bengal in boat
© www.tovima.grReciprocity adrift in upcoming storm, an offshore problem!
If people stash their wealth or earn income overseas, that is fine with us - just as long as their tax authorities get the information they need to tax that wealth or income according to the law, and as long as money laundering and financial crimes can be effectively tracked, and so on. Where there are cross-border barriers to the instruments of democratic societies, then there is an offshore problem.

The only credible way to provide the necessary information is through so-called automatic information exchange (AIE), where governments make sure the necessary information is available across borders, as a matter of routine.

For years we at the Tax Justice Network were ridiculed for advocating AIE: pie in the sky, many people said. The Organization for Economic Co-operation and Development (OECD), the club of rich countries that dominates international rule-making on tax and tax-related information sharing, was for years pushing its so-called Internationally Accepted Standard which was, well, the internationally accepted standard for cross-border information exchange, despite being only slightly better than useless. The message was that we should just accept this, and move on.

How the world has turned since a couple of years ago. The OECD is now in the middle of putting in place a system - known as the Common Reporting Standards (CRS) - to implement automatic information exchange (AIE). The CRS is the first ever potentially global system of AIE, and although it has major shortcomings and loopholes, it's potentially a giant step forwards from a largely transparency-free past.

Meanwhile the European Union had been moving ahead with plans to beef up its own, older plans for AIE, notably through amendments to tighten up its loophole-ridden Savings Tax Directive and other initiatives. The United States, for its part, has been rumbling forwards with its Foreign Account Tax Compliance Act (FATCA), which is, at least technically speaking from a self-interested U.S. perspective, fairly strong. In fact, the OECD's CRS is modeled on FATCA.

But - and here comes a big 'but' - how do these different initiatives mesh together? Might anything fall between the cracks?

The European Union, for its part, seems to be working hard and in fairly straightforward fashion to get its ducks in line with the CRS, the OECD's emerging global standard. It will be incorporating a lot of the OECD technical standards into EU law, in cut-and-paste fashion, and will add categories to include in the mix: such as covering the all-important insurance sector more comprehensively than the CRS does, and covering other categories of income and capital including income from employment, directors' fees, pensions, and ownership of and income from immovable property.

But the United States' position on meshing FATCA with the global standards? Well, now there's a story.

That building in the Cayman Islands is still there!
tax cartoon
© othersideofbrunswick.blogspot.comObama's rules...
President Obama recently gave his State of the Union address, with an eye to his legacy. He's taken an interest in tax haven issues in the past, declaring in 2009 that Ugland House, a building in the Cayman Islands that then housed some 19,000 companies, was either "the largest building in the world or the largest tax scam in the world. . . it's the kind of tax scam that we need to end."

So he managed to get himself some serious anti-tax haven credentials, at least from a public relations perspective. But how has the Obama administration shaped up on tax havens since then?

Well, in the details of the emerging global architecture on tax and financial transparency lies something - we'd go so far as to describe it as an international outrage - that is likely to seriously tarnish his legacy. A failure to take this seriously will make wealthy people wealthier and poorer people poorer, and will undermine crime-fighting, in the U.S. and around the world.

USA: 'we'll pretend to join in'

red octopus
© www.economist.comFATCA tentacles of taxation.
The U.S. position has basically been to say 'we are doing our home-grown FATCA project, and it's technically similar to the OECD's CRS, so we don't need to join the CRS.' Which, at first glance, looks like a position that could be defensible, depending on the detail.

A crucial part of the detail, however - and this is where the vortex starts to come in - hangs on the all-important question of reciprocity. The United States is extremely keen for other countries to pony up information about U.S. taxpayers hiding their cash offshore and overseas - as it should. But when it comes to reciprocity, or providing information in the other direction, things change.

The U.S. (again, on the surface) has said that is committed to sharing FATCA-related information under so-called Intergovernmental Agreements (IGAs) which are bilateral deals that stipulate how and in what circumstances the relevant information may be handed over to foreign governments.

