OVDPs (Offshore Voluntary Disclosure Programs – PVDTs in Spanish) should not be confused with the Tax Remission implemented in Ecuador last year, which condoned interest, fines and surcharges on amounts in outstanding tax or fiscal obligations.

OVDPs offer taxpayers, who have failed to inform, report or declare their assets, revenues and capital, the possibility to comply with this duty voluntarily under special temporary conditions, normally by paying lower tax (reduced penalty) with exoneration from fines, including exemption from administrative or criminal-law actions.  

The first edition that the OECD (Organization for Economic Cooperation and Development) brought out in 2010 with guidelines for OVDPs had remarkable results, leading to the signing of over 500 agreements worldwide for fiscal information exchange. Now over 150 countries, including Ecuador, have joined the Global Forum for Transparency and Exchange of Fiscal Information, including the Common Reporting Standard, which is the model for automatic information exchange.

In the near future, financial information is expected to become transparent automatically and annually among all financial institutions, enabling Tax Authorities to identify tax evasion and elusion hotspots globally.

Therefore, the OECD encourages governments to develop fiscal disclosure programs in which taxpayers can voluntarily declare their un-declared holdings, pursuant to local law, upon adopting the “Standard for Automatic Exchange of Financial Account Information in Tax Matters” around the world.

OECD can assist countries that are moving to adopt these programs in several dimensions, among others to: a) Establish the premises, b) Define the scope and terms, c) Establish reporting requirements, and d) Take analytical advantage of the compiled information to identify strategies to combat fiscal evasion.

According to the OECD, these voluntary disclosure programs help both parties, by enabling taxpayers to get their fiscal obligations in order, while assisting governments to accelerate tax collection, regularize their taxpayers, and therefore collect more in the future, as well as to detect tax elusion mechanisms or arrangements.

In fact, regularizing assets and other revenues not previously declared means that, in the future, such income will be subject to the taxes that should be paid, such as income tax on the yield from such assets; capital gains tax, tax on donations or inheritance tax, among others.

There have been several “waves” of fiscal amnesty worldwide, but in 2010 the OECD began pressing for their enforcement, as a measure enabling taxpayers to frankly disclose their revenues and assets, before Fiscal Administrations achieve such a degree of sophistication that they can identify such evasion and apply the full weight of the Law, including the corresponding criminal-law penalties.

Amnesty may provide the necessary incentive to repatriate revenues, assets or capital to the taxpayer’s country of fiscal residence, depending on the terms and design of norms approved by each country’s legislature.  

OVDPs must be designed not only for the purpose of tax collection, but also to motivate medium- and long-term fiscal compliance by taxpayers; to encourage them to repatriate such capital, assets or income, as relevant; and ultimately to learn how elusive measures operate, in order to set strategies to identify and combat such practices in the future.

Several particular features of OVDPs must be analyzed:

Limited timing – In my opinion, a fiscal or equity holdings disclosure program must provide a limited time period during which taxpayers subject to the program can declare their un-declared assets or earnings, rather than a permanent system or one that might be offered again at some future time. Some legislation has chosen to grant a lower rate or penalty to those using OVDPs in the first three months, for example, after which the rate will be higher for later applicants.

Group of Taxpayers who can apply for OVDPs – This will depend on how each country’s norms are designed, under which the concept of a specific group of taxpayers can be applied, such as individuals or corporate bodies, or both; or the type of tax, such as income tax, inheritance tax, etc. or a combined modality specifying the taxpayer type and a particular tax. OVDPs can also exclude anyone already found guilty of, or pending judgment for, fiscal evasion.  

Assets, revenue or holdings to declareMany countries have established a timeline for voluntary regularizing of un-declared assets or revenues. For example, only those assets acquired prior to December 31st of the year before the law was enacted creating Amnesty or OVDPs can be declared. Only those goods, assets and capital that are abroad, or those who are in Ecuador and have not been duly declared, can be involved. Assets are also excluded that are in certain specific jurisdictions or the GAFI because of asset laundering or cooperating with terrorism. All this must be duly regulated.

Lowered rates or penalties – In this regard, there are many variations from country to country. Some apply a lowered rate or penalty when joining the voluntary disclosure program, such as 8%. In other cases, as already mentioned, the rate may vary from the minimum to the maximum, depending whether the taxpayer joins the program in its earliest months or later. Other jurisdictions, e.g. Argentina, chose to encourage disclosure with a lowered (or even zero) rate for those taxpayers who decided voluntarily to repatriate their capital to their country, depending on the planned investment mechanisms.

Modalities for amnesty – In this regard, there are also many alternatives. The government program will ensure that, when a taxpayer joins the OVDP, it will be exempted from fines and interests for unpaid taxes on income, capital or assets that were not declared in a timely manner; or there is also the possibility of an official inspection for previous fiscal years in which the Fiscal Authority still has the power to make such examinations; or when criminal-law or administrative actions would normally be in order. If, for example, a taxpayer declares an asset (real property) under amnesty or an OVDP and is exonerated from owing the SRI income tax on this increase in property, would it also be subject to exemption from the solidary tax on that same property? Or could another municipal administration levy asset tax on the property that had not been declared previously? Proper legislative technique is essential, to avoid various interpretations of the scope of amnesty, designed from an overall perspective and scope.  

Post-OVDP measures – Should governments that enact OVDPs intensify control measures, raising sanctions and penalties after the amnesty period has ended?

In Ecuador, the possibility of implementing OVDPs has already been discussed, and preliminary projects are circulating in this direction, which are under consideration by the national Government. My next article will discuss the case of Chile, which implemented its OVDP in 2015.

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