AEOI and FATCA Model as a New Prespective of Tax Treaty

By Kukuh Hanna Prapanca, Employee of the Directorate General of Taxes

Technology opens horizons and penetrate an isolated border. Many possibilities which we think is difficult to happen, but thanks to technology achievements, many things that was once unimagined, now become a reality. I am talking about information technologies that evolve so rapidly, so every line of human life becomes interconnected, cross-border economic transactions occur easily, hundreds of thousands of terabyta data is passed over our heads via satellite or cable under the ground where we stand. As the world is becoming borderless, data can be exchanged so easily, people started to realize that a lot of things could have been better with the disclosure of information. Welfare and life improvements bridged by the rapid development of information technology.

Indonesia is a country that is being stretched. Indonesia's economic growth is above the average of its neighbors. Proven to date, despite the slugigish pace, Indonesia's economic is able to survive from economic crisis and the global slowdown although Indonesia is still struggling. Indonesian taxation institutions (*Directorate General Of Taxes) is one apparatus that responsibles for more than 80 percent of state's revenue. Various government policies in the field of taxation suggest that tax is very important for this country and always endeavor to increase both the ratio and the tax base. In 2016, Indonesia launched a policy of "Amnesti Pajak" or a tax amnesty. With all of its pros and cons, tax amnesty has been established since July 2016 by Indonesia through DGT as the executive administrator.

There are few consderations why Indonesia is urged to implement tax amnesty. One of the reasons is because the Indonesian government felt the need to provide opportunities for its citizens to be transparent to the country (through DGT) regarding their tax obligations of income and assets as well as debts that had not been disclosed correctly in the tax return; both within and outside the country. Before Indonesia really runs three substantial agendas in financial sector, namely:

1.       The revision of the laws on disclosure of banking data for the purposes of taxation,

2.    ILAP implementation, which requires all state institutions such as the electricity company and the state telecommunications company, and the local water company to report the account of a taxpayer.

3.       AEOI (Automatic Exchange of Information), namely automatic data exchange (without being asked) between jurisdictions that are committed,

If these three things are implemented, the taxpayer can no longer hide their assets from tax authorities wherever it laid.

Panama paper and Paradise Paper, are proof that there are many taxpayers who are willing to hide their income and their assets for the sake of smaller tax payments, either by tax avoidance or tax evasion. As the world becomes Increasingly globalized and cross-border activities become easily occurs, Tax administrations need to work together to ensure taxpayers that they pay the right amount of tax to the right jurisdiction. A key aspect for making tax administrations ready for the challenges of the 21st century is equipping them with the necessary legal, administrative and IT tools for verifying compliance of reviews their taxpayers. Hence, the enhanced co-operation between tax authorities through AEOI is crucial in bringing the national tax administration in line with the globalized economy * (* OECD Journal). Although still in the design stage of individual infrastructure and the regulatory, AEOI is a real step towards global transparency.

AEOI was amended to respond to the call of the G20 Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the convention was developed jointly by the OECD and the Council of Europe in 1988 and amended by 2010. The Convention is the most a comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance, a top priority for all countries.

       Cooperation between taxation authorities that are existed is a recognized by tax treaty, but usually it only applies bilaterally. The two co-operative countries are mutually manage treatments of subjects and objects of taxation between both countries with the main purpose of avoiding double taxation. The provisions of the tax treaty that is intended to prevent double taxation, for example;

1.     The rule to resolve the case of dual residence in which a person or entity recognized as a subject of domestic tax (tax resident person) by two different countries. This rule is also known as Tie Breaker Rule.

2.     The rule of taxation in the distribution of taxation rights to certain types of income. The division of taxation right, exclusively given only to one country and there is also a form of restriction to a country to impose a tax.

3.      The provision of adjustment Corresponding to the counterparty in a country in terms of other countries to make corrections to the Taxpayer transfer pricing.

