Monica Bhatia, Head of the Global Forum on Transparency and Exchange of Information for Tax Purposes for the OECD, examines how the peer review process has enhanced tax co-operation and transparency.
Reflecting the decision taken by the Global Forum at its meeting in Mexico on 1-2 September 2009, the OECD Council adopted a decision formally establishing the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) as a Part II programme of the budget of the Organisation on 17 September 2009.
All of the activities of the Global Forum are carried out with the aim of ensuring the effective worldwide implementation of the international standard of transparency and exchange of information for tax purposes (‘the international standard’). This standard is based largely on the OECD Model Tax Convention and its Commentary, as updated in 2004, and the 2002 Model Tax Information Exchange Agreement and its Commentary. The standards have also been incorporated into the UN Model Tax Convention and the G20 has called on all countries to implement them. Further, a number of international organisations have incorporated them into their tax cooperation frameworks [and policies].
The principal mechanism used by the Global Forum to achieve its objectives is the ‘peer review’ process. The Global Forum developed the peer review mechanism during the first six months after its Mexico meeting. During this period its Peer Review Group (PRG), which is tasked with conducting the reviews, developed detailed Terms of Reference, a methodology for undertaking the reviews, as well as assessment criteria and a comprehensive schedule of reviews. These were adopted by the Global Forum in February 2010.
The peer review process developed by the Global Forum comprises two phases. Phase 1 reviews assess the quality of a jurisdiction’s legal and regulatory framework for the effective exchange of information, while Phase 2 reviews look at the application of the international standard in practice. The methodology also provides for Combined – Phase 1 and Phase 2 – reviews. To date the Global Forum has adopted 79 Phase 1 reviews and 20 Combined reviews. A total of 555 recommendations have been made in these reviews, following which 17 jurisdictions could not move to Phase 2 and three could progress to Phase 2 subject to meeting certain conditions. Another nine peer reviews, including two combined reviews, are under consideration by the Global Forum.
The Global Forum has also completed a number of supplementary reviews. The supplementary review process, adopted by the Global Forum in 2009, is so designed that the progress made by a jurisdiction in implementing the recommendations is reflected in a published document. The methodology also provides for a situation where a jurisdiction back-steps on its regulatory framework or stops exchanging information, in which case the Chair of the Peer Review Group may ask the jurisdiction to present the changes and the Peer Review Group may then decide to launch a follow-up procedure. Thus far, 17 jurisdictions have made requests for supplementary reviews. As many as 60 recommendations have been removed as a result of the supplementary reviews completed because it was found that the jurisdictions had taken sufficient steps to comply with the international standard.
The supplementary reports provide a measure of the effectiveness of the Global Forum and the impact that its work has had on policy development. The Global Forum has now entered the next phase of its task with the launch of the stand-alone Phase 2 reviews, which will assess the application of the international standard in practice. The Global Forum has drawn up its schedule of reviews and the first set of stand-alone Phase 2 reviews will be considered by the Peer Review Group in early 2013. By the September 2013 meeting of the Peer Review Group, we should have completed about 27 standalone Phase 2 reviews.
Recommendations made during the peer review process are one measure of output from the process. However, the Global Forum has been charged with encouraging countries to implement the standards and its recommendations are only a means to that end. The real proof of the success of the work done by the Global Forum is evident from the fact that jurisdictions have begun to make changes in their laws and legal structures to accept the recommendations that have been made. So far 50 jurisdictions have provided follow up reports describing actions they have taken to implement recommendations - 17 jurisdictions have allowed or improved access to bank information for tax purposes, in addition to this, 17 jurisdictions have introduced, or are introducing, measures to abolish, immobilise or otherwise identify the owners of bearer shares, 42 jurisdictions have improved their legislation to ensure the availability of accounting and ownership information and six jurisdictions have eliminated domestic tax interest requirements to access information for EOI purposes.
These statistics indicate quite clearly that the work of the Global Forum has found acceptance even among those countries that did not receive favourable reports. This is testimony to the principles of fairness, equity, and consensus upon which the Global Forum is operating.
