This article originally appeared in the January 4, 2021, issue of Tax Notes International.
]Now that the United States is about to ban anonymous shell companies, Canadians are taking a good look at their own beneficial ownership rules.
In December 2020 U.S. corporate transparency advocates scored a big win when Congress included beneficial ownership legislation — the Corporate Transparency Act — in its final National Defense Authorization Act (H.R. 6395). The NDAA has since experienced some turbulence: President Trump vetoed the act, prompting the House to override his veto. At the time this article was written, the Senate had not yet decided on whether it too would override the veto. If the NDAA is enacted, its approval will end a 12-year long fight to get the Corporate Transparency Act enacted.
Meanwhile, some Canadian transparency watchers are taking note of U.S. developments and asking how their country can improve its own beneficial ownership standards. Individual provinces like Quebec and British Columbia are beginning to draft beneficial ownership proposals for property and corporate entities, but there’s no federal law in the works.
In a December 17 op-ed in the Toronto Star, directors from Transparency International Canada and Canadians for Tax Fairness said Canada is actually falling behind on global beneficial ownership standards and needs to step up. They point out that at least 50 countries have implemented, or plan to implement, beneficial ownership disclosure rules — rules that would help quash Canada’s money-laundering industry and boost revenue undercut by the COVID-19 pandemic.
In the shadow of the pandemic, tax disclosure and tax transparency are being eyed as a means to promote economic recovery. Over the coming months, governments and standard-bearers are scheduled to either roll out or contemplate new disclosure standards targeting crypto-assets, public country-by-country reporting, public beneficial ownership registers, and other areas.
Digital and Crypto Tax Transparency
In November EU member states agreed to bring digital platforms under the EU’s tax transparency rules (Directive 2011/16/EU on administrative cooperation in taxation). Under the so-called DAC7 proposal (COM(2020) 314 final), EU member states must automatically exchange information about cross-border revenues generated by EU sellers on digital platforms, even if those platforms aren’t based in the EU. It is expected to go live on January 1, 2023.
Sellers will have to report income from the rental of immovable property; the provision of personal services; the sale of goods; the rental of any mode of transport; and investment and lending in the context of crowdfunding.
At the same time, the EU is thinking about adding a DAC8 addressing cryptocurrency and
e-money transparency. They are in the EU’s crosshairs for two main reasons:
national tax administrations lack information of crypto-assets and e-money usage, and they could be missing out on key revenue; and
there are disparities in how sanctions are applied across member states.
The EU’s main goals are simplifying taxpayer compliance and subjecting cryptocurrency and
e-money exchanges to exchange of information rules, but the particulars are still being determined. The EU could simply issue crypto-related guidelines for member states or issue a formal DAC8.
These decisions will likely play out in the coming months because the EU just closed a consultation on the issue and is sifting through the responses. The initial feedback is that some stakeholders are concerned about potential impacts on low-value users.
Among these stakeholders, the European Payment Institutions Federation (EPIF) argues that e-money and e-money institutions are already well regulated under existing laws and requirements and may not need to fall under DAC8. They point to the EU’s e-money directive (2009/110/EC) and its second payment services directive (2015/2366/EU), as well as EU anti-money-laundering and know-your-customer requirements that are triggered when tax evasion is suspected.
Beyond that, e-money is mostly used for
low-value transactions like payments on public transportation and online purchases and is largely not used to house large amounts of money, according to the organization.
“Reporting obligations on low value transactions . . . would be extremely burdensome for the e-money industry, let alone a significant obstacle to new innovative solutions in the sector,” EPIF said.
EPIF believes the EU should adopt a “proportionate approach,” and reporting obligations should only apply to e-money users that use their accounts to store large amounts of capital, potentially for extended time frames.
“The best way to determine this is by establishing clear reporting thresholds to demarcate between those accounts used for storing money and those used for transactional purposes,” the organization said. EPIF also thinks data should be collected via a single home-country reporting mechanism.
Transparency of crypto-assets is also on the OECD’s radar. The organization is planning to release a crypto tax framework in 2021. This new system would be rooted in the OECD’s common reporting standard to enable the automatic exchange of information, according to its October secretary-general tax report.
While the general reporting infrastructure has been determined, there are several technical issues that must be resolved. They include whether other types of virtual assets should be included in the scope; whether other intermediaries, such as wallet providers, are to be included in the scope; whether other income beside sales should be reported; and whether the value of crypto-asset holdings should be reported.
Beneficial Ownership Transparency
At the end of 2020 all U.K.-inhabited overseas territories agreed to implement public beneficial ownership registers. Those registers won’t go live until 2023, and there’s considerable work that must be done between now and then.
It’s certainly a huge move for the United Kingdom. Its overseas territories have received considerable scrutiny for their corporate transparency rules and low corporate tax rates.
