In a breakthrough which escaped almost everybody’s attention, a group of countries have agreed to share information with each other about their residents’ tax and financial information. The exchange will be automatic, electronic and multilateral, and includes countries which are responsible for more than 90% of global financial services exports. Agreement from the US is a major step, or will be if it is ratified and implemented; and the remaining step is to ensure developing countries are fully included.
The media reports (e.g. Le Monde and the FT) have focused on Switzerland and Singapore, two of the last great bastions of financial secrecy, agreeing to transparency. But the signatures from two of the biggest financial secrecy jurisdictions, Luxembourg and the United States, is also news, with possibly more significant ramifications.
The United States has been interested in having countries provide information automatically about the financial affairs of US citizens resident abroad, at least since the 2010 Foreign Account Tax Compliance Act (FATCA). But this was a strictly non-reciprocal measure (so much so that one of the US models for the bilateral agreements negotiated to ease the path of FATCA explicitly excludes reciprocity.)
The US agreement to the May 6th declaration is an important shift in the position of the biggest single exporter of financial services. They have committed to a multilateral, reciprocal system of automatic information exchange. This is a big step forward for international cooperation on tax.
Of course, it remains to be seen whether Congress will agree: not least because it means overriding the resistance of states such as Delaware to transparency of beneficial ownership. The White House’s proposed 2015 budget includes a number of relevant measures, not least to ‘Provide for reciprocal reporting of information in connection with the implementation of FATCA’, and to ‘Provide authority to readily share beneficial ownership information of U.S. companies with law enforcement’. Time will tell whether Congress will approve federal action of this kind.
Though 90-95% of financial service exports are now covered by this agreement (see figure), large parts of the world (about 13% of world GDP and 35% of the world’s population) are not.
Countries and jurisdictions committing to automatic information exchange, by share of global financial services exports
Notes. Financial services exports shares are ‘global scale weights’ from the 2013 Financial Secrecy Index (FSI), constructed from IMF data (primarily Balance of Payments Statistics data on financial services export flows, supplemented with flows extrapolated from stock data: International Investment Position and Coordinated Portfolio Investment Survey data). If Hong Kong follows China in signing, a further 4.5% of the global total would swing from ‘Currently uncommitted (FSI)’, leaving only a handful of very small players on the Financial Secrecy Index yet to sign.
Reciprocity is a two-edged sword. While the May 6th declaration has made it much easier for OECD countries to share information with each other, the emphasis on reciprocity may lead to the exclusion of developing countries from accessing this information.
Developing countries are unlikely to give priority any time soon to investing in computerisation of their tax systems to provide data for rich countries; and with their focus on reciprocity, OECD countries might refuse to provide information to developing countries which don’t immediately have the capacity to reciprocate.
One solution would be to allow a fixed window – say 5 years – during which lower-income countries can receive data without reciprocity. Countries could use this window to ascertain the value of the data, to adapt their systems to make good use of it, and to invest in the capacity to reciprocate. Otherwise, the danger is that this agreement helps industrialised countries to enforce their tax laws, to improve financial regulation and tackle crime, but does little to help developing countries.
If fully followed through, the agreement is a far-reaching step towards more effective global cooperation to prevent illegal cross border transactions and tax evasion.