Advocates for international tax reform cheered when the world’s most developed economies released details on Feb. 13 of a sweeping new taxation framework designed to curb international tax avoidance.
But the battle might have just begun as governments begin to thrash out the details. These logistics could make a crucial difference in whether the accord will benefit developing countries, which are seeking to stem the estimated $1 trillion that they lose each year in capital outflow, which includes through tax evasion.
One of the most controversial details is the condition that agreements between rich and poor governments to share tax information be “reciprocal” – a provision in the current agreement that could indefinitely exclude developing countries from reaping its benefits.
Under the new taxation standard released by the Organisation for Cooperation and Development (OECD) – a government-funded policy think-tank for developed nations – domestic tax authorities automatically share basic information on taxpayers. This information covers people and financial institutions that reside in one country but hold financial assets in another, and it includes the type of secretive offshore entities identified in ICIJ’s Offshore Leaks database.
Despite a long history of support for such measures from the not-for-profit sector, this proposal was developed by the OECD, a policy think tank funded by the world’s 34 most developed economies, after a request from the G20, a collection of the world’s largest economies.
In other words, one club of rich nations asked another club of rich nations to design a solution to a system that imposes some of the most painful damages on smaller, developing nations. Although Africa’s 54 countries lose an estimated $50 billion each year through illicit outflows, including tax evasion, South Africa was the only country from the continent to be represented in the G20 and the OECD.
Although not at the drafting table, developing countries will be consulted on the new framework through a series of regional discussions throughout the year, before the final document is adopted at the G20 meeting in Australia in September. The G20 and the OECD have established the Global Forum on Transparency and Exchange of Information for Tax Purposes, which assembles 121 different jurisdictions from across the globe, to monitor and review the standard.
High on the discussion list will be whether information exchange must immediately be reciprocal – with developing countries sharing the same information with wealthy countries as they receive from them – or whether developing countries should be given more time to update their tax systems and laws to match the standards of the developed world.
“What it really means is the ability for information flow to be one directional, at least at the beginning,” said Heather Lowe, Legal Counsel and Director of Government Affairs at Global Financial Integrity.
But some observers saw Switzerland’s response to the OECD’s standard as a rejection of immediate automatic information exchange. As the London-based Tax Justice Network (TJN) reported on Feb. 14, Switzerland’s Federal Department of Finance quickly announced it would consider the standard only when it had been adopted globally – “secrecy jurisdiction speak for ‘Get Lost’”, according to TJN.
“Most developing countries don’t have the capacity to reciprocate at the moment,” said Lowe.
Lack of trained taxation personnel and insufficient legal instruments mean that many developing countries cannot monitor and enforce taxation as effectively as developed countries. In addition, the flow of illegal assets is overwhelmingly in the direction of wealthy nations – there are few if any Swiss who are stashing their assets in Nigeria.
In Australia and Mozambique, two countries with comparable population sizes, the former employs over 25,000 people in its tax office while the latter employs 3,300. According to GFI, Mozambique lost nearly $873 million in illicit outflows between 2002 and 2011.
“This is a marathon, not a sprint,” says Alberto Barreix, senior tax expert at the Inter-American Development Bank, pointing to significant levels of tax transparency among developing Latin American countries.
“If you have a leak [of capital], this leak will hurt less developed countries more than developed countries,” said Barreix. “In order to help those in developing countries that want to lift bank secrecy, you have to recognise two or three velocities but that in the end we are all going to get there.”
Agreeing on reciprocity is not the only contentious issue that must be resolved. Pressure will also be on the G20 to ensure that the new standard allows tax authorities to identify the real owners of accounts in secrecy jurisdictions, known as beneficial owners.
“This whole system only works if you can work and figure out who owns the accounts,” said Lowe, who sees in the OECD proposal a “deliberate choice to weaken the demands on the financial institutions”.
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