Apart from making changes in their laws, jurisdictions around the globe are entering into new agreements. Agreements that were not in keeping with the internationally accepted standards are being updated to reflect the norm. More than 800 new bilateral agreements have been signed that allow for the exchange of information in accordance with the international standard. Multilateral Tax Information Exchange Agreements (TIEA) negotiations have resulted in the signing of more than 100 bilateral Tax Information Exchange Agreements. Thirty-eight jurisdictions including 35 Global Forum members have now signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters, an innovative and wide-ranging instrument that meets the Global Forum standards, and more have indicated their intention to do so.
As important as it is to make some real efforts to set up legal systems that are based on principles of transparency, it is equally important to ensure that these systems operate effectively and efficiently. In fact, the Phase 2 peer reviews are designed to do just this. It can be seen the world over that countries now recognise the importance of having human resources dedicated to the task of managing exchange of information (EOI) mechanisms. Many countries have increased the number of staff directly involved in EOI, others have established new EOI Sections, drafted EOI Manuals outlining procedures to be followed in handling requests, or have amended procedures in their case management systems to include sending regular updates to EOI partners. Many countries have reported shortened times for responding to an EOI request. All these changes indicate that countries are moving towards more and more transparency and more effective exchange of information meaning that tax evaders have fewer and fewer places to hide.
The Global Forum does not simply publish its reports and then leave the jurisdictions to fend for themselves. The Global Forum has taken upon itself the task of helping member jurisdictions to enhance their capacity for exchange of information by teaming up with international organisations like the World Bank, IMF and others. Among the various mechanisms that the Global Forum has adopted, is the holding of various regional training seminars that focus on transparency and exchange of information for creating awareness of the international standard and help prepare countries for their peer reviews. Five regional seminars have been held (in Jamaica, Australia, South Africa, Ghana and the Philippines), attended by 248 participants from 77 jurisdictions and seven international organisations. Two pilot projects have taken off, funded by the UK Department for International Development (DFID), to provide assistance to Ghana and Kenya to help them build capacity. In order to match demand and supply of assistance, the Global Forum also hosts a coordination platform which contains details of jurisdictions needing assistance and helps link them with the Global Forum’s partner organisations and donor agencies that are in a position to provide it.
The effectiveness of the Global Forum is also demonstrated in its growing membership. From a membership of 95 in 2009, it has grown to 113 today. All the jurisdictions that have come on board are fully aware that along with membership of the Global Forum, come some attendant responsibilities. These include a commitment to the internationally accepted standards of transparency but also the need to make efforts to put in place and maintain a legal system that is in keeping with these standards. This is not an easy task. Yet, an impressive number of countries have joined the Forum and many more have evinced keen interest to join. This only shows that despite the responsibilities that membership of the Global Forum casts upon the jurisdictions, all countries realise the significance of this endeavour and the need to come together to address the problem of tax evasion.
In the years that it has been functioning, the Global Forum has become the legitimate voice of countries who are interested in setting up systems that are based on transparency and cooperation. The Global Forum has been able to bring the point home to countries around that world that transparency is not something that is just associated with exchange of information but that legal systems based on transparency have a direct correlation with the increasing of domestic tax revenues.
The Global Forum has set and operated a truly inclusive system that has worked with International Financial Centres and other low tax/ no tax jurisdictions. Their commitment to the international standard and the move towards greater transparency reflects the realisation that an economic model based on secrecy can no longer survive. They have actively worked as Global Forum members on equal footing to take the transparency agenda forward and will remain at the forefront of its future work.
As the Global Forum stands on the threshold of a new phase of its work with the launch of the Phase 2 reviews, it is clear that even though it has made giant strides so far, its work is far from done. Ultimately the real test of whether the Global Forum has achieved its goal is whether it has improved transparency and made exchange of information more effective in practice. This can only be determined at the end of the Phase 2 reviews. The challenge now is to build on the success that has already been achieved to enhance tax cooperation in practice throughout the world.
Monica Bhatia has over 20 years of experience in the Indian Ministry of Finance. She serves as the Director in the Department of Personnel and Training of the Government of India. In 2012, she was appointed Head of the Secretariat of the Global Forum on Transparency and Exchange of Information for Tax Purposes.