This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: Following the money.
At the core of tax enforcement is knowing who is earning or owning what. However, while that might seem like a baseline issue that should have been dealt with long ago, in some areas it has remained stubbornly difficult to fix.
As we enter 2024, countries around the world are working toward more transparency. Today we're highlighting how countries are working toward this goal and what we can expect from their efforts.
Here to talk more about this is Tax Notes contributing editor Nana Ama Sarfo. Ama, welcome back to the podcast.
Nana Ama Sarfo: Thank you, Dave. It's great to be back as always.
David D. Stewart: So to start off, let's just start with the basics. When we're talking about beneficial ownership, what is beneficial ownership and why is that concept so important?
Nana Ama Sarfo: Well, Dave, that's a really great question. So when we talk about beneficial ownership, what we're talking about is identifying either the actual person or persons who own or control or benefit from legal vehicles like corporations and trusts. And the concept is really important from a tax perspective because knowledge of that ownership or control can help tax authorities break through transactions involving entities that are otherwise opaque, and it can help them determine who the beneficial owners are and then whether they are following their tax obligations.
But I would say that one of the major questions surrounding beneficial ownership transparency is what kinds of entities should be subject to beneficial ownership reporting? So are we talking about corporations, trusts, real estate owners, etc.? That's a major issue that governments have had to grapple with.
And then from there, another important issue is whether beneficial ownership registries should only be accessible to government authorities for enforcement purposes, or whether they should be available to certain segments of the public, like journalists or civil society, or whether they should be available to the public at large.
So I would say that in general, beneficial ownership transparency has kind of been a perennial back burner topic for lawmakers around the world, but it's definitely an issue that's been gaining a growing amount of attention over the years.
David D. Stewart: You mentioned the idea of these being public. What is the argument for making these public as opposed to just something that tax authorities have access to?
Nana Ama Sarfo: So the general argument there is that the general public has an interest in knowing who controls corporations or certain legal vehicles, and that they should have access to this information so that they too can conduct their own investigations. And also the idea is that if this information is out there in the public domain, individuals will be less likely to engage in some sorts of tax evasion or illicit activity.
David D. Stewart: OK. Now turning to an example of this sort of thing that we're talking about, could you tell us about Canada's public beneficial ownership registry?
Nana Ama Sarfo: Yes. So Canada just launched a public beneficial ownership registry, and that system compiles the names and addresses of persons who have significant control over corporations that are federally registered within Canada. So overall, it's definitely a significant move, in the sense that it's the country's first public national beneficial ownership registry.
But that being said, it's way too early to assess the impact because most of Canada's corporations are incorporated at the provincial or territorial level rather than the federal level. So about 15 percent of Canadian corporations are federally incorporated. But all of that said, it's definitely a significant move that then could perhaps create some movement on the provincial or territorial level in terms of perhaps the creation of some public registers in those domains.
David D. Stewart: Now turning to the U.K., could you tell us about the U.K.'s Economic Crime (Transparency and Enforcement) Act?
Nana Ama Sarfo: Yes. So over the past few years, U.K. lawmakers have really tried to crack down on fraud and other sorts of economic crime. It's been stated in legislative documents that fraud is the most common economic crime within the U.K. And so we've seen some pretty significant legislation addressing this. And one of those measures happens to be the Economic Crime (Transparency and Enforcement) Act, as you had mentioned.
And that is important because it created a beneficial ownership register that applies to U.K. real estate that's owned by offshore companies. And for those who are wondering why U.K. lawmakers chose to do this in the first place, the answer is that the U.K. has had a reputation for being a place where non-U.K. residents can stash their illicit money, often by buying property. So U.K. lawmakers wanted to get a handle on this and get more insight into who is buying property within the U.K. and track that ownership.
David D. Stewart: Now, I understand that real estate ownership is a significant issue beyond the U.K., that also the OECD and the Financial Action Task Force (FATF) are also looking at the issue?
Nana Ama Sarfo: Yes. So both organizations are very concerned about the relationship between cross-border ownership of real estate and then money laundering. So one of the primary issues is that there's not a ton of transparency in this area, and it's also an issue that governments have flagged.
So for example, in 2022, the FATF evaluated real estate transparency within 32 of its member countries. And of those 32 countries, nearly 70 percent said that the real estate sector poses significant money laundering risks. And then coupled with that, we're seeing that cross-border ownership of real estate is increasing. So in France, the proportion of French real estate owned by nonresidents increased 50 percent between 2011 and 2019, according to an OECD report.
David D. Stewart: I assume in this area we're talking about significant amounts of money at stake. So what's being done? What can be done to get the information on these real estate transactions?
