Exchange of information on tax matters

(First of two parts)

The complexities of our tax laws and regulations are now bothered with the increasing demands of the international community. Sometime in the middle of this year, the compelling requirements of the international tax standards elicited an urgent response from our lawmakers to initiate amendments to the Philippine National Internal Revenue Code (Tax Code).

Senate Bill No. 3220 proposes to amend the Tax Code primarily to put in place a more effective mechanism in the Philippines for international cooperation in tax matters through compliance with international tax standards on exchange of information. It will be remembered that the Philippines, in a April 2, 2009 report of the Organization for Economic Cooperation and Development (OECD), was recently identified as one of the jurisdictions failing to comply with the internationally accepted tax standards on exchange of information. With the proposed amendments to the Tax Code, the fear of being internationally ostracized and labeled as non-compliant is hoped to be removed. Potentially, the proposed amendments will also help cultivate a more favorable climate for investors and bring up confidence in the country’s capacity to comply with the international standards.

While the repercussions of the proposed amendments are intriguing and the implementation process still abstract at this point, a quick overview of the proposed amendments is instantly begging.

In brief, the proposed amendments hope to give tax authorities of other countries, co-signatories with the Philippines in appropriate bilateral agreements, some form of access to information on tax matters within the Philippine jurisdiction, as is the case today in various jurisdictions worldwide. The highlights of the proposed amendments may be categorized into three parts. Firstly, the proposed amendments seek to give to the Commissioner of Internal Revenue the authority to supply foreign tax authorities with information held by banks and financial institutions, subject to specific requirements as to the relevance of the tax information requested.

Secondly, the proposed amendments intend to allow a foreign tax authority to examine the income tax returns of taxpayers, upon the order of the President of the Philippines, and according to the rules and regulations on the necessity and relevance of the request for information that may be enforced subsequently. 

Thirdly, the proposed amendments seek to penalize the appropriate personnel of the tax office for unlawful divulgence of the information obtained, and the bank personnel for willfully refusing to provide the information requested.

As it stands, the proposed amendments may be broad enough to cover an array of scenarios for the exercise of other foreign tax authorities in requesting information on tax matters. Other than the general standard of relevance and purpose for which a particular tax matter is being looked into, the proposed amendments are arguably in need of specific parameters within which they are to operate. 

As previously done, perhaps the application of the OECD Commentaries will again be controlling, or at least be suggestive, during the finalization of the regulations, to implement the proposed amendments. This was done in numerous instances where the tax office gives a certain degree of credence to various OECD Commentaries on different international tax issues and aspects. At this point, maybe the standards provided by the OECD Commentaries on the Model Agreement on Exchange of Information on Tax Matters (Model Agreement) are illustrative of the boundaries and guidelines within which the exchange of information is intended to be implemented.

The OECD Commentaries on the Model Agreement state that agreements for the exchange of information should strike a balance between rights existing in the contracting countries and the need for effective exchange of information. The OECD Commentaries recognize that each contracting party may determine the manner in which information is to be gathered under its own internal laws for purposes of complying with the request for exchange of information. At the same time, the OECD Commentaries also seek to ensure that procedural rights of notice and hearing, existing in the laws of the requested country, still apply to the extent that they do not unduly prevent or delay the effective exchange of information.

(Jeri Alanz A. Banta is a Manager for Tax Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]).