Economy

KEY POINTS

Impediments

·         Powers of tax authorities are confined to their national borders.

·         Very limited cooperation among different tax authorities of the world.

·         Very few legal tax treaties with Tax Haven countries through which tax information could be obtained.

·         There were strict bank secrecy laws in Tax Haven countries.

·         No universally accepted institutional mechanism to deal with this problem.

Global forum

·         To tackle this problem, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) was constituted in 2009.

·         Aim of the Global Forum was to ensure that all countries fully implement the international standards on tax transparency and exchange of information (EOI).

·         These standards require that tax information should be exchanged by a requested country on requisition from a requesting country.

·         Every country is peer reviewed on these standards.

·         After review, a rating is awarded which may be ‘Compliant’, ‘Largely Compliant’, ‘Partly Compliant’ or ‘Non Compliant’.

During the peer review, an adverse rating will be awarded to –

·         The country, which has domestic bank secrecy laws.

·         The country, which does not respond properly and delaying tax treaty negotiations.

Pros

·         This persuades the low rated country to amend its legal systems.

·         This will nudge all global forum members to increase their bilateral EOI relationships with all relevant countries.

·         International organisations such as World Bank and IMF do not grant assistance to a country, if the rating is adverse.

Global forum’s relevance to India

·         India has used the EOI mechanism in a big way to successfully obtain tax information from several countries.

·         On this basis, various actions are being taken across the country, including assessment and prosecution of tax evaders.

·         India is a member of all three main working bodies of the Global Forum — Steering Group, Peer Review Group (PRG) and AEOI Group.

Challenges

·         It does not have the power to take direct action against any country.

·         It can only award an adverse rating.

·         Tax evaders are inventing new techniques of evasion.

·         Global Forum operates on the principle of “consensus” implying that all countries should agree, which sometimes leads to less than optimal decision-making while deciding complex tax issues.

·         There are still countries which are outside the purview of Global Forum and are being used by tax evaders.