For some overseas territories, like the Cayman Islands and the British Virgin Islands, the upcoming rules likely won’t be too burdensome. These islands already share beneficial ownership and tax information with U.K. law enforcement because of their robust offshore finance industries. One key issue to watch: The legislation is broad enough that the overseas territories will have the ability to write their own standards.
For these registers, beneficial ownership will include direct and indirect control via shareholdings, voting rights, and the ability to appoint or remove a majority of directors. The overseas territories will determine what percentage of control triggers reporting requirements. This cannot exceed a 25 percent maximum to remain within international standards. In the near future, the U.K. Foreign, Commonwealth & Development Office will compile best practices for beneficial ownership registers.
The United Kingdom is also planning to use this work as a springboard for international outreach. The government plans to encourage other countries to launch public beneficial ownership registers, according to Wendy Morton, parliamentary undersecretary of state for European Neighbourhood and the Americas.
In a similar vein, Kenya has implemented new legislation requiring companies to file beneficial ownership information with the government by January 31. The legislation added a new section 93A to the Companies Act and defines beneficial owners as individuals who directly or indirectly hold at least 10 percent of a company’s shares or hold at least 10 percent of its voting rights.
Public Country-by-Country Reporting
Weeks before Portugal assumed the presidency of the European Council on January 1, some EU lawmakers sent a strong request: Prioritize public CbC reporting. The European Parliament supports the measure. In 2019 the EP approved a proposal that would require multinationals with at least €750 million in worldwide revenue to disclose their earnings, profits, and amount of tax paid in the countries in which they do business. But the measure died in the European Council because it narrowly lacked a qualified majority. The EU Greens/European Free Alliance coalition, which has long championed public CbC reporting, says the proposal is more important than ever because of the economic impacts of the COVID-19 pandemic.
A lot is up in the air. Austria recently came out in favor of public CbC reporting. That gives the measure a qualified majority of votes in the European Council. But there’s a lot riding on Portugal itself, which will hold a presidential election on January 24. President Marcelo Rebelo de Sousa is running in a crowded field, although he is expected to win reelection. If he does, he’s likely to support public CbC reporting because Portugal supported the 2019 proposal. At least one other presidential candidate — former EP member Ana Gomes — is running on a tax transparency platform. Gomes is a staunch supporter of public CbC reporting and says she would prioritize tax transparency domestically and in an EU presidency.
In the meantime, the European Commission is prioritizing public CbC reporting for its 2021 action plan, according to an internal commission document previously obtained by Tax Notes.
U.S. Transparency Watch
It is unclear whether the United States will rejoin the Extractive Industries Transparency Initiative (EITI) under the incoming Biden administration. The EITI is a global standard for good governance practices within the oil, gas, and mineral extractives sectors. In 2016 the EITI board adopted new beneficial ownership disclosure requirements — the 2016 EITI Standard — which set a timeline for member countries to design and establish publicly available beneficial ownership registries in their extractives sectors. So far, 53 countries have signed on.
The United States withdrew in 2017, and some experts are calling on the incoming Biden administration to reenter. But even if it does, it is unclear what impact it will have on U.S. extractives multinationals, some of which are leery about publicly disclosing their tax information. Notably, ExxonMobil and Chevron, both EITI board members according to latest information, refused to publicly disclose their U.S. tax payments in 2018, although they were obligated to do so as board members.
There also could be developments on the accounting side of things. In March 2019 the Financial Accounting Standards Board announced it was planning to update its accounting standards for income tax disclosures (Accounting Standards Update, “Income Taxes (Topic 740): Disclosure Framework — Changes to the Disclosure Requirements for Income Taxes”). In response, several Democratic senators petitioned the FASB to include public CbC reporting requirements within their income tax disclosure rules. The group said the extra information is necessary for combating tax avoidance.
At a minimum, the senators believe FASB rules should require multinationals to disclose the CbC tax information that they already report to the IRS. U.S. multinationals with over $850 million in annual revenue must file CbC reports, which request information about income tax paid and accrued, the number of employees, related- and unrelated-party revenue, tangible assets other than cash and cash equivalents, main business activities, and more.
But a final decision is still pending. In February 2020 the FASB decided that it would conduct more research and outreach on potential alternatives to disclosing some disaggregated income tax information. FASB staff is also researching potential amendments.
Automatic Exchange of Information
Developing and emerging countries are gradually beginning to adopt the OECD’s common reporting standard and automatic exchange of information. More developments are expected in 2021.
On one hand, there’s considerable room for progress. According to the OECD, there are 45 developing country members of the Global Forum on Transparency that have not yet been asked to commit to automatic exchange of information and have not set a date for their first year of exchanges.
On the other hand, the OECD is eyeing tax transparency as one way in which countries can shore up their economies post-COVID-19. Automatic exchange of information on financial accounts could help countries increase their capital taxation, according to Grace Perez-Navarro, deputy director of the OECD’s Centre for Tax Policy and Administration.