In February, President Rodrigo R. Duterte signed into law Republic Act No. 11213, “An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2017 and Prior Years with Respect to Estate Tax, Other Internal Revenue Taxes, and Tax on Delinquencies.” However, it was signed with certain line item vetoes including the grant of a general tax amnesty which was vetoed in its entirety.
The President indicated that a general tax amnesty, at this point would be overly generous and unregulated. He has requested Congress to pass another general tax amnesty bill that includes the lifting of bank secrecy for fraud cases, the automatic exchange of information (AEOI) and safeguards to ensure truthful declarations. Evident in the President’s message is the intention for the country to participate in an exchange of information regime that has been gaining ground in the international community.
AEOI was conceptualized to promote tax transparency and curb tax evasion. As economies worldwide increasingly become interconnected, cross-country investments and financial products are more accessible to anyone, regardless of residence or location. Initiated and developed by the Organisation for Economic Co-operation and Development (OECD) with the G20 countries, the Standard for AEOI represents the international consensus on automatic exchange of financial account information for tax purposes, on a reciprocal basis. It provides for the exchange of financial account information with the tax authorities in the account holders’ country of residence. Participating jurisdictions that implement AEOI send and receive pre-agreed information each year, without having to send a specific request.
The most prevalent standards that require exchange of information on an annual and automatic basis, effective as of date, are: (1) United States Foreign Account Tax Compliance Act (US FATCA); and (2) the Common Reporting Standards (CRS).
FATCA started the push for greater tax transparency by requiring financial institutions outside of the US to report tax information (i.e., income earned and assets owned) of US citizens and/or residents to the US Internal Revenue Service (IRS). As of date, there one hundred thirteen (113) jurisdictions that have signed an intergovernmental agreement (IGA) with the US government to facilitate FATCA compliance of financial institutions operating in non-US jurisdictions and the annual exchange of information which started in 2015. The Philippines signed its IGA with the US in July 2015 but with no significant progress recently.
CRS, on the other hand, involves several participating jurisdictions’ exchanging, on a bilateral or multilateral basis, financial account information submitted by reporting financial institutions. CRS went live in January 2016 and the first CRS exchange transpired in September 2017. According to the latest list dated November 2018, there were 108 participating jurisdictions with definite date of first reporting by 2020. On several occasions in the past, the Philippine government has signified, albeit informally, its intent to participate in the CRS regime. Like FATCA, there is no recent progress and there is no date for the Philippines’ first reporting and exchange.
Notwithstanding these delays, the Philippine government is still encouraged to participate and enter into bilateral or multilateral agreements on exchange of information with other jurisdictions. However, concurrence by at least two-thirds of the Members of the Senate is required before a treaty or international agreement is effective, as provided under Article VII Section 21 of the 1987 Philippine Constitution. To bolster its participation, the Philippines may need to amend bank secrecy and data privacy laws to legalize the sharing of information with other jurisdictions.
BENEFITS TO THE PHILIPPINES
Countries with strict bank secrecy and data privacy laws may be perceived as breeding grounds for tax evaders. On one hand, foreigners may prefer to invest their money in these countries since the government and financial institutions operating therein are generally not required to share information with the tax authorities of the jurisdiction/s where these investors are tax residents. On the other hand, tax residents of countries with such laws, especially high net worth ones, may simply invest their money in countries without personal income tax (tax haven jurisdictions) to maximize income while not paying the related tax along with the minimal risk of detection.
In a report from the G20 Argentina: The Buenos Aires Summit held in late 2018, it was noted that prior to the start of the AEOI, countries were able to collect 93 billion euros in additional tax revenue due to voluntary disclosure programs and offshore investigations. It is generally expected that AEOI may yield the same, or even greater results, due to its wider coverage and practical approach.
AEOI may help Philippine tax authorities detect non-compliance/non-reporting of income and taxes arising from investments of Philippine tax citizens/residents in participating jurisdictions, especially where tax administrations have had no previous indications of non-compliance due to limited disclosure or intentional non-disclosure. Consequently, AEOI may encourage voluntary compliance by compelling taxpayers to report all relevant information or face sanctions as tax evaders. With the foregoing, AEOI may, to a certain extent, deter future tax evasion through offshore investment schemes and financial accounts.
It is hoped that the current Administration’s intention to relax bank secrecy and data privacy laws will further its tax transparency agenda for the Philippines that align with ASEAN and global standards and practice. It is likewise hoped that the Philippines’ participation in the global AEOI regime may aid in the implementation of tax laws more effectively due to expected increase in visibility and wider reach to gather relevant tax information. To some extent, there may be expected additional tax revenues from detecting cases of tax evasion and/or voluntary disclosure/compliance. Additional fiscal revenue will then translate to more funds to support the development plans, ultimately spurring economic growth.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Gabriel Eroy is a Tax Manager from the Financial Services Organization of SGV & Co.