On September 20 the International Consortium of Investigative Journalists released its latest data leak, the FinCEN Files. The sprawling investigation details how global banks have moved over $2 trillion of suspicious funds for alleged money launderers, corrupt government officials, and drug cartels, all flagged via suspicious activity reports.
The release generated a firestorm of controversy and praise – supporters say the data leaks illustrate a broken enforcement system, while others contend that suspicious activity reports alone are not proof of wrongdoing and banks may be less willing to file them if they will continue to be subject to leaks. Either way, analysts will be digesting this data for months to come, and the findings come at just the right time for the U.N.’s Financial Accountability, Transparency and Integrity (FACTI) Panel, which on September 24 released its highly anticipated interim report on financial accountability, transparency, and tax governance in the global system.
The U.N. launched the FACTI panel in March as part of its 2030 Sustainable Development Goals. FACTI’s job is to flag gaps and weaknesses in the current system and release solutions in February 2021.
The interim report sets a roadmap for some potential solutions. The name of the game is systemic change — a lofty goal considering the realities of international consensus building. But FACTI is targeting a deck of staggered solutions. The panel sees a big role for private society in this endeavor, including multinationals, civil society, and the media.
The report is striking in its willingness to think big. One of the most ambitious proposals is a binding U.N. convention on tax matters. We already have two binding U.N. conventions — the U.N. Convention against Corruption and the U.N. Convention against Transnational Organized Crime. Tax could be the next frontier.
A U.N. Tax Convention?
FACTI feels international tax cooperation is “dominated” by voluntary forums, bilateral tax treaties, and multilateral instruments. But where the FACTI panel sees domination, others may see choices. A central question is why a binding, multilateral convention is necessary. The report suggests a tax convention would offer universal cooperation in one instrument.
A potential blueprint could come from the U.N. Convention against Corruption (UNCAC), which has been signed by 140 countries and is the world’s only legally binding and universal anti-corruption instrument. UNCAC covers five main areas in the public and private sectors:
preventive measures;
criminalization and law enforcement;
international cooperation;
asset recovery; and
technical assistance and information exchange.
UNCAC is now 15 years old, and the good news is that it has created more transparency — member countries are publishing budgets, tenders, and contracts, according to FACTI’s findings. Some UNCAC provisions like national anti-corruption strategies and agencies are now broadly incorporated into national laws. Governments are more receptive to international technical assistance.
The bad news is that the volume of worldwide corruption hasn’t significantly changed, according to the interim report. Lack of capacity and lack of political will are the two main reasons for this, but capacity issues seem to be the main problem. Whistleblower protections are also lacking. They are optional, and governments are largely treating them as such. The first UNCAC peer review process also found that more than two-thirds of member states lacked whistleblower protections, and most member states — at least 74 percent — had gaps and shortcomings in their frameworks.
But this feedback — good and bad — provides helpful data for a future tax convention, should the U.N. decide to pursue that route. It’s not enough to build a convention without building capacity. Optional provisions are only marginally helpful, and positive movement may be gradual.
Patching Gaps or Rebuilding the System
Convention aside, should international tax policymaking be located in the OECD or the U.N.? The FACTI panel says the issue is more nuanced than picking one body over the other, and it declined to make a determination at this stage. It is a surprising and tempered takeaway from the panel, given its ties to the U.N., but it also underscores the fact that the panel sees itself as an inclusive and impartial review body devoted to development.
Opinions generally fall into two camps. Some stakeholders told FACTI that the OECD’s Inclusive Framework and Global Forum should be updated to account for deficiencies or shortcomings, particularly on inclusiveness. Others said an intergovernmental U.N. body in which all countries are equal members is the best option, particularly because the U.N. system has untapped potential that could aid global tax reform. Supporters say the Sustainable Development Goals are another motivating factor for a U.N. body. But FACTI says neither solution is perfect on its own.
“Perhaps specific instruments could address the main weaknesses of the status quo, avoiding the need for reformulation. But other formats may not be amenable to expansion or extension,” the report says. For now, FACTI is keeping the conversation open. Over the coming months, the panel will be meeting with stakeholders for further discussion.
On October 12 the OECD is scheduled to release blueprints for its two-pillar international tax reform project. If approved, the project will mark the most sweeping overhaul of international tax rules in a century. Critics say the project will retain a lot of complexity in the international tax system and fails to fully embrace simpler solutions like unitary taxation.
Here too the report looks at a potential blended solution. The G-24 group of developing countries has been one of the most prominent advocates for unitary taxation, which treats a multinational enterprise group as one unit and then apportions profits per jurisdiction based on economic activity in that area. Sales, employees, and assets are commonly cited apportionment factors.
The G-24 had asked the OECD to incorporate unitary taxation into its base erosion and profit-shifting 2.0 project, and the OECD’s unified approach under pillar 1 does contain pieces of unitary taxation. The new taxing right under pillar 1 allocates a portion of a multinational group’s deemed residual profit to market jurisdictions based on sales. If the status quo remains, FACTI says unitary taxation could happen at the regional level or unilaterally. If the latter, countries could implement a formulary alternative minimum corporate tax, which is a joint proposal from the Independent Commission for the Reform of International Corporate Taxation (ICRICT) and the Tax Justice Network.
