Prompted by the financial crisis, countries have started paying more attention to the issue of tax assessment. In the context of the G20 summit held in London on 2 April 2009, the OECD issued a progress report on implementation of the internationally agreed tax standard. The standard was developed in 2004-2008 and requires the exchange of information upon request in all tax matters for the administration and enforcement of national tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged. This article provides an overview of implementation of the internationally agreed tax standard, with a focus on Belgium.
The OECD’s white, grey and black lists
The OECD has created three different lists with respect to implementation of the internationally agreed tax standard:
- White list (category one): jurisdictions that have substantially implemented the internationally agreed tax standard.
- Grey list (category two): jurisdictions that have committed to the internationally agreed tax standard but have not yet substantially implemented it.
- Black list (category three): jurisdictions that that have not committed to the standard.
The white list contains 40 countries, including Canada, China, France, Germany, Japan, the Russian Federation and the United States as well as lesser-known countries such as the Isle of Man, Jersey, Mexico and the US Virgin Islands. The grey list contains 30 so-called tax havens (such as Andorra, Aruba and the Cayman Islands) and eight “other financial centres” (such as Austria, Belgium, Luxembourg and Switzerland). Four countries were initially placed on the black list (Costa Rica, Malaysia, the Philippines and Uruguay) but a week later moved to the grey list after having agreed to cooperate (The most recent report, dated 19 May 2009).
Exchange of information under the 2008 OECD Model Tax Convention
Article 26 of the OECD Model Tax Convention sets forth five key ideas, of which only the first three are reflected in Belgium’s current double tax treaties (with the exception of the treaty with the US, see below):
- Countries shall exchange information in order to carry out the provisions of the Convention.
- Information received should be treated as secret and only disclosed in the framework of the assessment and collection of taxes.
- The exchange-of-information requirement should not result in a country being obliged to exchange information contrary to its own laws or administrative practices or to supply information that is not obtainable under the domestic law of that or the other contracting state or that is protected by a duty of professional secrecy or contrary to public policy;
- Countries should cooperate in the exchange of information even if they do not need the information for their own purposes or if they have no domestic interest in the information requested.
- A country cannot decline a request for information simply because the information is held by a bank or financial institution.
Belgium and the exchange of information
Belgium, like Austria and Luxembourg, has withdrawn its reservations to Article 26 of the OECD Model Convention. In fact, Belgium has already written to 48 countries, proposing to renegotiate its existing tax treaties so as to include Article 26. Belgium’s 2007 treaty with the United Stated contains an extensive exchange-of-information clause, as do its new treaties with China and Russia, signed in 2008. Moreover, the Belgian finance minister has announced that Belgium, in order to be removed from the grey list, will automatically exchange information in the framework of implementation of the Savings Directive as from 1 January 2010. (In order to be moved from the grey list to the white list, a country must have concluded at least twelve tax treaties providing for the exchange of information upon request.) Currently, all EU Member States, except Austria, Belgium and Luxembourg, exchange information on savings income. If Belgium does not timely apply the exchange-of-information system, withholding tax at a rate of 35% (rather than the present rate of 20%) will be imposed, effective 1 July 2011.
On 19 March 2009, the Belgian finance minister announced that the tax authorities will prepare a list of tax havens to be incorporated into the Belgian Income Tax Code. As soon as this list has been finalised, all companies with activities in the listed countries will have to mention this fact on their income tax returns and prove that their activities are based on sound economic and financial needs. There is also a plan to extend the statute of limitations for claims with respect to such payments from seven to ten years.
For its part, Switzerland distinguishes tax fraud from tax evasion (the latter being punishable by an administrative fine). Switzerland has now agreed to exchange information at the request of a foreign tax administration in both cases. However, it will only do so if the requesting administration can produce sufficient indications of tax fraud or evasion. For the sake of completeness, it should be noted that tax avoidance is legal if the parties do not conceal the effective transaction from the tax authorities, i.e., taxpayers are allowed to take all legal measures to minimise their tax liability.
Proposed EU directive on administrative cooperation in the field of taxation
On 2 February 2009, the European Commission published a proposal for a new directive on administrative cooperation in the field of taxation (COM/2009/029). The directive will apply to all types of direct and indirect taxes (except VAT and customs duties, for which particular rules already apply) and provides for both the exchange of information upon request (as well as further to administrative inquiries) and the automatic exchange of information. Moreover, other forms of cooperation are dealt with, such as simultaneous controls in more than one Member State and the obligation of tax authorities to share their experience and disclose information and documents.
As far as Belgium is concerned, the most important provision of the proposal is Article 17, which deals with limits on the obligation to exchange information.
Firstly, Article 17 states that even if a Member State does not need the information for its own tax purposes or has no domestic interest in the information, it shall nonetheless use its measures aimed at gathering information to obtain the requested information (meaning the national tax authorities should exchange information which they do not need for the assessment of domestic taxes). This paragraph is based on Article 26(4) of the OECD Model Convention.
Secondly, a Member State cannot cite administrative burden to refuse to provide information solely because the information is held by a bank or other financial institution if the information concerns a person resident for tax purposes in the requesting Member State.
Moreover, the directive introduces a most-favoured-nation clause, according to which a Member State must cooperate with another Member State at the same conditions as with a third country. In practice, this means that all other Member States could rely on the exchange-of-information clause contained in Belgium’s tax treaty with the United States.
The proposal must still be approved by all 27 EU Member States and afterwards transposed into national law.
New Article 338bis of the Belgian Income Tax Code, which entered into force on 20 November 2008, enables the Belgian tax authorities to tax Belgian residents based on information received from foreign tax authorities further to the exchange of information as foreseen in the Savings Directive. It should be noted, however, that certain questions could be raised relating to the use of information received before that date. In any case, when requesting information from foreign authorities about Belgian tax residents, the Belgian tax authorities should take care to observe the Belgian bank secrecy rules since, under Belgian law, they would not be able to obtain this information from a Belgian bank.