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The Progress on and Future of Automatic Tax Information Exchange

April 18, 2013

By Ann Hollingshead

Ann Hollingshead is a Financial Transparency Coalition blog contributor, whose posts appear weekly. Formerly a Junior Economist at Global Financial Integrity, Ann is now pursuing a Master of Public Policy (MPP) from the University of California Berkeley. Follow her on Twitter: @AnnHollingshead.

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This week the world saw a huge leap forward on automatic tax information exchange and, more broadly, the effort to crack down on tax evasion. As the recent investigation by the International Consortium of Investigative Journalists has shown, governments around the world have a big problem, not only with tax evasion specifically, but also the broader use of offshore vehicles for hiding cash and corruption.

Yet this week, the governments of ten European nations have answered this challenge in stunning fashion. Their efforts have ignited momentum on an effort that could be an integral part of not only reducing tax evasion, but also improving economic development and reducing poverty worldwide. Of course, we’re not there yet, we might even not be past the end of the first quarter. But we could get there.

Here’s where we are: On April 10th, the governments of France, Germany, Italy, Spain, and the United Kingdom announced they will launch the first ever multinational system of automatic tax information exchange. Shortly afterwards, the government of the Czech Republic and Poland, followed by Belgium, the Netherlands, and Romania, also signed up, bringing the number of participating countries to 10.

As Raymond Baker, Director of Global Financial Integrity, noted: “This is a resounding victory for taxpayers and transparency groups; it’s not possible to overstate the significance of this news.”

The European nations modeled their multinational system after the intergovernmental agreements developed between the United States and partner countries over the past several months to implement the Foreign Account Tax Compliance Act (FATCA). This template goes beyond the EU Savings and Tax Directive, which requires EU members to report information on interest paid, by reporting actual transactions. Moreover, Algirdas Semeta, the European Union’s Commissioner for Taxation, has noted that the European crackdown “against tax evasion could eventually extend to dividends, capital gains and royalties, significantly expanding the revenue earned by national treasuries.”

Meanwhile, the United States has expanded its prospective bilateral FATCA agreements with two important potential partners. The first is Bermuda, which has often tried to rebrand its “tax haven” image as merely a specialty in “risk management,” yet was also responsible for Google Inc. avoidance of $2 billion in worldwide income taxes by sheltering $9.8 billion of its revenues. The second was the Cayman Islands, which needs no introduction. Gonzalo Jalles, the Chief Executive Officer of Cayman Finance, explained that the Cayman Islands had agreed to enter into a Model  1 Intergovernmental Agreement with the United States so that it can “dispel misconceptions that the Cayman financial industry is built around some kind of secrecy or tax evasion structure.”

These efforts are important not only because they will provide some real and tangible progress on Europe’s and the United States’ ability to combat tax evasion, but also because they are providing momentum on two critical fronts. First, the European effort provides a blueprint for wider multilateral automatic tax information exchange; proving that a FATCA-like model in a multi-country context is not only feasible, but also effective. Second, the efforts open the door for developing countries to pursue these agreements—or better yet a similar system—as well.

For any of these efforts to have a real impact on economic development and reductions in poverty, it must translate to action in the developing world. That’s because tax revenues are, and will continue to be, the world’s most sustainable source of development funds. Yet if these systems and agreements exist only between developed nations and tax havens—and until developing countries participate in a similar system or agreements of their own—the progress we’ve made will have little effect on economic development and acute poverty.

But this is not a note of pessimism or caveat. The news this week on automatic tax information exchange is unequivocally good. The world needs the United States and Europe to blaze this path because, in all honesty, those are the only nations with the political power necessary to turn the tide on this. As Bermuda’s Finance Minister puts it: “The U.S. has such a big stick they can make this demand and they can make it stick.” But once the developed world has put these changes into motion, it will give the developing world both a road map, and the political leverage, to do it, too. And while we may still be in the first half of this ball game, ultimately, developing this system worldwide is the end game.

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

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