Reciprocity 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.
A lot has been made of the USA's failure to reciprocate. Reciprocation is not the intent. In fact, it will be a revenue detriment.
The ability of the U.S. to house and shelter foreign money is akin to a secret business venture. It accumulates wealth at home by enticing foreigners looking for a tax haven. What the U.S. is trying to bring to transparency (and tax ramifications) in offshore holdings for its own citizens, it offers in secrecy, free of charge or disclosure, to non-resident individuals, corporations and other entities. It charges zero rate on some categories of income (including interest paid by banks and savings institutions to non-residents or foreign corporations and on certain types of corporate and government debt).
Without the requirement for income earned locally by non-residents to be reported to the U.S. government, it doesn't have the info available to exchange. In addition, gaps in U.S. money laundering allow U.S. financial institutions to handle the proceeds of a long list of crimes, as long as those crimes are committed outside the U.S. Also, several states provide shell companies, secret arrangements, and non-reported income that is kept secret from foreign home countries. These policies attract foreign dirty money. It causes untold damage to ordinary citizens of foreign countries whose 1% use the U.S. as their offshore hideaway, including tax-free investments directly into U.S. markets. One of the most notable is the case of U.S. bank Wachovia that helped Mexican drug gangs launder the proceeds of hundreds of billions of dollars. As stated by Time Magazine
: "Suddenly America has become the largest and possibly the most alluring tax haven in the world."
EU Savings Tax Directive
Financial Secrecy Index: Narrative Report on USA
FINCEN new rules