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International tax transparency and Republic Act No. 10021

International tax transparency and Republic Act No. 10021 by: Senen M. Quizon

In the Organisation for Economic Co-operation and Development (OECD) progress report issued last November 10, 2010, the Philippines joined other 80 jurisdictions on the OECD’s white list of jurisdictions that have complied with the internationally agreed standards on transparency and exchange of tax information. 

The upgrade was secured by the country after the government issued Revenue Regulations No. (RR) 10-2010, which is the implementing rules and regulations of Republic Act No. (RA) 10021 (The Exchange of Information on Tax Matters Act of 2009), in time with the Global Forum on Transparency and Exchange of Information for Tax Purposes held last September 29-30 in Singapore.

While this development made headlines in the newspapers, little is known about the OECD list and the importance for jurisdictions to comply with the global standards on tax information sharing.    

The OECD, which consists of 33 of the largest economies in the world, has been instrumental in the promotion of international tax transparency and exchange of tax information as part of its global initiative to combat international tax avoidance and evasion practices.  Furthermore, the OECD is credited for the development of the standards on tax transparency and effective exchange of tax information which are reflected in the 2002 Model Agreement on the Exchange of Information on Tax Matters (OECD Model TIEA) and Article 26 of the 2004 OECD Model Tax Convention on Income and Capital and its commentary which provides useful guidance for countries entering into exchange agreements.  

The internationally agreed standards require exchange of information upon request if the information has a foreseeable relevance to the enforcement of domestic tax laws of the requesting party. Likewise, the standards require that no restrictions are to be made on exchange of information for reasons of protecting bank secrecy or domestic tax interest requirements.  The same standards have guided our legislators in ensuring that RA 10021 meets the international standards for effective exchange of information.

To comply with the global standards on the tax information exchange, RA 10021 authorized the Commissioner of Internal Revenue (CIR) to obtain information on bank deposits and other related information held by financial institutions, and to supply such information to requesting foreign tax authorities pursuant to an international convention or agreement on tax matters.  The same information is allowed to be utilized by the (Bureau of Internal Revenue) BIR for tax assessment, verification, and audit and enforcement purposes.  The law allows a requesting foreign tax authority to examine the income tax return of taxpayers upon order of the President of the Philippines.

The internationally agreed standards served as the basis for the OECD in categorizing jurisdictions depending on their degree of commitment or cooperation.  In this regard, the OECD has created and maintains three (3) lists:  (a) “white” list of jurisdictions that have substantially implemented the internationally agreed standards; (b) “gray” list of jurisdictions that have committed to, but have not yet substantially implemented, the internationally agreed standards; and (c) “black” list of jurisdictions that have not committed to implementing the internationally agreed standards.

The initial OECD list was released in 2000 and named and shamed 35 jurisdictions.  The Philippines, along with Costa Rica, Uruguay, and Malaysia (Labuan) belonged to the last four jurisdictions which appeared in the blacklist based on the OECD progress report released during the G20 summit on April 02, 2009.  However, only a few days after the OECD announcement,  the country was taken off the black list and transferred to the grey list due to the commitment made by the government to review its bank secrecy law and introduce legislation that would conform to the internationally agreed standards on exchange of tax information.   The Philippines attained “white list” status after it passed RA 10021, and issued the law’s implementing regulations (RR 10-2010).  Currently, the black list is empty, but other jurisdictions may be returned in the black list if they fail to honor their commitments or uphold the agreed international standards.

The international body which monitors compliance with the exchange of information standards is the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.  The Global Forum was established in 2000 and restructured in 2009 to ensure that all of its members are on equal footing and will fully implement the standards on exchange of information.   The Global Forum currently has 95 member jurisdictions, and one of its mandates is to conduct a two-phase peer review of the legal and regulatory framework of jurisdictions (Phase 1) and practical implementation of standards on tax transparency and exchange of information (Phase 2).   The Philippines has just been subjected to the Phase 1 peer review and is scheduled to undergo Phase 2 of the peer review in 2013.

What would happen to those jurisdictions that do not eliminate barriers to tax transparency or fail to comply with the agreed international standards on exchange of information for tax purpose or remained in the black list?  

Neither the OECD nor the Global Forum has the authority to impose sanctions against any uncooperative jurisdictions.  This means that each country has to decide on the actions they would take against any of the jurisdictions in the black list.  In line with this, the G20 provided a list of possible “defensive measures” that each country may take against the uncooperative jurisdictions.  Thus, aside from the negative publicity, possible sanctions may include the imposition of withholding tax on cross-border payments to black listed countries; repeal or revocation of bilateral tax treaties; embargo or cancellation of free trade agreements; and reduction of foreign aid and withdrawal of financing from international financial institutions. 

Privacy and independence/sovereignty issues explain the reluctance of some jurisdictions in adopting the standards on tax transparency and exchange of information.  The fear in many jurisdictions is that the easing of information may lead to fishing expeditions.  There is also the reluctance of many tax administrations to share taxpayer information while other jurisdictions object to the standards since this entails giving up their sovereignty over domestic tax law and policy formulation.

To safeguard privacy and protect confidentiality, the standards, as contained in the OECD Model TIEA and Model Tax Convention, impose an obligation to exchange only those information that have foreseeable relevance to the administration or enforcement of the domestic tax laws of the requesting party to avoid fishing expeditions.  The standards also require respect for taxpayers’ rights through strict confidentiality of information exchanged. 

RA 10021 provides for similar protection to safeguard taxpayers’ rights.  The law requires that all information received by a foreign tax authority should be treated as absolutely confidential in nature, in the same manner that the foreign tax authority would treat the same information obtained by them under its laws and regulations.  Moreover, while the law allows foreign tax authorities to inspect the income tax returns of specific taxpayers, examination may not proceed without the order of the President of the Philippines, upon recommendation of the CIR.  The law also gives the taxpayer, whose return is the subject of request for inspection by the foreign tax authority, the right to receive notification within 60 days from receipt of the request. 

Under Section 3 of RA 10021, as implemented by RR 10-2010, all requests must also meet certain requirements that include the following: the identity of the person under examination or investigation must be clearly stated in the request; the grounds for believing that the information requested is in the Philippines must be proven to avoid fishing expedition; and the evidence that the requesting country has exhausted all means available in its own territory to obtain the information must be stated in the request. 

With these developments, taxpayers engaged in offshore or international transactions should be prepared to encounter increased scrutiny from both the BIR as well as foreign tax authorities.  It is thus incumbent upon them to ensure that they comply not only with the domestic tax laws and regulations, but also adhere to the tax laws prevailing in other countries where they derive income as well.  On the part of the BIR, the cooperation and sharing of information could lead to enhanced quality of audit as well as  faster resolution of  tax disputes particularly those involving foreign-sourced income of local taxpayers.