Since the 2009 G20 Summit, we’ve seen repeated claims that banking secrecy is over. But viewed alongside the countless tax and corruption scandals that have plagued us since, it would be understandable if you question that sentiment.
In our new analysis, Unequal Exchange, we explore just how far one key transparency tool, the automatic exchange of financial information, has come. Will all countries stand to gain or will it simply be a tool for the few?
An important method of fighting cross-border tax evasion by wealthy individuals is for governments to share information about financial assets and income that other country’s residents hold in their financial institutions. Technology and globalization have made it relatively easy for someone to move his or her money out of their home country and into places that may have fewer regulations and lower levels of transparency. With the help of financial secrecy (and a few complex business structures), it can become nearly impossible for authorities to track such assets. Criminals, tax evaders and corrupt politicians are able to take advantage of a porous financial system, but government authorities tracking these culprits are often caught up by the hard lines of national borders.
There have been a number of exchange of information agreements put in place aimed at helping ease this problem, but the Common Reporting Standard, developed by the G20 and Organization for Economic Cooperation and Development (OECD) is the biggest global push to end cross-border tax evasion by wealthy individuals yet. The aim is to create a global network of exchanges that would allow financial information to flow back and forth between countries regularly.
For example, France would share information on UK residents that have bank accounts in French banks. The UK would then reciprocate with information about French residents with bank accounts in the UK. This information sharing would help tax authorities clamp down on the use of offshore accounts to hide one’s money.
And this couldn’t come at a better time.
Thanks to scandals like Panama Papers and Swiss Leaks, we have an idea of the scale of the offshore world and the vast sums of money being hid. Various studies have pegged the amount of money stashed offshore at anywhere from USD$7.6 to USD$32 trillion. One recent estimate put the amount of lost tax revenue due to hidden offshore assets at USD$190 billion, but the real amount may even higher.
Often concealed by layers of corporate entities in vault-like tax havens, the missed tax revenue from hidden assets is vital to increasing government resources. It’s estimated that in Africa and the Middle East almost 33% of the region’s assets are hidden offshore and out of reach.
When the OECD and G20 began designing the CRS, they did so without meaningful consultation of low-income countries. The result was a system designed by wealthy nations, with wealthy nations in mind, making many of the prerequisites impossible for countries that don’t have sizable tax administration budgets or advanced technical capacity. To make matters worse, some wealthy countries are choosing to share information predominantly or exclusively with other wealthy countries.
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In our analysis of information exchange agreements in place around the globe, we found a stark political reality in which high-income countries receive the lion’s share of information, while some of the world’s poorest are receiving none at all. Three of the five agreements analyzed only involve European or European-linked jurisdictions, while FATCA, which involves a range of developing countries, in many cases requires that they provide information to the U.S. without receiving any in return.
The OECD’s Common Reporting Standard certainly looks great on paper. Over 100 jurisdictions are signed up, including 22 middle-income countries. But despite the exchange being open to any jurisdiction that can navigate the technical hoops, participants can pick and choose which other countries they ultimately want to share information with. This means that poorer or politically weak countries are often left on the outside looking in.
Switzerland, a favorite hiding place for kleptocrats and the corrupt, has agreed to exchange information with just 9 high-income jurisdictions under the CRS (in addition to members of the European Union, under a separate EU agreement).
And when you look at the world’s poorest countries, the severity of exclusion settles in.
None of the world’s 31 low-income economies are on the receiving end of any automatic information exchange, while just 21 of the world’s 109 middle income economies receive automatic information. This is in direct contrast to high-income countries, where 55 of the world’s 78 receive information. While the number of bilateral exchanges involving developing economies is growing, it’s still dramatically smaller than those involving high-income economies.
This type of information barrier means that low and middle income countries may very well continue to struggle to get their hands on information that could help reduce cross-border tax abuse.
— source financialtransparency.org 2017-10-22