Tax transparency: Implications of international conventions, agreements
In this simple statement, the continued survival of government, constitutionally, is hinged solely on its ability to provide public goods and services that would guarantee security and wellbeing of the citizens.
Providing public goods and services for citizens’ security and wellbeing requires huge financial resources; especially in this age of technology-dependent populace, increasing social restiveness and stiff competition for investible capital among nations.
Governments depend primarily on tax revenue for the funding required to fulfil its mandate. Thus, tax revenue is the pivot for developing and maintaining infrastructures, instituting law and order, and promoting appropriate economic interventions.
The central role of tax revenue in governance and ability of governments to deliver on its mandate has taken the issue of taxation beyond purely legal matter into the public domain of morality.
The public outcry that trailed allegations that notable companies like Starbucks, Google, etc. paid very little tax relative to their large volume of business in some countries bore testimony to the fact that taxation is much more than a legal issue in today’s business environment. Especially, where the defence that “we broke no law” only succeeded in inciting the populace against these companies.
What is Tax Transparency?
Tax transparency is multi-sided – it concerns taxpayers (including their agents or consultants), governments, tax authorities and the citizens. In this context, we will work with the definition proposed by the firm of Ernst & Young LLP (UK) in its publication Tax Transparency: Seizing the Initiative, 2013, which considers tax transparency as:
• “The way an organisation communicates its approach to tax and the tax it pays. How an organisation provides clarity on the complex area of tax and gives stakeholders confidence that a fair share of tax is being paid.
• The way governments disclose the payments they receive in the form of taxes and how tax authorities in different countries cooperate to share information about the same taxpayer”.
One other element of tax transparency (that is relevant to our situation) is the duty of society to question the tax system, taxpayers’ compliance, activities of tax agents (consultants) and the use of tax revenue.
We can then sum up tax transparency as taxpayers’ responsibility to adequately report their tax standings thereby demonstrating that correct amount of tax was paid; governments’ responsibility to properly and correctly account for all tax revenue collected and the use; duty imposed on tax authorities to exchange tax infor`mation with counterparts in other jurisdictions; and social duty of citizens to demand accounts from all relevant parties in the tax system.
Voluntary and Mandatory Transparency
Tax transparency obligations come in two forms – obligations legally imposed and obligations voluntarily assumed.
Ordinarily, legally imposed obligations would come with possible sanctions as a mean of ensuring compliance; whereas voluntary assumption of tax transparency obligations can be a tool for managing reputational risk.
Until recently, mandatory tax transparency reporting for a taxpayer was limited to the requirements of the Companies & Allied Matters Act and relevant accounting standards (including the International Financial Reporting Standards –IFRS).
Almost none exists for the Government and tax authorities. The scope has widened significantly by the provisions of certain international conventions and agreements to which Nigeria is a signatory.
Some countries (mostly Europe, Australia and North America) have enacted domestic legislation for increased tax transparency. Australia is a model of such regime with the release of the Tax Transparency Code (TTC) in 2016.
The TTC prescribed the tax information that each relevant taxpayer is mandated to publish, including Medium & Large Businesses (turnover of between A$100m & A$500m):
A reconciliation of accounting profit to tax expense and to income tax paid or payable; identification of material temporary or non-temporary differences; and accounting effective corporate tax rates for local and global operations.
In addition to the first, large Business (turnover of over A$500m): Approach to tax strategy and governance; tax contribution summary for corporate taxes paid; and information about international related-party dealings.
The tax authority equally have tax transparency obligations under the domestic law.
For example, the Australia Tax Office (ATO) is required to publish information regarding large corporate tax entities that have a total income of $100 million or more per annum; publish information regarding mineral and petroleum royalties payable per entity, irrespective of the amount; and optional periodic publication and disclosure of aggregated information relating to a specific tax, excise duty or customs duty.
International Agreements & Conventions
Nigeria is a signatory to the following international agreements or conventions: Bilateral Tax Treaties: there are currently fourteen (14) tax treaties in force. Each of the treaties contain (in varying proportions) provisions relating to exchange of information, assistance in tax matters, mutual agreement procedures.
Foreign Account Tax Compliance Act (FATCA): Nigeria signed up to the FATCA with the USA. Under the FATCA, financial institutions in Nigeria are under obligation to report on accounts or assets held by US nationals.
Convention on Mutual Administrative Assistance in Tax Matters (the Convention): Nigeria signed the Convention in 2013 and it has entered into force. Currently 126 jurisdictions (as at November 2018) comprising of all OECD, G20, and BRIICS countries, and major financial centres have joined the Convention for the purposes of exchanging tax information, joint or simultaneous tax audit and assistance in tax collection.
Multilateral Competent Authority Agreement on Common Reporting Standards (CRS MCAA): Nigeria signed the CRS MCAA in 2017. Under the CRS MCAA, 100 jurisdictions (as at end of 2018) have started automatic exchange of accounting information. The number is set to grow as 8 other jurisdictions (including Nigeria & Ghana) are set to join in 2019/2020.
Multilateral Competent Authority on Country-by-Country Reporting (CBC MCAA): Nigeria was one of the first countries to sign the CBC MCAA in 2016.
Under the CBC MCAA, countries agreed to automatically exchange CBC reports filed by multinational enterprises resident in their jurisdictions with other countries that signed up. Exchange of CBC reports began in 2017.
Other BEPS Agreements: Embedded in the BEPS agreement is the automatic exchange of “Tax Rulings”. Every country that agreed to implement the BEPS package is expected to automatically exchange domestic tax rulings with relevant jurisdictions.
Major tax transparency obligations under international agreements and conventions are imposed upon the tax authority. The aim of the transparency obligations are to strengthen cooperation among tax authorities, promote tax certainty for taxpayers, avoid double non-taxation and reduce harmful tax competition.
Tax transparency obligations of governments are two-fold- Collect all accruable tax revenue. The government has both legal and moral duty to ensure collection of all accruable revenue using appropriate policy, legislation and administration.
Regional economic conventions has pushed the boundaries of tax transparency beyond what is contained in domestic legislation. The role of the EU in the Apple case with Ireland is a case in point.
The Irish government allegedly failed, under the EU rules, to appropriately tax the income of Apple in Ireland. The EU went ahead to compel Apple to pay the supposedly under-assessed tax.
Properly account for the revenue collected- accounting for tax revenue comes in two forms.
Adequate public information on revenue assessable, actual assessment, amount collected, tax expenditure; proper application of the funds generated for only the good of the people who paid the taxes and for whom the revenue was generated.
Fiduciary Transparency Duty of Tax Professionals
An emerging tax transparency issue is that of fiduciary duty of tax professionals or agents to the various stakeholders.
Tax professionals are now being saddled with a duty to do impact analysis of the tax advices that they offer to companies. What is the impact of tax advice?
Citizens (general public)- ability of government to provide social infrastructure; and personal or family economy (lost wages, businesses;
Government- availability of revenue for government to carry out its constitutional responsibility; and political legitimacy of government may come under threat and throw the whole country into crisis
Shareholders- security of investment (tax problems may drive the business out of market.
Taxpayers- reputation of the company; and effective corporate tax rate when adjusted for back duty, penalty, interest and professional fee.
Tax transparency obligation is evolving from being voluntary to being mandatory and it is not limited to taxpayers or tax authority. Every one stakeholder is included.
• Gbonjubola works with the Federal Inland Revenue Service
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