The Organisation for Economic Co-operation and Development (OECD), an international organization dedicated to promoting economic development and cooperation among its member countries, conducts extensive research and analysis on a wide range of economic and social issues, offering policy recommendations to its member nations.
It also develops international standards and guidelines in various areas, such as taxation, environmental protection, and corporate governance, to foster best practices and policy coherence among member states.
In particular, OECD’s achievements in tax cooperation, including initiatives like the Base Erosion and Profit Shifting (BEPS) project, have been instrumental in helping member countries to combat tax evasion and enhance tax compliance. These efforts contribute to a fairer and more transparent global tax system. Leveraging OECD standards and guidelines can significantly strengthen our capacity to counter tax evasion and promote sound fiscal policies, ensuring a more equitable economic environment.
With increased global connectivity and technological advancements, business footprints now extend across various jurisdictions. While this has bolstered the global economy, it has also heightened the risk of exploiting taxation systems to avoid and evade taxes. Exploiters often seek strategies to identify and capitalize on gaps and mismatches in tax rules, shifting profits to locations with lower tax rates or tax havens where they have little or no actual economic activity.
In order to combat the above challenges, it is crucial to enhance tax transparency and improve exchange of information between different tax administrations. The OECD plays a vital role as a global standard-setter and consensus facilitator in tackling tax evasion and avoidance.
In collaboration with the Council of Europe, the OECD developed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in 1988, which was amended by the Protocol in 2010. Since then, G20 has consistently encouraged countries to sign the Convention. According to OECD’s website, nearly 150 jurisdictions are currently participating in this effort, representing a diverse group of countries, including all G20, BRIICS, and OECD members.
This widespread participation makes the Convention the most comprehensive multilateral instrument available for various forms of tax cooperation. The Convention covers numerous types of administrative assistance, such as the exchange of information on request, spontaneous exchange, automatic exchange, simultaneous tax examinations, and assistance in tax collection.
The primary goal is to augment and facilitate international cooperation among different countries in tax matters through information sharing and mutual administrative assistance with the aim to curb tax evasion and avoidance, ensuring a more transparent and fair global tax system. This collaborative approach helps countries protect their tax bases and maintain fiscal integrity in an increasingly interconnected world.
In response to evolving business dynamics, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters has undergone several updates to align its framework with global standards and best practices. One significant update is the inclusion of measures to address tax base erosion and profit shifting (BEPS).
The BEPS initiative aims to tackle the challenges associated with tax planning strategies that multinational companies employ to exploit gaps and mismatches in tax rules, enabling them to shift profits to low or no-tax jurisdictions. This project equips governments with the necessary rules and instruments to combat tax avoidance effectively.
The primary objective is to ensure that profits are taxed in the jurisdictions where the economic activities generating those profits occur, thereby maintaining the integrity of national tax bases. By addressing these issues, the BEPS Project seeks to create a more equitable and transparent international tax system that prevents the artificial shifting of profits and strengthens countries’ tax revenue worldwide. The continual updates to the Convention demonstrate a commitment to fostering global cooperation and ensuring that tax policies keep pace with the changing landscape of international business.
In September 2016, the then Federal Finance Minister of Pakistan, Muhammad Ishaq Dar, signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) following which, in June 2017, Pakistan signed the Multilevel Convention on BEPS and the Multilateral Competent Authority Agreement for the Automatic Exchange of Financial Account Information. These agreements marked a significant step in Pakistan’s commitment to enhancing interna
tional tax cooperation and transparency.
The peer review report on exchange of information on request (EOIR) for Pakistan in 2023 assessed the country’s implementation of EOIR standards across three key categories: (a) availability of ownership, accounting, and banking information; (b) access to information by the competent authority; and (c) the actual exchange of information. Pakistan was rated as “Largely Compliant,” reflecting its substantial progress in meeting these international standards.
The report highlighted some critical statistics: between 1st July 2019 and 30th June 2022, Pakistan made outbound EOI requests for 593 taxpayers. However, it noted that one peer (another jurisdiction) raised concerns regarding the accuracy of account numbers transcribed by Pakistan and whether all domestic means had been pursued before making these requests. These issues led to a significant number of the requests being withdrawn by Pakistan.
Pakistan’s participation in these multilateral agreements shows its ongoing efforts to align with global standards and improve its tax administration capabilities. By addressing concerns highlighted in the peer review report, Pakistan aims to enhance its ability to combat tax evasion and improve the effectiveness of its information exchange mechanisms. The continuous improvement in these areas is crucial for fostering international trust and cooperation in tax matters, ultimately contributing to a fairer and more transparent global tax system.
The signing of these conventions had the potential to profoundly impact Pakistan’s tax transparency and collection system, facilitating information exchange and cooperation with international tax authorities to help the government recover revenue. However, to date, there has been no considerable progress or tangible financial benefits.
Critics argue that rather than actively seeking international cooperation to counter tax evasion, Pakistan has shown a lack of seriousness by introducing tax amnesty schemes and displaying reluctance to actively follow the money stashed abroad through available global cooperation avenues. Pakistan should intensify its efforts to make more comprehensive and specific EOI requests, duly supported with the required information, to extract relevant data from corresponding jurisdictions.
In the absence of a serious commitment and strategic approach, the country risks missing out on the significant advantages these international agreements could offer. Enhanced efforts in utilizing these agreements are crucial for effectively combating tax evasion and improving the country’s fiscal health.
Corruption and the misuse of the system by powerful elites and other economic players is a critical issue in Pakistan. Pakistani authorities must make concerted efforts to curtail this menace, as conventions like the Multilateral Convention on Mutual Administrative Assistance in Tax Matters provide a gateway to exchange information and ensure the country is not deprived of its funds or revenue in an illicit manner.
Numerous data leaks have indicated the stashing of significant amounts of funds by Pakistanis in various international jurisdictions, highlighting the scale of the problem. However, due to frequent asset whitening schemes, incompetence of authorities or their lack of interest in corroborating the source of these funds, Pakistan has been unable to investigate these issues either locally or internationally.
Instead of actively seeking international cooperation to counter tax evasion, Pakistan has shown a lukewarm attitude by introducing tax amnesty and money/assets whitening schemes and displaying reluctance to pursue the money stashed abroad through available global cooperation avenues.
The country must gear up its efforts to make more comprehensive and specific EOI requests, duly supported with the required information, to extract relevant data from corresponding jurisdictions. By strictly adhering to international standards and leveraging the OECD platform, Pakistan can transform itself, save its resources from corruption and tax evasion, and direct them towards the welfare of its people.
Furthermore, enhancing tax transparency and cooperation through OECD’s frameworks can provide Pakistan with the tools needed to combat tax evasion effectively. By fully utilizing the benefits offered by the Mutual Administrative Assistance in Tax Matters, Pakistan can significantly improve its tax collection system, recover lost revenues, and ensure a more equitable distribution of resources. Such steps are crucial for fostering a transparent, accountable, and prosperous economic environment that prioritizes welfare of all citizens.
Copyright Business Recorder, 2024