The key to addressing the issue of tax evasion and black money is better cooperation internally as well as globally, says Jeffrey Owens, Director, Centre for Tax Policy and Administration, Organisation for Economic Cooperation and Development, in an interview with Vrishti Beniwal.
How do you look at India's efforts in handling tax evasion and black money?
India now has 14 Tax Information Exchange Agreements and it has been negotiating 30 Double Taxation Avoidance Agreements.
That is remarkable in such a short time.
Clearly, there is a lot of political push and willingness by the revenue service to get these agreements in place.
There is a clear message going to Indian taxpayers. The time when you could use tax havens is coming to an end. There is a much higher risk of detection and there are proposals for putting heavy penalties.
I think over the next 12 months, we will see a significant change in the behaviour of Indian residents. Your government has recently formed a panel to look at illicit payments.
That is very much a right approach. We would like to work with India, both in terms of presentation to the panel and having India to work with OECD to address this broader issue.
The government is under attack from various quarters for not being able to bring back black money.
By definition, black money is difficult to deal with, because you don't know where it is, how much it is and who has it. You deal with that by a concerted government effort across various departments - justice (law), police, tax and the financial intelligence unit.
These people have to work together, first to identify the money and the people behind that and then find mechanisms to bring the funds back.
When a tax auditor, for instance, goes to a company or a high net worth individual and smell something is not right, he should be able to identify and pass on the information to the justice department.
How do you deal with non-cooperating countries?
India is not alone and many OECD countries have a major problem with money laundering, bribery and tax evasion.
No matter how big a country you are, you can't resolve the issue by yourself.
You have to have cooperation because black money may involve three-four countries and it is always easy when you move forward together. That's why we launched the Oslo dialogue. We had a meeting in March.
This is the problem we are proposing and we would be delighted if India joins us on this. Also, recognise that you need a lot of political will as well.
How do you view amnesty schemes for tax recovery?
You have to be very careful because it is penalising the honest taxpayers. It also undermines the ability of the tax administration.
Every two or three years if you are going to get an amnesty, you stop paying taxes. But if you have a situation where you have a major structural change, such as a G20 development on a tax haven initiative, at that point of time you should give an opportunity to tax evaders to come clean.
The United Kingdom, Ireland, France, Australia, Canada, the US have used it and it is working very effectively.
The programme says you have six months or nine months to pay every single penny of tax that is due and the interest on the taxes. The penalties can be discussed.
The OECD model tax convention talks about freezing and repatriation of assets between contracting states. But most countries do not follow this. How do you plan to address the issue?
In a global economy, many of these tax evasion activities are multilateral. They are concerning five, six or 10 countries.
Part of the answer is that we need to move from bilateral to multilateral treaties. We have just developed a Convention on Mutual Administrative Assistance in Tax Matters.
It provides assistance in assessment of tax, service of documents and recovery of taxes. Many bilateral treaties do not do that.
That convention is now being signed by 22 countries. Brazil and South Africa are going to sign and I understand India will also. That will give you a new powerful instrument.
India has expressed concern over bank secrecy and made a strong pitch to end this. What is OECD doing?
The issue of tax havens is probably one of the most important and sensitive issues we have dealt with in the past 20 years. We are making good progress.
All the pressure is in the direction of removing bank secrecy as a barrier to effective cooperation between countries.
Do you agree with Finance Minister Pranab Mukherjee on the need to share past bank information?
We want to achieve effective exchange of information, but you also have to respect legality (aspects). Very few international agreements are retrospective.
But the experiences of some of our member-countries show that if you can get access to information on current cases, that sometimes leads you back to the past.
And, the fact that taxpayers know you can have that access does provide them a strong incentive to come forward and have a voluntary compliance.
In the Indian context, the big issue is illicit flows, whether they are bribes, money laundering or tax evasion.
The international community has recognised these are all activities that flourish in a climate of bank secrecy, weak regulation and weak cooperation.
So, even when you are dealing with separate types of crimes, the environment in which these activities can take place is similar.
When you make progress in one of these, you also move forward in the other two.
India has seen a rise in transfer pricing disputes. Where are we going wrong?
It's less than 10 years that you put in place your transfer pricing legislation. So, you are still learning. The rules you have are broadly consistent with OECD transfer pricing guidelines. The proposals in the Direct Taxes Code will help.
I am pleased that you are now going to put in place advance pricing agreements. That is a very good way of minimising disputes.
You already have this panel on dispute resolution. Now you need to go one step further and put arbitration provisions in your treaties.
There are a lot of pending cases in India and that in part reflects the complexities in some of the transactions you have here and in part the fact that your legislation has been developing.
India was also trying to introduce safe harbour rules, but there have been various concerns about implementation. Do we need these?
OECD has always been a bit sceptical about safe harbours. But at the end of the day, you have to be pragmatic. It is not a unique problem for India.
The most effective way of reducing the disputes is to have a good dialogue between the tax administration and the taxpayers.
We call it an enhanced relationship, characterised by trust, transparency and willingness to talk to each other. If you can have that, a lot of the issues that arise in transfer pricing are resolved even before a company files its tax returns.
So, don't get hung up on a particular technique, whether APAs or dispute resolution panels. Stand back and see, can we change the dynamics of relationship between the taxpayer and the tax authorities?