Framing Is Everything
Ultimately, blended approaches are a measure of last resort. FACTI says the world needs a systemic approach to tax disputes and compliance. But what would that look like? Here, the U.N. is quick to manage expectations. “There are no silver bullets or single measures,” the report says. But the panel seems to be advocating for a bottom-up approach, a review that starts with the lowest-income countries and moves up.
“There is no universally agreed standard for assessing international tax cooperation that takes into account the risk to other jurisdictions from the practice of any country,” the report says. “Thus, there is no coercive mechanism that begins from an assessment of the impact of jurisdictions’ tax systems on lower-income countries.”
Why bottom-up? Lower-income countries generally have more to lose. The report illustrates this point via the Caribbean and its experience with financial regulation in the wake of the 2008 financial crash. International banks in the region could adapt to regulatory and compliance changes, but smaller, domestic banks could not, and some lost their correspondent banking relationships. Caribbean stakeholders told FACTI that there should be a universal set of standards applicable to both correspondent and respondent banks that can accommodate the needs and adaptation challenges of smaller banks in smaller countries.
This issue is particularly salient regarding exchange of information relationships. Some developing country stakeholders told FACTI that their exchange of network relationships with developed country partners are lopsided, and that their requests for information aren’t always honored, with few repercussions.
Beyond this, FACTI says the developed country vs. developing country dichotomy that has pervaded international tax discourse is too simplistic. Instead, policymakers need to be looking at much more targeted groupings — for example, lower-income countries, large emerging markets in the G-20, OECD countries, and international financial centers in developing areas.
On the dispute side, the report notes that alternatives that account for developing country needs are still rooted in the same dispute system that developing countries find unbalanced, especially arbitration. The U.N. Tax Committee has released some suggested solutions, like arbitration requested by the tax authority rather than the taxpayer, representative panels of arbitrators supported by the U.N. Tax Committee, and the use of mediation. But FACTI suggests more can be done.
“Arbitration frameworks may be revised, but it is unlikely that the confidence of developing countries in such processes will change,” FACTI said. In response, FACTI is reviewing proposals for introducing entirely new dispute resolution instruments or institutions, and details are forthcoming.
Centralized Financial and Tax Data
FACTI suggests that country-by-country reporting is a stacked deck against developing countries. The OECD’s €750 million revenue threshold for reporting companies means that only 15 to 20 percent of multinationals are obligated to report, and most large businesses in developing countries don’t meet that threshold. Local filing is not always possible based on OECD guidelines, which only allow it in three cases. For example, local filing is allowed if the group parent is not obligated to file a CbC report in its home jurisdiction. That can inhibit local jurisdictions from getting CbC data from multinational units operating in their countries. CbC data is generally shared through automatic exchange of information relationships. If none exists, good luck getting data. Data confidentiality standards are another bar, but FACTI says the data in question is limited and less sensitive than personal taxpayer data.
What could make taxation information collection even better? Centralized data, according to FACTI.
“The glaring gaps in global data collection argue for systematic, regular and frequent global data collection and dissemination — yet there is no one source with the responsibility of publishing consistent and reliable data on taxation for the entire world, an important systemic shortcoming,” the report says.
FACTI is considering whether there should be a “neutral and authoritative” body that collates and analyzes tax-related data (including gender-disaggregated data), although FACTI doesn’t address how it might account for some of the confidentiality and exchange framework issues that prevent lesser developed countries from getting information.
Along those lines, FACTI thinks there is space for a global asset registry (GAR).
There is precedent for this idea. ICRICT has floated a GAR framework based on available transparency tools. A GAR could simply link registries that track ownership of land, securities, companies, trusts, and foundations. The idea could be tested in major financial centers, according to the organization.
ICRICT says a GAR must have two characteristics: It must track beneficial ownership data, and it must have machine-readable data that can enable cross-checks. There are other characteristics that can be negotiated over time. Ideally, a GAR would be global in nature, but it could also be a network of interconnected national asset registries.
ICRICT believes the registry should ideally hold historical data as well, potentially with the help of blockchain. Its scope is also negotiable. It could encompass intangibles; it could apply to financial assets; or it could solely be limited to the types of assets (like homes or vehicles) that are already registered — although ICRICT says this last option would be too limited.
A looming question is whether a GAR should be public or should limit access to authorities. ICRICT favors a public registry but also acknowledges the opposing privacy-related arguments.
Conclusion
A running theme through the report is that every destination requires a path. What is the path for destination 2030? It starts with capacity building, then meanders into policy updates and international cooperation. Similar to the OECD, FACTI’s goals are ambitious — if the panel is able to implement most of the projects it is considering, the resulting policy reform will be wide-sweeping and set a new, more equitable standard for how tax provisions are judged.