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Automatic exchange of tax data, a not so innocent move

May 17, 2014

Published in ‘New Europe’ Print and Digital Editions

NE04The next level of international cooperation in taxation is called automatic exchange of information. It came last March as a study and a set of standards published by the Organisation for Economic Cooperation and Development (OECD), and is currently in the process of evaluation before being definitely adopted by the organisation’s member countries. But let’s start from the beginning—the keyword here is globalization.

Globalization is the term used to denote the removal of barriers in international trade and capital flows. It also means the possibility for the average citizen to move abroad, to work and invest abroad, and finally to place his money abroad. Such possibilities, which in the past were reserved to the very few, nowadays have become commonplace, and are largely used by hundreds of thousands of citizens. Modern technology such as Internet and phone banking, as well as the use of smartphones have facilitated international banking transactions, and have thus reinforced this trend.

Such developments are usually viewed as positive, although there is a downside. Globalization has led to the harmonization of regulations and practices, but has not yet touched (and probably never will) national tax systems. Those remain largely heterogeneous and resistant to change as they reflect the very different local realities, historical differences, and even ideological divergences. But such heterogeneity provides incentives for avoiding taxation—it suffices to place one’s savings abroad, in a country of more favorable taxation than one’s own country of residence. The problem arises when such practice become popular enough to attain sufficiently large numbers of people and concern big amounts of income; then the ensuing tax avoidance starts posing a real problem to governments and tax authorities.

Today, large amounts of money are kept offshore and, to the big disappointment of tax administrations, go untaxed. Of course, there is some international cooperation in place, which mostly takes two forms, exchange upon request, and spontaneous exchange of information. In practice, both have proved insufficient. There is also in certain cases, mostly inside the EU, a third approach, automatic exchange of information, which is considered as the most effective form of fighting tax avoidance in this area. In the EU, this technique is systematically used among member states for all types of income concerned with the Savings Directive. Interestingly, the OECD notes about the Savings Directive that “in the absence of automatic exchange of information, in excess of 75% of taxpayers may not have complied with their residence country tax obligations.”

And this is how we got here: to the works and proceedings of applying a system of automatic exchange of taxpayers’ data worldwide, among financial institutions of all countries—but keep cool, it’s still just a project. That was decided at the highest political level, at various meetings held in 2013 by the G8 and the G20, which instructed the OECD to work on the project and develop a global model for such exchange of data.

In real life, the implementation of such a system is going to prove quite a difficult task. It presupposes to collect specific data for all clients, pre-existing and new ones, in a standard format; this is extremely time-consuming, especially for old clients. It also means that uniform due diligence procedures should be applied by banks to all their clients. Finally, for the system to work efficiently, it is necessary to establish a uniform standard of taxpayer identification, the famous tax identification number (TIN), another project under way, this time by the European Commission. These are but some of the difficulties to be resolved; finally, if everything goes well, the automatic exchange of data is scheduled to become operational by late 2015.

Theoretically speaking, the new system represents a step forward in the fight against tax evasion, and in the endeavor to establish more tax justice. In practice, there are a number of serious issues to address; serious enough that it would be a mistake not to stress them. First of all, the OECD itself: how legitimate is it for this organization to be entrusted with the development of global standards, given that it only represents the interests of 34 developed countries? Let us remind that the OECD was established in its early form, just after the Second World War, as a body to administer the Marshall Plan; later, in the early 60’s, it became a ‘forum’ for carrying out economic research and recommending policies. Then, in the 90’s, it changed focus and concentrated on globalization and international taxation. According to some analysts, it became the ‘international tax police.’ Problem is it represents only the views (and interests) of its 34 members, while the concepts and policies it produces are supposed to be applied to all countries—there is clearly an issue here.

The second point is even more preoccupying. Automatic exchange of data means a routinely machine-made collection and distribution of sensitive personal data to foreign authorities. This issue seems to be voluntarily downplayed; there is only a single reference to it in one of the OECD’s reports:

“To engage in exchange of information, and in particular automatic exchange, countries need a high degree of comfort, that the information be kept confidential both in law and in practice and is only used for the purposes allowed under the applicable exchange instrument.”

I’ll leave it up to you to figure out the unwanted consequences when and if this system were applied to the growing number of ‘difficult’ places in today’s world.


From → Views & Opinions

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