The changing tax landscape and voluntary disclosure programs
The world is gradually becoming border-less making it easier for individuals to hold assets outside their country of residence. Some of these monies held in foreign financial institutions go untaxed in their home countries. It goes without saying that cooperation at national levels is required to fight tax evasion and exchanging information is considered critical in addressing this.
The trend in exchange of information started first in Europe in 2003 with the EU Savings Tax Directive which required member states to provide other member states with information on interest paid to achieve effective taxation of the payments in the member state where the taxpayer is resident for tax purposes. In 2010, this trend became international with the emanation of the US Foreign Accounts Tax Compliance Act (FATCA) and more recently, the Common Reporting Standard (CRS).
There continues to be increased focus by tax authorities on multinational companies and High Net-worth Individuals (HNWIs) with significant cross border dealings. One does not have to look far back in time to know that the Panama leaks may have provided useful information in plugging tax leakages. The main question being whether the right tax has been settled in the home and host countries. Changes to privacy and data handling legislation through the automatic exchange of information between countries have now taken toll.
Last year, Nigeria experienced perhaps its worst hit with the global decline in oil prices leading up to an official recession. This emphasised the country’s fiscal and infrastructure deficits. While most developed countries have tax to Gross Domestic Product [GDP] ratios above 20%, Nigeria still records a global low of 6%. Amnesty and voluntary disclosure programs have been employed by other governments in addressing tax evasion. Perhaps this explains the rationale behind the recently announced Voluntary Asset and Income Declaration Scheme (VAIDS).
This article focuses on some trends in disclosure programs, highlights salient consequences and what taxpayers need to do given the information at hand.
Recent trends in information sharing and asset disclosure
Foreign Account Tax Compliance Act (FATCA) – United States of America
In 2010, the US enacted FATCA to prevent and detect tax evasion and improve taxpayer compliance. All U.S. citizens (including Nigerian green card holders) and tax resident individuals who own certain foreign financial accounts or other offshore assets are required to voluntarily report these assets or accounts to the US IRS. Foreign financial institutions also have reporting obligations to the U.S. Department of the Treasury.
As a result of this law, many US taxpayers became aware of their US tax obligations and non-compliance as the case may be. In 2014, the US initiated an offshore voluntary disclosure program that allows US taxpayers to regularise their tax reporting and avoid criminal liability and/or substantial civil penalties.
Common Reporting Standard (CRS)
In February 2014, the Organization for Economic Cooperation and Development (“OECD”), released the Common Reporting Standard to enhance the automatic exchange of bulk taxpayer information without a need for request/approval. Under CRS, granular information to be reported by Financial Institutions (FIs) with respect to accounts includes account balance, interest, dividends, rental income, other income generated with respect to assets held in the account or payments made to the account, and residence of taxpayer. In the case of certain types of entities, information relating to the controlling persons of the entities will also be reported.
The Standard is gradually gaining global acceptance as about 60 countries have shown intention to implement in 2017. As at 7 June 2017, Ghana intends its first information exchange by September 2018. Nigeria is also currently taking actions to formally endorse the CRS. Countries that have committed to this initiative automatically exchange information in agreed formats that largely favour the residence country of the taxpayer.
Mutual Administrative Assistance in Tax Matters
In order to deal with tax evasion and avoidance through an effective exchange of information on tax matters between the tax jurisdictions of different countries, the OECD set up a convention (“The Convention”). This initiative was first developed in 1988 and amended by Protocol in 2010. The amended Convention was opened for signature on 1 June 2011.
Irrespective of whether the exchange of information is automatic, on request or spontaneous, the OECD Convention requires all participating jurisdictions to exchange information relevant for enforcing the domestic tax laws of other jurisdictions that are parties to the convention. Nigeria signed the amended convention on 29 May 2013, but came into force on 1 September 2015.
Voluntary Assets and Income Declaration (VAID) Scheme
In March 2017, the National Executive Council [NEC] approved the implementation of the VAID scheme in principle. The Scheme seeks to encourage voluntary disclosure of assets and income as well as payment of all outstanding liabilities subject to a limited amnesty expected to last for 9 months. The scheme takes cognisance of Nigeria’s low tax to GDP ratio of 6%, one of the lowest globally and aims to curb tax evasion. It also seeks to curb the use of tax havens by multinationals and high net worth individuals. It is estimated that the Scheme would generate approximately USD1 billion in tax revenues. Guidelines on the scheme are yet to be issued but it goes without saying that the trend of information sharing to tighten tax revenue leakages is here to stay.
Generally, FIs will be required to enhance their due diligence procedures and collect additional documentation. Under FATCA and CRS, these may include self-certification forms to enable them determine the tax residence of the account holder and then report to the home country of the taxpayer. Automatic sharing of information across countries means that non-disclosure of information such as those in tax havens will no longer be sustainable.
The VAIDS scheme is expected to require full disclosure of information from income earned worldwide, assets held home and abroad, taxes paid and unpaid. It is also expected that a limited amnesty will be granted. While VAIDs is expected to be launched in the coming days, its implementation would imply that Nigerian taxpayers must also now be in full compliance with all tax laws.
In recent times we have seen the tax authorities seek to implement the provisions of information exchange under the Federal Inland Revenue Establishment Act (FIRSEA). Section 47 of the FIRSEA provides that the tax authority may give notice for full information on a person’s income or gain to be disclosed. For persons engaged in banking, this notice must be done in writing signed by the Chairman of the relevant tax authority.
These requirements have consequences whether intended or unintended for taxpayers as follows:
Business risks: Closure or suspension of accounts where relevant information is not provided to the FI
Reputational risks: These associated with inaccurate completion of such forms where information is not provided accurately and in a transparent manner
Significant penalties: Full disclosure of income earned both home and abroad will no longer be an option. Increased disclosures may result in significant tax penalties and interests for taxpayers who are wilfully or unintentionally non-compliant. This may also trigger extended audits and investigations.
Double taxation: Subject to the provisions of the local laws in different jurisdictions, taxpayers may be liable to tax on their worldwide income in multiple jurisdictions. Where double tax treaties exist, taxes suffered in other jurisdictions may be admissible as credit but it is also possible that refunds for excess taxes paid may not be obtainable giving rise to significant tax liabilities.
Tax leakages without proper structuring: Efficient structuring will now be needed more than ever before where assets have been held without giving thought to tax implications that could unfold. This will also be a major factor to be considered before acquiring assets, raising finance, and making investment decisions or embarking on any major business transactions.
Expatriation and Exit taxes: Individuals may choose to surrender their citizenship in a bid to avoid cumbersome reporting requirements and fines. This may attract exit taxes depending on asset and income value of their worldwide assets prior to expatriation as is the case in the US.
Whatever decision a taxpayer adopts in the light of the information disclosed will have associated consequences. As the popular saying goes, failing to plan is planning to fail. It will be interesting to see how the voluntary disclosure program unfolds in Nigeria. Taxpayers will need to stay abreast of these developments and plan ahead to avoid unintended exposures that erode value.
Esiri Agbeyi is a Partner at PwC Nigeria. She leads the People and Organisation tax team, advises corporates on international tax matters and provides specialised tax services for High Net Worth Individuals. She is a regular writer and public speaker on tax matters.
Oluwatoyin David is a Senior Associate on secondment with the Private Business/Client unit in PwC London.
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