Implementing the exchange of tax information act

In March 2010 the President signed Republic Act No. 10021, “The Exchange of Information on Tax Matters Act”. This law is important primarily for two reasons: from a domestic standpoint, it reinforces the Bureau of Internal Revenue’s (BIR) arsenal against tax evasion by expanding the Commissioner’s authority to look into a taxpayer’s bank deposits and, more importantly, sharing this information with his foreign counterparts. From an international perspective, it begins the process by which the OECD will remove the Philippines from its “Grey List”. This is comprised of countries that have shown a refusal or inability to exchange information with revenue authorities of other jurisdictions concerning bank deposits of specific persons. The Grey List is part of an international initiative to combat tax evasion that began in the late 1990s with the realization that money flows to countries with opaque disclosure rules unfairly reduced the tax base of other countries and distorted the distribution of capital. The furor over recent high profile financial scams and the issue of bankers’ compensation has also given impetus to the fight against tax evasion. Remaining on the Grey List has practical implications for a foreign entity doing business in the Philippines especially when its home country provides disincentives (mostly fiscal) for dealing with Grey List countries. These actions in turn impact on the Philippines’s ability to attract foreign investment and be a credible international trading partner.

The heart and soul of the law are set forth in Section 3, which amends Section 6 of the Tax Code. This amendment gives the Commissioner the power to look into a taxpayer’s bank deposits on the request of the competent authority of a foreign country with which the Philippines has an agreement and to share such information with that authority. Prior to the amendment, the Commissioner could look into information held by financial institutions only in the case of a decedent to determine his gross estate, or when a taxpayer wishing to compromise his tax liabilities alleges financial incapacity to pay the tax. In making the request for information the foreign authority must show that the information being requested is “foreseeably relevant” to enforcing its tax laws. This prevents a country from going on a fishing expedition or requesting information that is not relevant to the tax investigation at hand. Section 3 also allows the BIR to use the information it discovers from the request for its own tax assessment, verification, audit and enforcement purposes.

While the law’s passage is the first step to our removal from the grey list, it is also critical that Philippine authorities sign tax information exchange agreements (TIEAs) with at least 12 jurisdictions and that these TIEAs come into force and effect. The agreements must be substantially as that laid down by the latest version of Article 26 of the Model Tax Convention. Essentially, viz.:

• State parties must exchange information that is foreseeably relevant to enforcing their domestic tax laws. States cannot refuse to supply information on the ground that such information is held by a bank or financial institution.

• Information obtained under the request shall be kept secret and shall be disclosed only to tax authorities.

• A State is not obliged to carry out activities that would violate its laws, nor supply information that it does not have, nor supply information that is classified as trade and commercial secrets or processes, nor information the disclosure of which is inimical to public policy.

The international body that monitors progress of countries in this regard is the Global Forum on Transparency and Exchange of Information for Tax Purposes, which presently has 90 members from the G20, OECD countries and even Grey List countries. By international consensus The Global Forum has a three year mandate to conduct peer reviews of its member countries, of which the Philippines is one. The first phase of the review shall be concerned with the legal and regulatory framework in place, while the second is concerned with the practical application of the framework. The first phase review for the Philippines is scheduled in June this year, while the second phase is scheduled sometime in 2013. The Global Forum’s seal of good housekeeping will determine whether the Philippines gets off the list permanently or whether it needs to perform additional actions such as amending Republic Act (RA) 10021. This calls to mind the actions of a similar international group: when in 2001 Congress passed the anti-money laundering law (R.A. 2160), the Paris-based Financial Action Task Force (FATF) determined that the reporting thresholds under the law were too high as to make the law ineffective. When FATF refused to take the Philippines off the “black list” of countries with no or ineffective anti-money laundering laws, Congress relented and amended the law in 2003.

The Global Forum is one example of how international consensus gives rise to international law. It can be argued that the Global Forum can enforce international standards of disclosure by the power it wields to recommend to the OECD to remove from, retain on or return countries to the Grey List. Just as significant, an individual state can, through its domestic law, force the issue of another country’s compliance with international law. Recently, for example, France amended its tax laws to define the meaning of non-cooperative jurisdictions (essentially Grey List countries) and to penalize French entities receiving income from these places by increasing withholding tax rates on real estate profits, real estate capital gains and capital gains on the sale of shares stock when these are realized by entities established in non-cooperative jurisdictions. France has also increased the withholding tax rates on passive income (interest, dividends, royalties) paid to entities located in non-cooperative jurisdictions. These measures are obviously meant to discourage French persons from doing business in non-cooperative jurisdictions by increasing the costs of their obligations and liabilities.

Presently, the BIR is drafting the internal regulations of RA 10021. This is certainly critical to safeguarding taxpayers’ rights to privacy. However, it is just one step in a long process to keeping our good standing in the international community. Philippine revenue and diplomatic authorities must conclude the requisite 12 tax information exchange agreements. In the meantime that that number has not been achieved, Philippine diplomatic authorities must conduct an information campaign among other countries of the existence of the law. These actions should dispel any suspicions that the Philippines is a haven for dubious funds.

(Noel P. Bonoan is the chief operating officer and vice chairman of Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

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])