World leaders at the G8 Summit meeting in Lough Erne, Northern Ireland, issued a declaration Tuesday calling for countries to share tax information and increase transparency to discourage tax evasion, and President Obama released an action plan for identifying actual company ownership.

The G8's 10-point “Lough Erne Declaration” states, “Governments have a special responsibility to make proper rules and promote good governance. Fair taxes, increased transparency and open trade are vital drivers of this.”

The declaration recommends, “Tax authorities across the world should automatically share information to fight the scourge of tax evasion. Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where. Companies should know who really owns them, and tax collectors and law enforcers should be able to obtain this information easily. Developing countries should have the information and capacity to collect the taxes owed them—and other countries have a duty to help them.”

Other parts of the declaration relate to anti-corruption measures. “Extractive companies should report payments to all governments - and governments should publish income from such companies. Minerals should be sourced legitimately, not plundered from conflict zones. Land transactions should be transparent, respecting the property rights of local communities.”

The G8 also called for economic policies to promote free trade and greater transparency. “Governments should roll back protectionism and agree new trade deals that boost jobs and growth worldwide.  Governments should cut wasteful bureaucracy at borders and make it easier and quicker to move goods between developing countries. Governments should publish information on laws, budgets, spending, national statistics, elections and government contracts in a way that is easy to read and re-use, so that citizens can hold them to account.”

White House Action Plan
The White House released its own action plan in response to the G-8 commitment for members to publish national action plans on transparency of company ownership and control. The United States committed to the following actions:

I. Risk Assessment: The United States is currently updating its national risk assessment, a public document assessing major money laundering conduits and methods, which will specifically address abuse of legal entities. 

II. Advocate for Comprehensive Legislation: Continue to advocate for comprehensive legislation to require identification and verification of beneficial ownership information at the time a company is formed.  One possible approach could include the following provisions:

• Definition of Beneficial Owners – Define beneficial owner as a natural person who, directly or indirectly, exercises substantial control over a covered legal entity or has a substantial economic interest in, or receives substantial economic benefit from, such legal entity, subject to several exceptions.

• Collection and Verification of Documentation – Include two options for covering legal entities depending on whether the applicant forms the legal entity directly or uses a regulated company formation agent.  Both cases would require the collection and verification of the documentation associated with beneficial ownership. 

• Regulation of Company Formation Agents - Extend Anti-Money Laundering obligations to company formation agents, including an obligation to identify and verify beneficial ownership information.

• Accessibility of Information – Ensure law enforcement authorities, including tax authorities, will be able to access beneficial ownership information upon appropriate request through a central registry at the state level.  Although all states currently make some basic information available through public registries, states may choose to make beneficial ownership information publicly available.

• Transfers – Mandate that entities update information filed with a State or a formation agent within 60 days following any change of beneficial owners.

• Exemptions – Include, but not limit exemptions to, publically-traded companies in the U.S., federally regulated financial institutions, and operating companies meeting certain employee or revenue requirements.

• Liabilities – Mandate civil and criminal penalties for knowingly providing false information or documentation to a State or formation agent.

III. Clarify and Strengthen Customer Due Diligence Standards for U.S. Financial Institutions: The United States is currently engaged in rulemaking to develop an explicit customer due diligence obligation for U.S. financial institutions, including a general requirement to identify the beneficial owners of legal entity customers.

International Cooperation: Assess the effectiveness of existing means for complying with requests for mutual legal assistance and other forms of international cooperation related to beneficial ownership of companies.

OECD Report
The declaration comes in conjunction with a report to the G8 from the international Organization for Economic Cooperation and Development calling for a global system of automatic exchange of tax information. The OECD report, “A Step Change in Tax Transparency,” prepared at the request of the G8 for the Lough Erne Summit, outlines four concrete steps needed to put in place a global, secure and cost effective model of automatic exchange of information. The report follows the G20 finance ministers’ endorsement in April 2013 of automatic exchange of information for tax purposes as the expected new standard. It said that because tax evasion is a global issue, the model needs to have worldwide reach to avoid merely relocating the problem elsewhere. The process also needs to be standardized to minimize the costs for businesses and governments and to improve effectiveness.

The four steps are enacting broad framework legislation to facilitate the expansion of a country’s network of partner jurisdictions; selecting the legal basis for the exchange of information; adapting the scope of reporting and due diligence requirements and coordinating guidance, and developing common or compatible IT standards.

