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New Era in Tax Cooperation?

GB Geo-Blog

New Era in Tax Cooperation?

Efforts to counter international tax evasion are nothing new, and over the years a myriad of preventative initiatives and policies have been devised. The main actors attempting to hold the fort against evaders are tax administrations, which, until recently, only experienced partial success in this struggle, due to the absence of genuine cooperation at the international level.

It is common practice for countries to exchange information about tax – something made possible under the relevant provisions in tax treaties to avoid double taxation. Yet, although there are thousands of bilateral tax treaties in effect, for various reasons, certain jurisdictions have shown no interest in concluding such agreements, while others have simply limited the scope of exchange-of-information provisions during treaty negotiations, primarily due to domestic bank secrecy laws. International bodies, such as the Organisation for Economic Cooperation and Development (OECD), have been proactive in the struggle against international tax evasion by promoting international standards on the exchange of information and tax transparency. Indeed, by 1987, the OECD had already stated that unduly restrictive banking secrecy laws not only resulted in a loss of revenue to governments, but also impeded international tax cooperation. Nevertheless, a lack of political will limited the effectiveness of these efforts. Recently, however, a number of events have given rise to actions that could be described as a crusade against international tax evasion.

As a result of the international economic contraction, many governments have provided bailouts and economic stimulus packages, which evidently represent additional expenditure for national budgets. Large economies are, therefore, looking for more resources to close the revenue gap created by these measures. Of course, in times of recession, it may prove difficult to increase the tax pressure, as this could be economically, counterproductive, and politically, a non-starter. A contrario, improving tax collection and tackling tax evasion are – or should be viewed as – reasonable alternatives, from an economic and political perspective. Considerable amounts remain undisclosed in jurisdictions with favourable tax regimes protected by bank secrecy. Although it is challenging to obtain exact official statistics, according to the OECD, it is estimated that, in the US alone, the revenue loss amounts to US $100 billion per year – money that would have otherwise been collectable, but for tax fudging.

In early 2008, scandal transfixed the international tax community, when it was made public that a former employee of a Liechtenstein banking group had sold to German intelligence an incriminating list containing the names of hundreds of high-level individuals who had evaded taxes by hiding considerable sums of money in Liechtenstein. This scandal reached staggering proportions in the international tax world as other countries started investigations after acquiring similar lists. This was the perfect environment for the OECD to promote its “international tax standards on tax transparency,” and to take these to the next level by putting these principles into practice.

Tax transparency was one of the key issues discussed during the G20 Summits in Washington, London and Pittsburgh. (It will likely figure again at the Toronto G20 summit in June of this year.) At the London Summit of April 2nd, 2009, the G20 leaders agreed to take action against non-cooperative jurisdictions, including tax havens. In their communiqué, the G20 leaders stated their willingness “to deploy sanctions” to protect their public finances and financial systems. This was perhaps the key ingredient that injected life into the new standards. The position of the G20 governments completely changed the rules of engagement, and the results were nothing short of spectacular.

As a consequence, jurisdictions as diverse as Andorra, Austria, The Bahamas, Hong Kong, Liechtenstein, Macao, San Marino and Singapore passed legislation implementing their commitments to the international tax principles of tax transparency, while others, such as Costa Rica, Guatemala, Malaysia and the Philippines, initiated legislative changes to this end.

Since the publication of the OECD’s Progress Report list on April 2, 2009 (in conjunction of the G20), 19 jurisdictions have been transferred into the category of jurisdictions that have substantially implemented these principles. Even jurisdictions like Andorra, Liechtenstein and Monaco have been moved to the cooperative category.

Four OECD Member countries – Austria, Belgium, Luxembourg and Switzerland – that had included reservations to the article on the exchange of information in the Commentaries to the OECD Model Tax Convention, removed their reservations.

In 2009, almost 200 ‘exchange of information agreements’ were signed, and 110 tax treaties or protocols were executed or brought up to the international exchange-of-information standard by countries that were considered not to have substantially implemented international tax transparency principles.

Finally, the UN has endorsed the exchange-of-information standards by including a new version of the article on the exchange of information in the UN Model Tax Convention, which is generally used by developing countries during treaty negotiations.

The results, it must be said, are rather impressive, and the key players in this thrust deserve praise. Yet the work is far from over. Commitments need to crystallize, and this may prove to be a signal challenge. Implementing the tax standards on tax transparency requires resources, which may be scarce in some jurisdictions. Therefore, the issue is not only one of maintaining the political and diplomatic pressure, but also of coordinating technical and financial assistance.

Recently, the OECD created a Tax and Development Task Force with the participation of developing countries, NGOs and business organizations. The group aims to create clear and effective mechanisms to make progress in the field of taxation and development, but only time will tell whether this is sufficient to fully implement the international principles of tax transparency.

Luis Nouel is the Manager of Global Publications of the IBFD in Amsterdam. He has been dealing with international tax issues for more than 16 years, both in government and in big four practice.


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