TEA | What about Tax Transparency?

Introduction

Do you remember BEPS? I am your BEPS guy, remember?

BEPS (Base Erosion and Profit Shifting) refers to tax planning strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in tax rules to avoid paying tax.[1] BEPS practices cost countries 100-240 billion USD in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue.[2]

No shit. Now, if MNEs exploit gaps/mismatches in tax rules, what is the apparent solution to this? That these gaps be plugged of course. But how? You will find that for countries to respond appropriately, they need to share information.

Tax Transparency is central to the OECD (Organization for Economic Community Development) BEPS Action and simply means that information shared with one tax authority can promptly and easily be shared with others. How is this financial information shared? Who is likely to know your financial information apart from your insiders? Hmmn… maybe your bank? Yes. So tax transparency is about putting an end to bank secrecy and tax evasion through global cooperation.[3]

Today, we will be using a lot of abbreviations so pay attention to the only time I use the full thing. We are becoming tax experts eh. My current objective is to explain international tax transparency vis-a-vis the relevant regulations published by the Federal Inland Revenue Service (FIRS). To begin this, allow me begin from the beginning.

What about Information Exchange?

In previous articles I have reiterated the truism that international tax avoidance requires internationally concerted efforts. Countries are ultimately unable to appropriately catch all MNEs within their tax base because mismatches can always be exploited. Perhaps you can plug gaps, but you cannot foresee and control mismatches between your tax system and other tax systems. Multinationals can always exploit these to erode base or shift profits. The key to international tax co-operation is effective exchange of information.

You see, multinationals are usually resident in one country. Their headquarters is in one country. Let’s call this the origin. However, they do business in many countries across the world. Let’s call these the x-men. Information exchange usually involves disclosure of tax information by the x-men countries to the origin country. This includes various categories of income such as dividends, gross proceeds, royalties, salaries, pensions etc.

Information exchange can be automatic, spontaneous or on-request. Automatic exchange of information is the systematic and periodic transmission of this information. Spontaneous exchange is the provision of this information when it is presumably relevant to that country, information that has not been previously requested. On-request is a no-brainer. Come on!

Automatic exchange of information (AEOI) is organized and is the focus of this article.

Today, more than 90 jurisdictions exchange financial accounts information on an automatic basis, with more than EUR 95 billion recovered so far thanks to this system. As a result, 47 million offshore accounts with a total value of around EUR 4.9 trillion have been exchanged so far.[4]

What are Common Reporting Standards?

Now, Common Reporting Standards (CRS) are standards for automatic exchange of bank account information on individuals and certain entities between consenting countries, on an annual basis. It is the method to the madness, the how. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered as well as common due diligence procedures to be followed by financial institutions.[5]

To participate in the AEOI, countries have to enter into MCAAs (Multinational Competent Authority Agreements). These execute the automatic exchange of information among tax authorities. If Nigeria signs an MCAA on the CRS, it means that Nigeria can automatically receive information on the bank accounts held in other countries by Nigeria tax residents. Nigeria has signed up to the MCAA on the Automatic Exchange of Country-by-Country Reports (CbC MCAA) as well as the MCAA on Automatic Exchange of Financial Account Information (AEOI MCAA).

Nigeria, what’s up?

To the highlight! Nigeria has signed two Regulations which give effect to both MCAAs it signed. The first is the Country-by-Country Reporting Regulations and was published in June 2018. The second is the Income Tax (Common Reporting Standard) Regulations introduced in September 2019.

Country-by-Country Reporting Regulations

Oh I forgot. MNEs can be compelled to share information about their many subsidiaries in x-men countries. This is called Country by Country reporting. All large multinationals are required to prepare a country-by-country report with aggregate data on global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates. This CbC report is shared with tax administrations in these jurisdictions for use in transfer pricing and BEPS risk assessments.[6]

The main objective of the CbCR Regulations is to provide the FIRS with key information on the global activities of MNE Groups for the purpose of risk assessment.[7] In Nigeria, the CbCR Regulations are only applicable to MNE Groups with a consolidated revenue of ?160bn and above, if headquartered in Nigeria (if Nigeria is the origin) or the equivalent of €750m if headquartered outside Nigeria (if Nigeria is part of the x-men). Andersen Tax explains it as follows:

The Ultimate Parent Company of an affected MNE is required to file a CbC report that discloses financial information about the jurisdictions where the MNE operates, including related party and third-party revenues, profits and taxes paid and indications of the level of economic activities performed such as number of employees. The CbC report therefore provides tax authorities with information on where value is created within a group. This information is relevant for the FIRS' risk assessment procedures.[8]

Common Reporting Standard Regulations

The main objective of the CRS Regulations is to provide tax authorities with financial information of corporations and individuals required to tackle tax evasion and avoidance.

Nigeria’s CRS Regulations places a responsibility on Reporting Financial Institutions (RFIs) to share information on Reportable Accounts (RAs). RFIs include depository institutions, custodial institutions, investment entities and specified insurance companies. An RA is an account with a closing balance equivalent to $250,000 as at the end of the reporting financial year.

RFIs are required to file on an annual basis, financial account information on Reportable Accounts (RAs) maintained by the RFI. The information to be reported include interests, dividends, account balance or value, sales proceeds from financial assets etc. Unlike the CbCR, the CRSR affects both companies and natural persons.

What shall the local man do to be saved?                          

In summary, what exactly does Tax Transparency mean to the local man? That all the banks in enabled countries can collate tax information (about taxpayers) and send to their tax authorities. The relevant tax authorities will then collate the information that relates to Nigeria and share. Similarly, Nigerian banks will also be required to share information on the bank accounts held by individuals that are tax residents of other countries with the FIRS. The FIRS will then automatically share this information with these other countries.[9] The purpose of this is to combat international tax evasion.

So yeah, the FIRS will have access to information on your bank activity, both your local bank accounts and your foreign bank accounts. Currently, more than 90 jurisdictions are sharing information automatically, so go figure. Nigeria’s CRSR places the threshold at a bank balance of $250,000. So dear HNI (High Net-worth Individual), pay your taxes.

But if you are like me – you have only local accounts and you can only dream of $250,000, this is not your message. Relax and play Lady Donli’s Enjoy Your Life. Or ask “God when?”

Whichever, TGIF!

[1] https://www.oecd.org/tax/beps/about/

[2] https://www.oecd.org/tax/beps/

[3] https://www.oecd.org/tax/beps/tax-transparency/

[4] https://www.oecd.org/tax/beps/tax-transparency/

[5] https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/

[6] https://www.oecd.org/tax/beps/beps-actions/action13/

[7]https://www.mondaq.com/Nigeria/x/853988/tax+authorities/Unprecedented+Global+Drive+for+Tax+Transparency+The+Nigerian+Perspective

[8]https://www.mondaq.com/Nigeria/x/853988/tax+\authorities/Unprecedented+Global+Drive+for+Tax+Transparency+The+Nigerian+Perspective

[9] https://www.pwc.com/ng/en/assets/pdf/the-common-reporting-standard.pdf