchanges go live. However, none in that group have yet committed to this strategy.
“This represents a missed opportunity given the potential benefits of VDPs prior to the commencement of automatic exchanges,” according to the status report.
Meanwhile, in Latin America, the landscape is a bit different. Countries such as Ecuador and Mexico have linked their AEOI programs to other enforcement initiatives. In the case of Ecuador, it linked its AEOI to a VDP.
Mexico linked its AEOI data to its Foreign Account Tax Compliance Act enforcement activity. The ongoing discussion in the region is how tax administrations can build on this momentum and use AEOI and exchange of information on request data for other tax purposes, such as enforcing controlled foreign company rules in Mexico and ensuring that double tax conventions are applied appropriately in Uruguay.
From efforts like these, clearly the flavor of tax multilateralism advanced at the Global Forum is a kind of “hub and spoke” multilateralism, in which the group’s regional initiatives play a key role in helping Global Forum members workshop the group’s central tax transparency standards.
In doing so, the initiatives account for their unique regional characteristics and needs. This process is still fairly young — even the Africa Initiative, the oldest initiative, was founded in 2014. The newest one, the Asia Initiative, was created in November 2021.
However, it’s an interesting example of how to account for regional variations within a larger multilateral body, particularly as countries seek capacity-building assistance from the Global Forum.
“Over the coming years, one of the biggest challenges [we will face] is being ready to really respond to all the demands for assistance we receive from developing countries,” Manatta said.