Reducing Tax Evasion Around the Globe


OECD outlines steps to international exchange of tax info with the goal of reducing tax evasion.

A newly released report, “A Step Change in Tax Transparency” prepared by the Organization for Economic Cooperation and Development (OECD) for the G8 Summit, outlines “a standardized, secure and cost-effective model of bilateral automatic exchange for the multilateral context.” Quite a mouthful, but it boils down a series of steps that would help countries automatically exchange information that would help them cut tax evasion. “Because tax evasion is a global issue, the model needs to have worldwide reach to avoid merely relocating the problem elsewhere,” according to a release about the report.

Indeed, amounts deposited in tax havens globally total roughly $2.7 trillion. That’s according to a 2012 study, “The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown,” by Niels Johannesen of the University of Copenhagen and Gabriel Zucman of the Paris School of Economics.

To effectively exchange tax information between countries, several steps are key. These are, according to the OECD report:

Reaching common agreement on the scope of reporting and the exchange of information:For instance, a comprehensive reporting regime would cover various types of investment income and also address situations in which a taxpayer tries to hide capital that itself represents income or assets on which the taxpayer has evaded taxes. It also would cover not just individual reporting, but reporting by different legal entities that may have been used to circumvent reporting regulations. The reporting framework should apply to brokers, insurers and other financial institutions, along with banks. Finally, the agreement also should include a comprehensive set of due diligence procedures the financial institutions will follow to identify reportable accounts and account holders. Such a comprehensive approach is needed to boost the quality and predictability of the information being exchanged.

Selecting the legal basis for the exchange of information:The model will need a legal basis for financial institutions’ domestic reporting obligations and their activities in exchanging information. These agreements must include provisions to guard the information and limit the number of people to whom it’s disclosed. Moreover, countries that agree to provide and receive this information must first have in place the legal framework and administrative capacity to ensure its security.

Developing common or compatible IT standards:Coming together on a common, secure technical solution will reduce the costs to both governments and financial institutions, and will help ensure that information is transferred quickly and safely

The report notes that several key developments already have occurred. Last year the U.S. Treasury issued several model IGAs or Intergovernmental Agreements. These make it easier for partner countries to comply with FATCA by, for instance, simplifying due diligence requirements and relaxing some deadlines, according to this summary by Thomson Reuters.

And in April of this year, the G20 finance ministers and central bank governors endorsed the automatic exchange of information between countries as the new standard in their fight against tax evasion.

Still, the challenge is daunting. The study by Johannesen and Zucman concludes that treaties put in place between G20 countries and tax havens during the financial crisis requiring the exchange of tax information “led to a modest relocation of bank deposits between tax havens but have not triggered significant flows of funds out of tax havens.”

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What's Basis Points?

Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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