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ON THE LEFT: Best way to tackle offshore tax evasion


ON THE LEFT: Best way to tackle offshore tax evasion

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FOR MANY YEARS countries around the world have been engaging in the automatic exchange of information in order to tackle offshore tax evasion and other forms of non-compliance.

The Organisation for Economic Cooperation and Development (OECD) has been active in facilitating automatic exchange of information by creating the legal framework, developing technical standards, providing guidance and training and seeking to improve automatic exchange at a practical level.

As shown in the 2012 OECD report to the G20 in Los Cabos, automatic exchange of information is widely practised and is a very effective tool to counter tax evasion and to increase voluntary tax compliance. In 2010, the United States (US) enacted the law commonly known as the Foreign Account Tax Compliance Act (FATCA), requiring withholding agents to withhold 30 per cent of the gross amount of certain US-connected payments made to foreign financial institutions unless such financial institutions agree to perform specified due diligence procedures to identify and report information about US persons that hold accounts with them to the US tax authorities.

Many jurisdictions have opted to implement FATCA on an inter-governmental basis and, more specifically to collect and exchange the information required to be reported under FATCA on the basis of a Model 1 FACTA inter-governmental agreement (FATCA IGA). Many of these jurisdictions have also shown interest in leveraging the investments made for implementing the FATCA IGA to establish automatic exchange relationships with other jurisdictions, which themselves are introducing similar rules.

These countries recognise that, through the adoption of a common approach to automatic exchange of information, offshore tax evasion can be tackled most effectively while minimising costs for governments and financial institutions. With the strong support of the G20, the OECD together with G20 countries and in close cooperation with the European Union and other stakeholders, has since developed the Standard For Automatic Exchange Of Financial Account Information. This is a standardised automatic exchange model, which builds on the FATCA IGA to maximise efficiency and minimise costs.

In broad terms, financial institutions report information to the tax administration in the jurisdiction in which they are located. The information consists of details of financial assets they hold on behalf of taxpayers from jurisdictions with which their tax administration exchanges information. The tax administrations then exchange that information. This process requires: rules on the collection and reporting of information by financial institutions; information technology administrative capabilities in order to receive and exchange the information; a legal instrument for providing for information exchange between the jurisdictions; and measures to ensure the highest standards of confidentiality and data safeguards.

The first core requirement for exchange of information automatically under the standard is to require financial institutions to collect and report the specified information to the tax administration in the jurisdiction in which they are located. The tax administration are then able to exchange that information with their automatic exchange partners. An explicit objective when designing the standard was to build on FATCA, and more specifically the FATCA IGA, as by maximising consistency with the FATCA IGA governments and financial institutions could leverage on the investments they are already making for FATCA. This was to ensure that a new international standard could be created, which would deliver the most effective tool to tackle cross border tax evasion, while minimising costs for governments and financial institutions.

The OECD is the Organisation for Economic Cooperation and Development.