The resounding theme for the 2023 G20 summit, held on 9th and 10th September in India, has been “Vasudhaiva Kutumbakam” – an ancient Sanskrit phrase meaning “the world is one family.” The term perfectly juxtaposes traditionalism with contemporary issues of globalisation. That juxtaposition is one familiar to the tax world in which enshrined domestic tax rules are increasingly required to sit harmoniously alongside global tax co-operation and transparency frameworks.
So far, much of the focus on international tax transparency has been placed on the financial services sector. The intention with tax transparency initiatives has been to counteract tax evasion, often through defeating financial secrecy. However, given the advancement in international tax transparency frameworks in the financial services sector, the OECD’s current focus appears to be widening. Under the 2023 Indian G20 Presidency, the OECD was invited to report on the current levels of tax transparency on foreign-owned real estate and explore possible improvements to tax transparency in that market area. The OECD’s report, entitled “Enhancing International Tax Transparency on Real Estate” (the “Report”) introduces and frames the discussion on these issues.
Focus on the Real Estate Sector
Amidst increasing indications that cross border real estate holdings are on the rise, the concern described in the Report is that following the implementation of the Common Reporting Standard (a global standard for the automatic exchange of information between tax authorities) and FATCA, real estate is not only being used as a legitimate wealth-protection investment, but to also shelter undeclared assets that would otherwise have been subject to CRS and FATCA reporting. Tax administrations recognise that they have limited visibility over the cross border ownership of (and income from) such foreign owned real estate. The clear concern is that, as a consequence, taxes due in connection with foreign owned real estate may remain unpaid.
The potential benefits of enhanced tax transparency in the real estate sector are easy to understand. For example, in the UK, which has historically been somewhat of a safe haven for foreign real estate owners, various domestic tax transparency initiatives have been established (such as the overseas entities register regime and HMRC’s Trust Registration Service) with the aim of making it easier to spot tax evasion and money laundering activities. The UK Government’s aspiration is that increased visibility will help with better understanding how to regulate the sector, improve trust and reliability in the sector and present fairer opportunities to investors.
OECD Proposals and Limitations
The OECD notes in the Report that there are two building blocks to enhancing tax transparency on foreign owned real estate: 1) the collection of reliable and relevant information at the domestic level; and 2) implementing legal and operational gateways to facilitate the sharing of information between jurisdictions, such as through existing exchange of information through a digital infrastructure.
The OECD also concedes, however, that there are key limitations in these aims, a few of which are addressed below.
Limitation 1 – relevant and reliable information
The information available for sharing is limited to what is collected for domestic tax compliance purposes. Such information may not be relevant to another jurisdiction that operates an alternative basis of taxation. Information that is collected may also not be verified, or obligations to provide information may not be enforced. As such registers may remain incomplete or inaccurate.
Accordingly, sharing reliable and relevant information which is collected at the domestic level, for multi-jurisdictional tax compliance purposes, is a difficult process. Considering what information should be collected going forward for these purposes and the actual collection of such information, through existing registers or new compliance methods, is likely to prove be a highly burdensome task for tax administrations. Many of those tax administrations are likely to lack readily available resources to commit to some of the OECD’s proposals.
It should be noted that certain jurisdictions have begun the uphill battle of resource development in the area of tax transparency regarding foreign owned real estate. The Report notes that Germany and the UK have recently implemented registers of beneficial ownership of foreign entities owning local real estate. Also, the United States has recently introduced the Corporate Transparency Act (effective from 1 January 2024) to facilitate the reporting of beneficial owners of corporate entities (US or foreign) conducting business in the United States. Not all countries, however, have provided comparable resources for investment in enhancing tax transparency measures and enforcement infrastructure.
Limitation 2 – The industry
While the Report highlights the difficulties in collecting reliable and relevant information for sharing with partner jurisdictions from the perspective of tax administrations and regulators, one criticism of the Report is that it spends less time in considering the practical obstacles with collecting the required information from the real estate investment industry. The Report identifies certain common elements in tax fraud cases including complex ownership structures that avoid revealing the beneficial owner(s) of the property and complex loans or credit finance arrangements which are deployed to reduce tax liabilities.
Such elements may, however, legitimately be present in sophisticated investment fund structures where no tax evasion is taking place. It is frequently a complex process to obtain details of the ultimate beneficial owners for these structures; in many cases, the number of beneficial owners could stretch into the hundreds. Therefore, in the short term at least, enforcing the collection of such information could impact real estate investment transactions causing delays and possibly even the loss of certain investors who wish to maintain their privacy.
Limitation 3 – Proactive information exchange
Another limitation noted in the report is that information exchanged is often restricted to situations where the interested jurisdiction already has indications that a person owns real estate abroad and has requested the specific information. The necessary resources required by tax administrations, to pro-actively comb through all information provided to them to spot cases of tax evasion or illegitimate tax avoidance, are unlikely to exist in more than a very small number of jurisdictions.
Therefore, even if the digital infrastructure for automatic exchange of information on cross border real estate holdings was to be put in place, it is possible that full utilisation of all the available information in the manner envisaged in the Report may only exist at some distance in the future.
The Way Forward
Owing to such gating limitations, the road to seamless tax transparency on foreign owned real estate is likely to be a long one. In the short term, the Report proposed that governments and tax administrations take incremental steps to promote and facilitate the exchange of information in this sector. The aspiration is that these smaller measures will act as a visible deterrent for tax evasion and increase voluntary compliance rates.
Notwithstanding the challenges described above, one message which is clear from the Report is the OECD’s intention that enhanced international tax transparency is here to stay. Facilitating tax transparency has been a point of focus within the United Kingdom and other G20 countries for many years, culminating in legislative initiatives such as the Corporate Transparency Act by key countries such as the United States. The positioning of the OECD towards developing tax transparency in the context of foreign owned real estate is therefore a consistent and comparable development.
Looking over the horizon to tax developments in the second half of this decade, the expectation is that the Report signals a strong global trend towards an end goal of “Vasudhaiva Kutumbakam” - the world as one family (from a tax perspective, at least!).