In May last year the Center for Global Development's Alex Cobham (now TJN's Director of Research) wrote a useful blog entitled Joining the Club: The United States Signs Up for Reciprocal Tax Cooperation, welcoming the U.S. commitment to reciprocal information exchange, as far as the announcement went. By November, though, as the details came through, he began to raise the alarm. In a post entitled Has the United States U-Turned on Tax Information Exchange?, he wrote:
"A full commitment to reciprocal and automatic, multilateral information exchange, backed by legislation to ensure beneficial ownership information is available, has been replaced by an indication that the United States will seek to provide information in the few bilateral Foreign Account Tax Compliance Act (FATCA) agreements that require it, for which the United States accordingly commits to 'advocate' for domestic legal changes that would create the necessary beneficial ownership transparency.

"After the midterm elections, the success of such advocacy seems unlikely. But it would be a sad irony if the legacy of an administration that began with such strong rhetoric on shutting down tax havens was to leave the United States as the biggest remaining centre of anonymous company ownership."
Drill down to look at the precise details of what the U.S. is offering, and it the substance seems paper-thin.

The gory details

The United States is already a tax haven for foreigners. To achieve effective reciprocity with other countries it would need to tighten up its rules considerably, and in various ways. The U.S. Treasury's Financial Crimes Enforcement Network (FINCEN) seems to be taking a lead on some of the internal stuff to prepare the ground for international co-operation, with new rules entitled "Customer Due Diligence Requirements for Financial Institutions." [---]

If Fincen were to close all the loopholes and obtain all this customer information, it doesn't seem clear to us that it would be authorised to pass it on to the U.S. Internal Revenue Service (IRS), which would be the body that would be mandated to hand over the necessary information to foreign governments that need it to tax or police their wealthy citizens and criminals.

A Europe-based expert we spoke to went as far as to call the U.S.' adherence to the emerging global transparency standards, just based on what this Fincen document says, 'farting in the wind.' This document shows that the US is currently unable under its domestic law to reciprocate with information exchange, because its banks are not required to collect the necessary beneficial ownership information.

So much for the requirements for financial institutions in the U.S. to fish the information out of its customers. Now look at how the (non-) information they do obtain are to be shared out with the U.S.' foreign partners. Article 6 from one of the U.S. Model IGAs (Intergovernmental Agreements) says:

"Reciprocity. The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner]." The U.S. government acknowledges the need to be reciprocal. That's nice. But will it be?

[G]et a picture of what the U.S. may obtain from other countries, versus what other countries may obtain from the U.S. Here's a summary of some of the differences, from TJN's Andres Knobel. Just look at how thin the US banks' reporting obligations are about Germans, compared to German banks' reporting obligations about US persons.

German banks' reporting obligations (to IRS):
All financial accounts
Identify controlling person of passive NFE and Non-US entities
All types of information

U.S. banks' reporting obligations (to Germany):
All financial accounts, but depositary accounts only if held by individuals
No reference to German controlling persons (neither passive NFEs nor of Non-German entities)
"All" types of information except for account balance, gross proceeds from sale or redemption of property and controlling persons' identity, moreover, "interest' paid (not if credited) only to depositary accounts.

You get the picture. Reciprocity, anyone?
Oh, and then there is the problem that only some countries, but not others, have signed or committed to sign these IGAs.

And then there's the problem that the U.S. legislation required to tackle this stuff is all over the place, in different legislative nooks and crannies. Jack Blum, a Tax Justice Network Senior Adviser, gave a good overview of an earlier version of this mess to the U.S. Senate Finance Committee in 2008 [...]:"after the current round of IRS budget cuts there is no way the United States could implement Information Exchange. Without the people nothing the law says really matters. Things here are in a real mess."

Loophole USA: the big one. Will the OECD and its member states - not to mention developing countries - wake up to these issues? And will the United States itself realize that if it doesn't play ball, others won't want to play either? If not, the world's wealth will flood more upwards and out of sight rather more rapidly than it would have done. That'll be quite a legacy.