4.      The rule on the application of methods to avoid double taxation.

5.     The provision of Mutual Agreement Procedures (MAP) where if the taxpayer is treated not in accordance with the provisions of the tax treaty in another country then the taxpayer may request the tax authorities to resolve the problem through this MAP.

In addition to the elimination of double taxation, tax treaty is also intended to prevent tax avoidance and tax evasion. If these goals are achieved, of course ultimately a tax treaty can eliminate traffic bottlenecks in trade, capital and investment between countries so that in the end the prosperity of a country can be achieved because the resources are allocated efficiently.

As time goes by, the more diverse mode of tax evasion emerging and increasingly difficult to uncover, old diseases such as profit shifting, transfer pricing, base erosion more easily marked but more difficult to prove. How it can be happend? Prior to the AEOI initiation in June 2011, there are no concessions that specifically govern all of the participating countries mutually share tax-related data, both banking and other areas that could be used as evidence of tax evasion disclosure.

America is the first country that find the reluctance of jurisdiction in certain countries to provide the data requested by the United States related to tax evasion committed by its citizens. In some cases related to taxation, forced United States to file a lawsuit at a bank and even a state government becasue they refused to provide data of bank accounts of US citizens.

FATCA is a progressive step taken by the US, which provides certain discount on the part of tax domicile country (in the form of a penalty of 30%) if the country of residence shall be deemed uncooperative in providing data IEOR (Information Exchanges on Request) requested by the US, indeed revolutionary, but successful, and the IRS often come home with victory. FATCA has been usually attached to the tax treaty with the American partner countries, this means combining the unilateral policy on a bilateral agreement.

FATCA stands for the Foreign Account Tax Compliance Act. FATCA is a United States legislation that primarily aims to prevent tax evasion by US taxpayers by using non-US financial institutions and offshore investment instruments. FATCA impacts financial institutions on a graduated implementation timeline. Customers of financial institutions will be first impacted on 1 July 2014.

The United States has indicated resources that it is undertaking automatic information exchanges pursuant to FATCA from 2015 and has entered into intergovernmental agreements (IGAs) with other jurisdictions. The model IGAs by the United States acknowledge the need for the United States to achieve equivalent levels of reciprocal automatic information exchange with partner jurisdictions. Also, they include a political commitment to pursue the adoption of regulations and to advocate and support relevant legislation to achieve such equivalent levels of reciprocal automatic exchange.

In global perspective, a convention between countries to fight crimes in the field of taxation is a necessity, all countries should agree to exchange data automatically. AEOI is the answer, the concrete foundation is to be built this time through an era of transparency, by all countries of course. After all, if all jurisdictions cooperate, there would be no place for tax avoidance, so that later aspects of tax justice will be created. 2017 and 2018 is the time of proof, when 104 jurisdictions began to implement the AEOI. Hopefully, information technology infrastructure has deployed well, the instrument is already situated with good regulation, and mutual commitment to open properly carried out.

  The big question arises, what if all the prerequisites of technology and regulatory instruments are complete but there are still jurisdictions that only concern about their own benefit. I think the answer is simple, perhaps the FATCA model should not stick to the Intergovermental treaties, but is time to attached it to multilateral agreements such as the AEOI itself. That is, if there is a jurisdiction that does not want to run a commitment for transparency, then these jurisdictions were awarded a penalty by all countries alltogether.

In conclusion, it is time for tax treaties to increased its strength to filled with article that administrated how the exchange of data and methods of mitigation of tax evasion following the development of the globalization of the world, plus sanction to uncooperative partner countries in the cooperation tax purposes (FATCA model). The current global problems are beyond double taxation, more serious and complicated matters occur. AEOI have a broader spectrum, due to be multilateral and binding on all of the country, a model imposing sanctions on FATCA penalties deemed appropriate models attached to the approval of AEOI to provide more spirit of transparency. (*)

 *) The information and views set out in this article are those of the author and do not necessarily reflect the official opinion of the institution in which the author works.