Isn’t it odd that the poster-child of the G20/OECD tax information exchange agenda should now be subject to such staunch opposition? Stranger still that the proponents of exchange of tax information ‘on request’ as set out in various bilateral arrangements promoted by the OECD and endorsed by the G20 who both signalled its acceptance as the ‘end of secrecy’ should now be so equivocal in its defence.
How is it now that doubts about this ‘global’ standard for increased bilateral cooperation between states typified in the OECD Model Tax Information Exchange Agreement and Article 26 of the OECD Model Tax Treaty on Exchange of Information are being entertained by the very group that so successfully extolled its virtues?
Perhaps the answer lies in the motivation behind the promotion of the ‘on request’ model of tax information exchange in the first place. Is it possible that object of the TIEA exercise was not to promote this form of exchange at all but rather a means to another end?
Could it be that this was the first stage of a two step process to the multilateralisation of ‘automatic’ exchange using another OECD prototype – Article 6 of the Convention on Mutual Administrative Assistance in Tax Matters?
Lately the head of the OECD Tax Policy Directorate – the department largely responsible for the Harmful Tax Competition exercise of the late 1990s and the convincing the G20 of its enduring relevance of this programme, albeit repacked for post-recession consumption – has admitted the short-comings of the ‘on request’ model.
In fact this department which is the driving force of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes has easily made the transition from a dialogue on the ‘request’ model to the ‘automatic’ version after four years of intense TIEA negotiation backed by threat of collective G20 sanction.
It seems perfectly reasonable to conclude that the ultimate ambition of the OECD is to see the disciplines of tax cooperation contained not in a series of bilateral agreements of which there are hundreds now in existence but in a proper multilateral agreement which codifies not only the automatic exchange of tax information but also the cooperation in the collection of taxes. Both of which are covered by an OECD model agreement.
Faced with the pre-recession apathetic response to this model agreement, the Convention on Mutual Administrative Assistance in Tax Matters, which did not change in the meetings of the G20 – it might have been best to ground the standard in the bilateral model which if sufficiently prolific could then naturally progress to the acceptance of the multilateral arrangement; especially in circumstances where the OECD Tax Policy department has started to voice doubts about the effectiveness of the bilateral mechanisms.
Some countries, like Guernsey, in anticipation of a second iteration of the global standard on tax information exchange being ‘automatic’ buttress as in the first iteration by the threat of G20 sanction have already indicated that they will adopt this form of exchange. Others like Colombia faced with unlikely progress through the Global Forum’s Phase 1 Peer Review Assessment on its legal reflecting the existing standard have already acquiesced to this variant by becoming signatories to the OECD Model Convention.
Yet others like Latvia have joined the Global Forum while simultaneously becoming parties to the Convention. In fact it is true to say that as the enforced popularity of TIEAs has grown so too has the subscription to the Convention.
Is this good strategic planning by these countries or is it the premature adoption of this standard which is yet to ‘unseat’ the international norm? In the case of Guernsey and other offshore financial centres who rely on the European Union for their fortunes it might well be a pragmatic response to the growing appetite in Europe for automacity in its dealings with each other in matters of tax information exchange and more particularly UK regulations under its Finance Act which classifies countries according to the anticipated ease of obtaining tax information about delinquent UK tax payers which promotes those countries with automatic exchange to the most-favoured category.
For others who sign up to the Convention it may be ancillary, their primary objective of forging a closer relationship with the OECD in an attempt to stave off sanction for failure to progress through the Peer Review Assessments on time in a ‘quid pro quo’ which might pre-empt sanction by the G20 in advance of this year’s Los Cabos Summit which ought to continue to the ‘name and shame’ practice started in 2009 in respect of those countries who have yet to satisfy the Global Forum of their credentials in this area of tax co-operation.
For those who have made no moves to automaticity two theories can be advanced to explain why this might be the case. First, their singular focus to conclude an acceptable number of agreements – TIEAs or tax treaties – which contain the 2008 standard with the right number of ‘relevant’ partners has meant that they have not sensed the change in the orientation of the OECD towards the existing standard. Indeed, the change is subtle as the mandate of the Global Forum is still based on their activity to advance information sharing ‘on request’ renewal of which is dependent on the successful multiplication of these arrangements.
Second, they have determined that the cost-benefit of ‘automaticity’ does not support its adoption and further they have recognised that even within the G20 there is still no agreement about ‘automaticity’ and as such there is no need to move prematurely replace the global standard with a new one. Indeed they may well be cognisant of the rule of public international law which warns of the creation of customary international law though the mere acquiescence by a number of states of a rule supported with statements of their intention to be bound by the rule.
Whatever the end game might be for the OECD in relation to the G20’s programme on tax information exchange, non OECD/G20 members the Global Forum must have their own agenda informed as it must by national considerations of economic development and the proper allocation of thin human and financial resources.
This was the case before the recession and after the recession has faded from memory will continue to be the case. For this reason the following points about the uptake (or otherwise) of ‘automaticity’ amongst G20/OECD members is instructive.
In the UK, although Her Majesty’s Revenue and Customs (HMRC) has expressed a preference for automaticity when compared to the ‘withholding’ method as a general proposition, that has not prevented the UK government from agreeing to the former method in respect of bank accounts and the extraction of ownership information from the authorities in Switzerland. Indeed the UK along with Austria and Luxembourg have proposed arrangements which do require any information exchange but rely instead on a receiving a share of the funds held abroad using the ‘withholding ‘method.
Within the European Union (EU) Luxembourg and Austria have blocked the attempts to plug the loopholes in the EU Savings Tax Directive which they believe to be an attempt to solidify ‘automaticity’ as the preferred means of tax information sharing because they rightly believe it needs wider dialogue before entrenched in EU law.
In the US the proposed changes to the tax law, which if successful will extend reporting by US banks to the Internal Revenue Service of information on interest bearing deposit accounts by all non-US accounts, does not mean that this automaticity between the IRS and the banks will extend to America’s TIEA partners. In the first place the authority to exchange taxpayer information is grounded not in US domestic statute but in bilateral treaties and secondly their stated concern about the confidentiality mechanisms in these countries also points to the fact that they may refuse to respond to ‘requests’ if they remain unsatisfied that the appropriate safeguards are in place.
The only country with which the US is minded to apply automaticity is Canada.
It is possible that ‘automacity’ may be the end game but we are not yet there and OFCs do well to remember that the flow of information will always be skewed in favour of the onshore jurisdictions whose residents are accessing the world-class competitive services that offshore financial centres offer.
Perhaps more importantly they should remember that the reason behind the tax information exchange agenda and the G20’s involvement was to place pressure on certain European financial centres indirectly under the guise of a universal agenda of TIEA affirmation which has not be successful because those countries have found other non-reciprocal ways of appeasing G20 members which are neither exchange based on ‘request’ nor on ‘automaticity ’.
In the circumstances it is perhaps useful to keep the focus of the OECD/G20 agenda on those recalcitrants at the epicentre of the global meltdown and allow those countries to be burdened with their fair share of the cost of re-building the economy in an open and cooperative way. In so doing the Global Forum had start the important work of bringing the economic dimension to the dialogue which so far has been marginalised as if the sustainability of the global agenda on tax cooperation is independent of the improved economic circumstances of OFCs.