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While reciprocity in the financial exchange of information is desirable, mandating it from the start risks excluding most developing countries
By Koen Roovers and Christian Freymeyer.
The world’s richest countries and biggest financial centres are finally taking cross-border tax evasion seriously, but they also seem poised to leave a large portion of the world behind.
In the wake of last year’s G20 declaration, “to make automatic exchange of information attainable by all countries,” countries are now beginning to work together on how to tackle the problem. The Organization for Economic Co-operation and Development (OECD), an international body made up of rich nations around the world, was tasked with developing a global standard for ‘automatic exchange of information’ between governments, aimed at helping catch taxpayers that hold undeclared assets offshore.
A robust information exchange system would allow a country to view the tax information of their citizens’ wealth that is held in foreign bank accounts. This increased transparency would make it harder to hold unreported assets offshore in an attempt to evade regulators in one's home country.
On 6 May, 47 countries declared that they were “determined to implement the new single global standard [exchanging tax information] swiftly, on a reciprocal basis.” Reciprocity, in this instance, roughly equates to the saying, ‘if you scratch my back, I’ll scratch yours,’ meaning that in order to benefit from the system of information exchange, a country must first have the ability to share their own tax information.
While reciprocity is obviously desirable, requiring all countries to comply from the start risks undermining the intention of a global standard, simply by excluding most countries in the world.
This came into clear view on Monday, when Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, said that most developing countries would likely be left out of the system, due to their own information sharing constraints. But most people don’t hide their money in Malawi, they hide it in places like Switzerland or London.
So if the real goal is to curb international tax abuse, a system of tax information exchange needs to be open to all countries, regardless of their ability to instantly meet all requirements set by the world’s most powerful and developed nations. There is an inherent link between poor countries and the need for tax information exchange. By leaving these countries behind, the OECD effectively bypasses a large portion of international tax evasion.
Global Financial Integrity estimates nominal illicit outflows—money leaving developing countries that is illegally earned, transferred, or utilized—to be as high as US$946.7 billion in 2011 (up 13.7 percent from US$832.4 in 2010). Tax Justice Network estimates that up to $9.3 trillion of developing country assets are held unrecorded offshore. If the information exchanged would shed light on even half of these outflows and hidden assets, the benefits to government revenue streams could be enormous. Every dollar that flows out of a developing country illicitly has to end up somewhere else, and, ultimately, this money usually finds its way back to financial centres in the OECD.
While it’s evident that developing countries are in need of a robust mechanism to ward off tax abuse, their inclusion seems to be an uphill battle. And instead of extending automatic information exchange treaties to countries that need it the most, OECD countries like Switzerland are finding ways to limit their access to information.
The IMF lists 154 countries as developing or emerging economies, but only 12 of these are members of the OECD or G20. The problem begins with this very statistic. While developing and emerging countries will be key to creating the global fabric of information exchange, very few are meaningfully engaged in creating the system’s framework.
Mr. Saint-Amans said that developing countries face challenges meeting some of the conditions, in particular, the ability to safeguard confidentiality of the financial information it receives from abroad.
Instead of questioning developing countries´ insufficiently sophisticated domestic tax systems, Mr. Saint-Amans would be wise to look at those countries with sophisticated finance industries instead. Most citizens from developed, stable economies that seek to hide their assets from their tax authorities, chose financial centres in the OECD, not a developing country that lacks a sophisticated financial sector or political stability.
Perhaps it is this asymmetry that has propelled the creation of an information exchange system that alienates developing countries. There is simply little financial incentive for rich countries to cater the program to the needs of developing countries.
While these perceived shortfalls allow for developing countries to be written off as jurisdictions that are simply not ready, the same supposed problems haven’t stopped OECD member nations from entering bi-lateral tax agreements with the very same countries.
The Netherlands, one of the founding members of the OECD, currently has 77 tax treaties with countries around the globe. These agreements often take their inspiration from the OECD, and include provisions for exchanging information. While these exchanges are usually on request, rather than automatic, the confidentiality condition is similar. A provision in the Dutch treaties states “any information received by one of the States shall be treated as secret in the same manner as information obtained under the domestic laws of that State...”
Switzerland, too, has double taxation treaties with more than 80 countries, many of which are based on the old OECD model.
Saying developing countries simply 'are not yet ready’ seems to be an easy means to avoiding their inclusion. If the very same developing countries have been engaged in bi-lateral tax treaties for decades, why can’t they be worked into the global effort on information exchange as well?
If the long list of non-OECD countries engaged in tax treaties were vetted to have the ability to keep information exchanged secret when the information was requested, it seems odd to question their ability to keep information secret when it’s exchanged automatically. The populations of these countries, as well as their governments, should wonder why they were good enough for bilateral treaties in the first place, and more importantly, why they risk being kept out this time.
Koen Roovers is the Lead EU Advocate for the Financial Transparency Coalition, and Christian Freymeyer is the coalition's New Media and Press Coordinator.