Nana Ama Sarfo: Well, tax authorities already have some tools within their bilateral and regional tax treaties. So some of these treaties allow for the automatic exchange of real estate information. But that being said, not a lot of countries are using their treaties in this way, at least not within OECD countries.
There we're seeing that OECD countries are engaging in either spontaneous or automatic exchanges of income from real estate in under 30 percent of their bilateral treaties, and that automatic exchanges on real estate ownership and transactions are taking place in under less than 5 percent of their exchange relationships.
And then there's also the OECD's common reporting standard, which the OECD itself has noted that it's a system that can indirectly help tax authorities kind of piece together information about foreign real estate ownership or transactions. And then the European Union also has a framework for the automatic exchange of information on real estate. And under that framework, most EU countries automatically exchange real estate information on "as available basis."
David D. Stewart: So turning to an issue that's a little bit different, what's happening at the EU on public country-by-country reporting?
Nana Ama Sarfo: Absolutely. So the EU has a directive, public country-by-country reporting directive. And under that legislation multinationals with over €750 million in annual revenue that are active in more than one EU country will have to begin publishing information about the amount of tax that they're paying in each EU member state for financial years starting on or after June 22, so just within a few months. And it's a really striking sea change within the EU. Countries are already in the process of implementing public country-by-country reporting. But it hasn't been without some controversy.
So we know that in the summer a letter issued by the European Commission to individual European Union states was leaked. And that letter had actually advised member states to refrain from what they called "unjustified gold plating."
So in other words, the commission didn't want member states to unnecessarily expand the directive. But as the directive is written, the multinationals that meet that €750 million revenue threshold will have to disclose the nature of their activities, the number of their full-time employees, their profits or losses before income tax, their amount of accumulated and paid income tax, and their accumulated earnings.
And then all of that data will be published on the internet, and it'll be available using a common template and a machine-readable format. Aside from that data, companies will also have to individually report information from countries that are listed on the EU's list of non-cooperative jurisdictions. And then as for data from other countries, multinationals may aggregate that data if they choose
David D. Stewart: Turning to the area that's about as far away from the EU as possible, what is Australia doing on country-by-country reporting?
Nana Ama Sarfo: So in April 2023, Australia released a draft public country-by-country reporting legislation. And that also attracted quite a bit of attention for a few reasons. So first of all, Australia's directive has a lower threshold than the EU one. So Australian lawmakers are envisioning that this provision would apply to companies with at least AUD 1 billion in annual global income.
So if we convert that, that's a little over €610 million. And then another thing is that it's broader than the EU directive. So it would require companies to report things like their effective tax rates, their revenue from unrelated parties, so third parties. They would also have to list their tangible and intangible assets that are held at the end of the income year, and then also the book value of those assets.
So when Australia released this draft legislation, some stakeholders said that it was way too broad. And the government heard that feedback and it said that it would continue to consult with stakeholders on what the measures should look like and how broad those disclosures should be. So we should expect some more information about that within the coming months.
David D. Stewart: Now, are there any ongoing transparency efforts here in the U.S.?
Nana Ama Sarfo: Yes, there are. So in the U.S., some companies that use the Financial Accounting Standards Board's reporting requirements will have to publish enhanced disclosures about their rate reconciliation, and then also about their income taxes paid for fiscal years beginning after December 15, 2023. And under this update, they will have to disaggregate their federal, state, and foreign taxes paid when they're reporting under FASB's accounting standards Topic 740. And that topic addresses income taxes.
Now, I will say that it's less than what some stakeholders would've liked because some transparency advocates want the U.S. to adopt full public country-by-country reporting just like the EU has done and Australia's planning to do. And Gary Gensler, who is the chair of the U.S. Securities and Exchange Commission, has testified that he supports disaggregated tax reporting for public companies. But definitely this FASB development is a start in that direction.
David D. Stewart: All right, I think there's definitely going to be a lot to keep an eye on in the coming years. Ama, thank you for giving us an update.
Nana Ama Sarfo: Thank you so much for having me, Dave.
David D. Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Senior Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?
Jasper Smith: Thanks, Dave. In Tax Notes Federal, three tax professionals demonstrate how OpenAI's corporate structure was designed to protect its charitable purposes and tax-exempt status. Hugh Lambert studies data showing that government inaction can result in increased federal gift tax revenue.
In Tax Notes State, Jacqueline Laínez Flanagan explores the lack of guidance regarding direct cash transfers. Annette Nellen describes the federal tax law confusion that often results when states pass laws to provide payments to individual taxpayers.
In Tax Notes International, Lucas de Lima Carvalho explains the importance of control in the taxation of CFCs. Aleksandra Ball and Brandon Wells examine how online sellers are treated for tax purposes in the EU and in the United States.
And finally, in Featured Analysis, in the second of a two-part series, Robert Goulder comments on the oral arguments in Moore v. United States.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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