Tax havens: bilateral deals will not do

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Number 10 Downing Street has published a press release as a result of this morning's meeting with Chancellor Merkel of Germany. It says:

The Prime Minister has said that the upcoming G20 Summit in London must be used to tackle the “root causes” of the global recession and reshape financial regulation around the world.

Speaking at a joint press conference with German Chancellor Angela Merkel in Downing Street today he ‚Ķ said that “old tax havens have no place in this new world” and called upon all countries to share tax information with one another."

Which sounds good. And of course it’s something I want to hear.

But it’s not good enough. Not nearly good enough. I can’t say that strongly enough.

The reason is this: what they called for is an extension of the bilateral process of information exchange inherent in the OECD tax information exchange agreements. I’ve said it before – and I’ll say it again – these things are near to useless. Please read what I have to say here.

They do not work for four reasons. First, after eight years of negotiating them we have just 50. But there are at least 40 havens who should be information sharing and maybe 100 nations or more that need their data. So even if they have no agreements with each other we need 4,000 TIEAs. Each takes two or three years to negotiate (absurdly). So far not a single developing or mid income country has benefited from one. Realistically, it will take decades for any bilateral programme to even the scratch the surface of progress on this basis and at this rate. Effective information exchange is not going to be created bilaterally for the benefit of anyone expect maybe, and then only maybe in a decade or mores time, the very richest nations on earth.

Second, they don’t work. The standard agreement :

The competent authority of the applicant Party shall provide the following information to the competent authority of the requested Party when making a request for information under the Agreement to demonstrate the foreseeable relevance of the information to the request:
(a) the identity of the person under examination or investigation;
(b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;
(c) the tax purpose for which the information is sought;
(d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information;
(f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;
(g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.

Sorry – it’s not my habit to reproduce legal documents here – they’re not light reading, but look at what this says in reality. The applicant has too:

  1. Say who is under investigation. But if the name of the offshore trust or company that a named person owns is not available because of the existing secrecy laws of all tax havens that do not allow this data on public record this is not possible.
  2. A statement on how the information is to be received – which, unbelievably, is used as a frequent reason for refusing information;
  3. The tax purpose – precisely for which the information is sought – which may of course not be known in sufficient detail until the data is found. In other words to answer this question the nature of the data usually has to be known in advance;
  4. Why is it believed that the data is in the tax haven and who has it – but of course the very nature of offshore trusts, nominee companies and / or bank secrecy makes this nigh on impossible to prove in most cases – as the tax havens well know, which is why so many of them are adamant such secrecy cannot be given up.
  5. Who has the data!!! If this cannot be stated then the application is likely to be refused. See the agreement for how easy it is to do this.

In effect, if an application is to succeed the applying authority has to know precisely the offshore tax structure they are investigating, where it is, who runs it in that place, and quite possibly what precise information they want from them Рa generic request for ‘bank statements' would not be acceptable in most cases, for example.

The result is obvious: the number of requests made is tiny. And in addition, many of such claims are rejected even when sent because a 90 day window of response is set – and it is easier to let things drag out and say it has not been possible to find data in that time horizon than actually make any serious attempt to get it.

So, thirdly, these things don’t work because serious tax evaders know they don’t work.

And finally, and fourthly, these things only target tax evasion. Of course that is incredibly important – but offshore tax planning is even more important – and they do nothing at all to stop that. There is no basis for enquiring about tax avoidance under these arrangements. They are therefore, to some degree, the wrong instrument to promote at this time.

So, what should we be doing?

First, the mood music is right. Keep at it, please.

Second, let’s talk multilateral agreements – these agreements have to be offered to all who reasonably want them in a standard form. This is possible – the OECD has even considered it. This speeds the process.

Thirdly, we have to allow for automatic information exchange. The EU has recognised that this is the only way to beat evasion – which is why the EU Savings Tax Directive is on this basis. All attacks on tax havens have to be on this basis.

Fourth, we have to enforce better access to data on who owns what offshore – unless the ownership of companies and trusts (and by ownership I mean the names of the real warm bodies that beneficially control them) is on public record we are going to see a trickle of data, at best, forever.

Finally, we have to change corporate reporting so that companies must publish data on a country by country basis if we are to tackle tax avoidance. Only that can give us the data we need for this purpose.

We have two and a bit weeks to go until the G20.

We have a massive amount to do if this is as far as the UK and Germany have got.

I am convinced Gordon Brown wants a victory from the G20. I am sorry to say a few tax information exchange agreements and some weak words from Switzerland would not be a victory. They would certainly not be the outlawing of tax havens. Far from it.

So – the mood is right. the delivery needs a great deal of fine tuning as yet. But there is still time to deliver. We’ll hang on before delivering a verdict.