Automatic Tax Information Exchange
Action Item: Require governments to collect from financial institutions data on income, gains, and property paid to non-resident individuals, corporations, and trusts. Mandate that data collected be automatically provided to the governments where the non-resident entity is located.
Background: Globalization and the liberalization of economic activity has converted the private sector into a world without borders. This creates a major problem for national tax authorities because similar changes in their enforcement powers have not kept pace with industry. National tax authorities continue to be constrained by national borders and collecting tax revenue has been difficult.
Additionally, bank secrecy and other confidentiality laws in many jurisdictions (such as tax havens and international financial centers) prevent disclosure of relevant information by financial institutions to government authorities. Further, lax response by tax authorities in those jurisdictions to information requests from foreign governments often delays or prevents cases against tax cheats.
Tax, not aid, is the most sustainable source of finance for development, and tax havens undermine developing countries’ efforts to pay their way. The United Nations’ 2002 Monterrey Consensus and the 2005 UN World Summit require developing countries to mobilize domestic resources for development. This means tackling illicit capital flight and tax evasion. Moreover, the Commentary to the OECD Model Income Tax Treaty and the Commentary to the UN Model Income Tax Treaty both refer to automatic exchange of information.
Significant steps have already been taken on this issue. The first multilateral foray into this area was the EU Savings Tax Directive, which was adopted to ensure the proper operation of the internal market and tackle the problem of tax evasion by individuals. It came into effect on July 1st, 2005 and required the automatic exchange of data on interest paid has been agreed upon by all member states except Austria, Belgium and Luxembourg, which have recently agreed to begin sharing this information. The U.S.’s adoption of the Foreign Account Tax Compliance Act in 2010 was a watershed moment in progress toward multilateral automatic exchange of tax information, spurring greater bilateral automatic exchange agreements between countries, a recently announced European pilot project to create a multilateral automatic exchange agreement that will eventually be opened to third countries, and greater coordination of such actions at the G8, G20, and OECD levels. More needs to be done to ensure that all nations, especially developing countries, are a part of the emerging global cooperation.
G-20 Jurisdiction: Working Group 1 (Enhancing sound regulation and strengthening transparency) and Working Group 2 (Reinforcing international cooperation and promoting integrity in financial markets).
Executing Authority: European Union; U.S.; G8, G20; OECD; UN Committee of Experts on International Cooperation in Tax Matters.
Benefit: It is estimated that individuals have about $12 trillion of assets in jurisdictions other than their countries of residence and not declared in their countries of residence; the lost tax revenue annually from such undeclared assets is estimated at $255 billion. Tax evasion by corporations and other entities is also a major problem.