Information exchange agreements are one of the main tools open to governments in the fight against tax evasion. They allow tax authorities to investigate tax(non-)payers’ affairs across borders, uncovering unreported income and piecing together tax planning structures. They’re also the main focus of coercive efforts by big economic players to “crack down on tax havens.”
As in many areas of international economic policy, what developing countries need isn’t the same as what developed countries do. So while tax justice campaigners are celebrating the G20’s weekend declaration on information exchange, I’m a little more sceptical about what it will mean for tax and development. This post is also by way of a comment on Owen Barder and Alex Cobham’s proposed G8 initiative on tax transparency.
Information exchange comes in three flavours:
- On request, the current lowest common denominator in agreements, where one country’s tax authority must fill in a form for each taxpayer about whom it wants information, setting out and justifying its demand from another country.
- Spontaneous, where tax authorities pass on information of interest to another that they uncover in the process of an investigation.
- Automatic, touted by campaigners as the gold standard, under which information is transmitted in bulk between authorities. This has the advantage that a tax authority will find out about a taxpayers’ undeclared overseas income without needing to suspect its existence beforehand.
Taxpayer confidentiality means that countries can’t usually do any of this without the legal authority of a treaty. Treaties can come in two forms:
- Bilateral, either as part of a double tax treaty or as a standalone tax information exchange agreement
- Multilateral, of which there are several examples including an EU Directive and the Multilateral Convention discussed below.
G20: what’s going on
So, to the G20. Saturday’s Finance Ministers’ communiqué [doc] says:
we also strongly encourage all jurisdictions to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and call on the OECD to report on progress. We welcome progress made towards automatic exchange of information which is expected to be the standard and urge all jurisdictions to move towards exchanging information automatically with their treaty partners, as appropriate.
This latter sentence is a gradual strengthening of language, from this in November 2011 [doc]:
We welcome the commitment made by all of us to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and strongly encourage other jurisdictions to join this Convention. In this context, we will consider exchanging information automatically on a voluntary basis as appropriate and as provided for in the convention
We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate and strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance.
I’m not sure of the difference between “call on” and “strongly encourage” in diplomatic language, but these evolving declarations suggest a couple of trends in the G20’s coercive agenda. First, automatic information exchange is moving from something voluntarily towards becoming “the standard.” Second, the OECD is now going to be reporting back to the G20 on who has joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, an OECD/Council of Europe collaboration that is now open to all comers. (I wrote a sceptical post about the Multilateral Convention when I was at ActionAid, and while I won’t recap the points I made there, I was never reassured about the convention’s governance.)
It seems, then, that a direction of travel has been mapped out towards an international standard in which jurisdictions exchange information automatically through the Multilateral Convention, monitored by the OECD and under pressure from the G20. This is quite consistent with Alex and Owen’s proposal, under which automatic exchange among the G8, their dependencies and overseas territories, would be “the foundation of a global system for automatic exchange of tax information between all countries who wish to participate in it.”
Coercion and developing countries
We can be sure that the G20 pressure is targeted at tax havens, not developing countries. Note that Alex and Owen, above, emphasise countries “who wish to participate in it.” In practice, however, many developing countries will inevitably be caught up in the momentum. They are already participants in some of the key international instruments. For example, in sub-Saharan Africa, where tax administrative capacity is weakest:
- Ghana is already a member of the Multilateral Convention, while Nigeria and Gabon have both committed to joining.
- Botswana, Burkina Faso, Cameroon, Gabon, Ghana, Kenya, Lesotho, Liberia, Mauritania, Nigeria, Senegal and Uganda are all members of the Global Forum on Transparency and Information Exchange for Tax Purposes, the OECD satellite body through which countries’ compliance with “the standard” dictated by the G20 is monitored.
So what’s the risk? I’m worried that, if they adopt the automatic information exchange standard any time soon, overstretched revenue authorities in developing countries will have to undergo a massive reprioritisation of effort towards putting in place systems to enable them to supply information automatically. This when they already struggle to find the capacity for, for example, transfer pricing audits. It’s hard to imagine them finding the resources to both comply with the demands placed on them by automatic exchange, and to make use of the data they receive automatically. (The same concern, at a lower level, might apply to developing countries’ existing commitments to information exchange on request: what’s the compliance burden placed on a developing country by the requests it receives from treaty partners, and by the Global Forum’s peer review process?). Alex and Owen have this covered when they suggest that:
The authorities of developing countries will be able to access the information shared by our tax authorities from the outset, even if their own tax authorities are not yet themselves in a position to share information automatically.
I’ve also heard people argue that automatic information exchange might be the kind of motivator that tax authorities and governments in developing countries need to push them to get serious about tackling tax evasion, given that many of its biggest exponents are influential members of elites. Well, that’s possible. But wouldn’t it make more sense to abandon talk of information exchange with developing countries and focus on information transfer? That way they’d have all the information without such a large compliance burden. And an asymmetrical arrangement is easily justified from a development perspective.
Source-based information exchange?
Aside from the compliance burden, another question is the basis on which information is exchanged. Automatic exchange is designed to benefit the country in which a taxpaying individual or company is resident, since the information flows to there from the other countries in which she earns her income. This is also the basis of Alex and Owen’s proposal. It would certainly be useful for developing countries in the context of tax haven abuse by their individuals and medium-sized domestic companies, but it is of no use to them in investigating the tax affairs of foreign investors. Maybe that’s not the brief, but Alex and Owen’s proposal does say:
We attach particular priority to ensuring that developing countries are able to access and use this information to enable them to collect taxes which are legally due from companies and individuals within their jurisdiction.
This got me thinking. What would an automatic information exchange system designed to support source-based taxation of multinationals look like? There is at least one piece of information that could flow in the opposite direction, from residence to source country.
Consider Tax Authority A investigating Company A, and Tax Authority B investigating Company B. Company A sells widgets to Company B. Under existing automatic exchange standards, no information would be exchanged, unless Company A was owned by Company B, or vice versa. Alex and Owen’s proposal extends this, as follows:
all participating authorities will collect data from financial institutions and companies about income, gains, and property paid to non-resident individuals, corporations, and trusts, which they will provide automatically to the jurisdiction in which that individual or company is resident.
Under this version, Tax Authority B would transfer information to Tax Authority A about the payment made by Company B to Company A for the widgets. It’s an improvement, because at the moment companies often force tax authorities to jump through legal hoops to obtain this information via treaty requests. That’s because even if Companies A and B are part of the same multinational, they are separate companies, and Tax Authority A can’t ask Company A for Company B’s financial information.
The one complication is that neither tax authority in this scenario would necessarily know whether Company A and Company B were related parties. Sometimes tax authorities in developing countries struggle to prove that an overseas party with which the company under audit is transacting is a related party at all, especially if their tax law defines related party in a way that is hard to prove.
This information would in fact be available to Tax Authority C in the multinational’s parent country, which should (or at least could) have a list of all parent Company C’s subsidiaries overseas. Source-based information exchange, limited to the case of multinational companies, would complement residence-based exchange. It would involve the tax authority in the country of the parent transferring information it gains through auditing the parent on to tax authorities in the countries where the multinational works.