What do Argentina, India and South Africa have in common with Jersey, Cayman and the Turks and Caicos? They’ve just agreed to share financial information with each other, for tax purposes. Specifically, they have agreed to exchange, automatically, information on “all types of investment income (including interest, dividends, income from certain insurance contracts and other similar types of income) but also account balances and sales proceeds from financial assets”.
This is a big departure from the status quo: current bilateral agreements, if they exist at all between financial centres and developing countries, allow only for such information to be provided in response to specific requests – where the burden of proof on the requesting party is frequently prohibitive. In addition, there is no requirement for any particular information to be held – so even a successful request can result in no useful exchange. As such, the move to multilateral and automatic exchange, requiring by definition the collection of the relevant information, marks a major breakthrough for the fight against illicit financial flows.
The following countries and jurisdictions make up the ‘early adopters group’ for the OECD’s new standard for automatic tax information exchange:
Argentina, Belgium, Bulgaria, Colombia, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Malta, Mexico, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, Spain, Sweden, and the United Kingdom; the UK's Crown Dependencies of Isle of Man, Guernsey, and Jersey; and the UK's Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands.
The group has committed to achieving automatic exchange for some accounts by September 2017 and for all by September 2018.
UK Prime Minister David Cameron in particular should be congratulated for following last year’s G8 commitments and ensuring the presence of so many of the UK’s traditional financial secrecy jurisdictions; and these jurisdictions should be congratulated too for their willingness to make this important commitment.
Absent from the early adopters group are high-income countries including Austria and Luxembourg (although these have just agreed to a substantial enhancement of the EU savings tax directive, which is the leading operational model of multilateral automatic information exchange), Switzerland, and the USA. Many secrecy jurisdictions (tax havens) are also absent, most obviously Singapore and Hong Kong. Only a handful of developing countries are included, with Brazil and China particularly notable by their absence, while only Colombia from outside the G20 is included.
What’s next? There are three main areas to consider.
Making it happen. Most of the jurisdictions outside the EU have not participated in automatic, multilateral exchange before. Many lack the mechanisms to identify beneficial ownership, to say nothing of the structures to collate and exchange information on this basis. While the deadlines seem far off, there is much to be done. In addition, it is important that the pilot phase generate information about the costs and benefits of the process itself, and the best ways to proceed for subsequent adopters – especially those with more limited financial and administrative resources.
Making it better. As the experience of EU savings tax directive shows, gaps in the CRS are likely to emerge over time; and as existing criticisms of the CRS make plain, there are important gaps from the outset. The process of fixing these should not be pushed to some point of final pilot evaluation many years hence. Instead, the standard should be seen not as fixed in stone but as a living document with both the potential and the need to respond to criticism and the exploitation of loopholes.
Making it work for more of the world’s people. Finally, and most importantly, extending the benefits of automatic information exchange should be an overriding priority. The aspiration must be that the same answer above can be given to the question of what the likes of Bangladesh, Bolivia, and Zambia have in common with Singapore, Switzerland, and the United States…
The future of tax information exchange for development is automatic; and the future is just beginning.