The report also provides potential timeframes for each step and notes that much of this work is already underway at the OECD. It also stresses that more and more jurisdictions are joining the Convention on Mutual Administrative Assistance in Tax Matters, which provides a legal basis for automatic exchange of information and underlines the role of the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes, which has been mandated by the G20 to monitor implementation of the new standard.

Speaking ahead of the G8 Summit in Lough Erne, OECD Secretary-General Angel Gurría said, “I congratulate the G8 for putting its full force behind international efforts to bolster sustainable growth through global solutions to tax evasion and avoidance. Tax systems must be fair and be seen to be fair. The OECD is helping countries work together to put an end to offshore tax evasion by delivering a secure and cost effective system of a single global standard for automatic exchange of information.”

A growing number of European and non-European countries have agreed to join a pilot for the implementation of the standard, the OECD noted. The G8 Summit will also provide additional impetus to OECD’s work on addressing base erosion and profit shifting by multinational corporations (see OECD Calls for Curbs on Tax Avoidance by Multinationals).

“We will also need to close the tax avoidance loopholes used by multinational corporations, create a level playing field and help governments—in developed and developing countries alike—to raise the revenues they need to provide their citizens with the services they deserve.”

G20 finance ministers were presented with OECD analysis of the issue in Moscow in February 2013. They will discuss an action plan, to be presented in July 2013. Another OECD initiative, Tax Inspectors Without Borders, aims at assisting tax administrations in developing countries which often lack the capacity to carry out complex audits of globalized businesses.

Mixed Reactions
An advocacy group known as the Financial Transparency Coalition expressed its disappointment that the G8 declaration did not go far enough. It noted that at this year’s summit, G8 leaders had an opportunity to pursue tax and transparency policies that would provide economic stability, root out systemic corruption and enhance the democratic process in rich and poor nations alike, but G8 leaders largely failed to seize this opportunity.

The group praised U.K. Prime Minister David Cameron’s desire to see the creation of public registries disclosing the beneficial owner of companies is admirable, but added that world leaders agreed Tuesday only to “ad-hoc, national-level promises to introduce registries, with no guarantee that even this limited information will be made public. There was no G8-wide commitment to introduce registries containing the beneficial owners of companies and trusts, and this is deeply disappointing.”

The coalition, however, said it was encouraged that G8 leaders stated as one that automatic information exchange between tax authorities should be “the global standard” and that G8 countries have “a duty” to help developing countries improve their capacity to enforce tax laws. President Obama’s released a G8 Action Plan on Tuesday for identifying company ownership, and the coalition said this would be a good start in tackling the issue in the United States.

“But we remain concerned that rich countries may want to play by a different set of tax information sharing rules than poorer nations,” said the coalition. “The impact of trillions of dollars that multinational corporations and corrupt officials siphon out of poor countries is ten times the aid that flows into these countries.”

The Financial Transparency Coalition also said it is encouraged that G8 leaders have tasked the OECD with developing a template to extend Country-by-Country reporting standards in a move that further legitimizes this important transparency tool.

”People in rich and poor nations alike are looking to their leaders to resist vested interests and pursue policies that tackle corruption and rampant tax dodging,” said Financial Transparency Coalition manager Porter McConnell. “Today G8 leaders have taken some significant steps in an effort to make the rules of the global economy fair for everyone. But it is troubling that there is no G8-wide agreement on the introduction of beneficial owner registries, let alone that they be made public. Over the past several months, crimes that rely on financial secrecy, such as tax evasion, money laundering and trafficking, have become front-page news. Illicit finance is one of the most pressing issues of our time; it’s robbing citizens of developing countries and G8 countries alike. We hope G8 leaders will build on what they have agreed today, and put in place some basic financial rules to staunch this massive flow of secret cash.”

Another advocacy group, Global Financial Integrity, said it welcomed the statements from G8 leaders Tuesday reiterating the significant progress that has been made to crack down on international tax evasion and supporting a global standard of automatic tax information exchange, but the research and advocacy organization expressed disappointment in the White House and world leaders for failing to fully address the need for transparency in multinational companies’ basic financial reporting and in corporate ownership.

“Today’s declaration really solidifies the progress made to-date on battling international tax evasion and extends it to countries not actively pursuing such initiatives like Japan and Russia,” said GFI legal counsel and director of government affairs Heather Lowe in a statement.  “However, President Obama and world leaders generally failed to grasp the need for public transparency in corporate tax reporting and corporate ownership information.”

