The road to financial transparency: Are we ready to share?

“Building Inclusive Economies, Building a Better World” is the theme of the 2015 Asia-Pacific Economic Conference (APEC) which the Philippines is hosting. In line with this, the member countries have acknowledged the importance of transparency and the need to work together to avert cross-border tax evasion.

Recently, the Philippines took part in the global initiative allowing automatic intergovernment exchange of taxpayers’ detailed financial information.

Commissioner Kim S. Jacinto-Henares of the Bureau of Internal Revenue (BIR) confirmed that the Philippines is one of the 90 countries that would implement the Standard for Automatic Exchange of Financial Account Information in Tax Matters (“Standard”) spearheaded by the Organization for Economic Cooperation and Development (OECD).

The OECD said more than 50 countries “have committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017.” The Philippines is projected to follow suit some time in 2018.

In August 2015, the OECD released the handbook for the Standard, providing the much needed guidelines for its implementation.

According to the OECD in its background information brief prior to the release of the handbook, under the single global standard, jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. The handbook sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. It consists of two components: a) the Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions; and b) the Model Competent Authority Agreement, which contains the detailed rules on the exchange of information.

What needs to be done by the Philippine authorities?

According to the handbook, the participating country needs to comply with the four (4) core requirements to implement the Standard:

• First is translating the reporting and due diligence rules into domestic law, including rules to ensure their effective implementation.

• Second is selecting a legal basis for the automatic exchange of information.

• Third is putting in place information technology (IT) and administrative infrastructure and resources.

• Last is protecting confidentiality and safeguarding data.

HURDLES IN IMPLEMENTING THE STANDARD IN THE PHILIPPINES
Needless to say, there’s more to laying the groundwork for the CRS. At the periphery are statutory hurdles that put to the test a state’s capabilities and readiness for compliance. For instance, the automatic exchange of information under the Standard runs contrary to the Philippine bank secrecy laws. Under Republic Act Nos. 1405 and 6426, deposits in the Philippines are considered confidential in nature except with written consent of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

The challenge is recognized by both Finance Secretary Cesar V. Purisima and BIR Commissioner Henares who share the position that the country needs to amend its regulations if it seeks to align with the Standard. Such calls were reiterated during the presentation of the Philippine delegates in the APEC 2015 Special Senior Finance Officials’ Meeting held in Clark last 21-22 January 2015. During the event, the government affirmed the need to expand the coverage of Section 6 (F) of the National Internal Revenue Code (Tax Code) authorizing the Commissioner to access bank information for prosecution of tax evasion cases to also enable the Philippines to comply with the automatic exchange of information obligation.

The reason for the proposed expansion in coverage springs from the restricted power of the BIR Commissioner to inquire into certain bank deposits even after recent amendments. Instances where such inquiries are authorized include cases involving (1) a decedent to determine his gross estate; (2) a taxpayer who has filed an application for compromise under Sec 204 (A)(2) of the Tax Code due to financial incapacity to pay his tax liability; and (3) exchange of information by request under Republic Act 10021. Hence, the automatic exchange of information set forth by the Standard cannot happen unless the bank secrecy laws are amended and/or the Tax Code expands the power of the BIR Commissioner to inquire into certain bank deposits.

Furthermore, even though the Anti-Money Laundering Act (AMLA) allows inquiry or examination of bank deposits or investments when probable cause of money laundering has been established in court, such information cannot be used by the taxing authority under the CRS since tax evasion is not a predicate crime for money laundering. Hence, the AMLA should be amended to include tax evasion as a crime subject of any of the money-laundering offenses. Finance Secretary Purisima deems the revisions as necessary to ensure continued compliance with Foreign Account Tax Compliance Act (“FATCA”), the Standard and to improve tax collection. Currently, the Philippines is one out of only two countries which does not treat tax evasion as a predicate crime, the other being Lebanon.

Though the Standard appears promising in establishing transparency in cross border transactions and in minimizing tax evasion, the problem lies in setting up the necessary laws and infrastructures for implementation in the Philippines. With barely two years left before its implementation, our readiness to comply with the Standard still rests on shaky ground. Apparently the automatic sharing of information will not be that automatic.

(The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.)

Glacy S. Tabirara is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.