She pointed out that anonymous shell companies remain a problem. “While we are happy to see all G8 countries in agreement over the fact that anonymous shell companies are an international problem, which we appreciate is a significant step forward, the U.S. action plan under this commitment should have been stronger. This is essentially the same action plan the White House has had for two years under the Open Government Partnership, and the administration has yet to really ‘advocate for comprehensive legislation’ despite relevant bills having been introduced in Congress.”

“Also troubling is the fact that the G8 failed to endorse the concept that this information should be available to the public,” Lowe added. "The declaration states that ‘Companies should know who really owns them.’ I feel fairly confident that most companies are already aware of who really owns them and if they don’t, they certainly should as a matter of sound corporate governance.  Law enforcement and the public need to be informed about whom really owns a company.”

“Anonymous shell companies are the most widely used method for laundering the proceeds of crime, corruption, and tax evasion,” Lowe noted. “But these phantom firms are also used to disguise campaign contributions, get around being barred from an industry, and dupe other business owners. Public registries of meaningful corporate ownership information are not only about stopping crime, they are about sound business practice and open and fair elections, among other things.   The G8 Leaders failed to grasp this basic and important concept.”

In a strong endorsement of international efforts to curtail tax evasion, the G8 communiqué states, “Tax authorities across the world should automatically share information to fight the scourge of tax evasion.”

“Automatic exchange of tax information is essential to detecting and deterring tax evasion,” Lowe commented.  “Tax evasion is taking a serious toll on rich and poor countries alike. Automatic tax information exchange ensures that tax authorities and law enforcement in these countries have the necessary records they require to detect and deter tax evasion. We are thrilled to see the G8 endorse automatic exchange as the global standard moving forward.”

Ten European nations, including four members of the G8, and many of Britain’s overseas territories—such as notorious tax havens like the British Virgin Islands, Bermuda, and the Cayman Islands—announced in April that they would begin a pilot program to exchange information automatically on a multilateral basis. The European nations in the pilot program also committed to promoting multilateral automatic information exchange as the new global standard, a move lauded by GFI. Moreover, G20 Finance Ministers—a larger grouping of nations which includes all members of the G8—announced in April that automatic tax information exchange is “expected to be the standard,” added Lowe.

“With the endorsement today from G8 ministers, we hope they will move quickly to include developing countries in any system of automatic information exchange.  GFI estimates that illicit financial flows—the proceeds of crime, corruption, and tax evasion—drain roughly $1 trillion per year from developing countries,” said Lowe.  “This is one of the reasons why we were so happy to see the G8 recognize that ‘Developing countries should have the information and capacity to collect the taxes owed them—and other countries have a duty to help them.’  One of the best ways to help developing countries collect their taxes would be to include them in any multilateral system of automat tax information exchange.”

Despite committing to address the harms posed by individual tax evasion, GFI criticized the U.S. and G8 for failing to embrace transparency to curb aggressive tax avoidance by multinational enterprises.

The G8 declaration notes that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

“While we’re happy that the G8 acknowledges aggressive tax avoidance and profit shifting is a problem, they failed to agree to curtail it in any meaningful way,” said Lowe.  “This is one area where coordination of changes to legal systems is essential to combat the problem, and public reporting by companies of revenues, profits, losses, taxes paid and number of employees in each country in which they operate is necessary in order to see whether those measures are having the desired effect.  It begs the question of whether the G8 countries have a sincere interest in knowing whether the new measures they plan to put in place will be effective, and whether they fully understand the public’s interest in being able to see that their governments have addressed the profit shifting phenomenon.   Furthermore, simple publication of that basic financial information will very likely cause a company to consider whether it wants to take a very aggressive tax position if the results of its actions will be open to public scrutiny.  There are some questions that a company is going to want to avoid, but the information has to be available to allow the public to ask those questions.”

While GFI was critical of the G8 for failing to embrace transparency around corporate tax dodging and beneficial ownership information, the research and advocacy organization welcomed the endorsement of transparency for the extractives industries. The G8 declaration stated that “Extractive companies should report payments to all governments and governments should publish income from such companies.”

“Transparency in the extractives industries is the new global norm, and we are heartened to see the G8 acknowledge this,” said Lowe. “The U.S. and Europe now have legislation requiring companies in the oil, gas, and mining sectors to report payments made to foreign governments, and Canada announced last week that they would introduce similar rules. Today’s statement signifies that the two remaining members of the G8—Japan and Russia—are also on board with this important anti-corruption initiative. It’s now up to mining heavyweights like China and Australia to move forward in adopting similar rules.”

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