In the end it’s action that counts

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As the Economic Times of India notes:

Will renegotiating the Double Taxation Avoidance Agreement with Switzerland help the country get a grip on the menace of black money? Unlikely!

The reality is that for all their public posturing, no political party is serious about getting to the root of the problem.

Reason? The close nexus between unaccounted money and politics in our electoral system.

Yet, as the Global Financial Integrity Report released in December 2008 shows, the numbers at stake are now too huge to be brushed under the carpet. The Report estimates that anywhere between $22-27 billion left the country every year illegally during the period 2002-06, giving us the dubious distinction of being the fifth largest source for illegal flows in the developing world.

In a country where close to a quarter of the population live below the poverty line this is simply unacceptable. But no government has shown the determination needed to address the problem.

Contrast this with the stern action taken by some OECD countries [and] the G20 [which] has demanded greater co-operation to tackle the shadow financial system. The problem is, the onus is on requesting nations to prove the information sought is ‘foreseeably relevant’ to suspected crime or tax evasion. So tax authorities need hard evidence. In the Indian context this is just not forthcoming, partly because it has got politicised.

This issue must be depoliticised and political parties must come together in a bipartisan manner to bring back Indian wealth kept abroad.

This is an extraordinarily accurate assessment of the current impediments to progress. The political will to make progress is mot always present. When it exists the technical obstacles to progress for developing countries are at pre3sent far too high for any realistic recovery to occur.

The need is for automatic information exchange of income and gains of all sorts credited to individuals and to the entities  they either own, control or benefit from (companies, trusts, foundations, partnerships and more) in one country when the individual is resident in another.

This is not hard. The individual can be identified by their passport number. It is the universal money laundering identification document. The data to be exchange need not be complex:

  1. Name
  2. Person making payment (bank name. etc.,)
  3. Type of income paid (dividend, interest, royalty, etc.,)
  4. Account paid to
  5. Relationship between account paid to and the party for whom information exchanged (in own name, in name of an owned and identified entity, beneficiary of named trust, etc)
  6. Amount paid
  7. Currency paid in
  8. Date of payment
  9. Any tax deducted.

Of course this may not be enough on all occasions to ensure complete data to ensure tax is correctly paid is available in the country receiving the data.

And of course, on occasion data will be sent which does not refer to a taxable event in the recipient state.

So what? If no tax is due what is the problem?

The point is this: if data is exchanged in this way the data required to create the ‘smoking gun’ to ensure an effective enquiry can be raised under a double tax agreement or Tax Information Exchange Agreement would be available in the country of the recipients residence if it wanted to use it.

There is no way on earth the supply of this data would overburden the recipient states. It is electronic data. It is very unlikely that all the information to be supplied by the Cayman Islands to India in a year would need more than one CD to be remitted. In its most basic format it could be supplied on an Excel spreadsheet (suitably encrypted).

There is no way that this imposes a burden on the recipient state: if they chose not to use the data that is up to them.

But the evidence is unambiguous from research done in the USA: when data is automatically supplied to tax authorities tax compliance rates increase dramatically. Domestically this increases from around 50% to 80% or more in the USA. Internationally and from tax havens I suspect the compliance rate is much lower than 50% to start with, and would probably reach the same 80% or more if information was exchanged. The gain is obvious, even if no data that is exchanged is ever used.

And with this data the G20 commitment to Tax Information Exchange Agreements makes sense because the data to trigger their use would be available.  Otherwise it is not.

This is the way forward. This is what we need. It is clear some in India know that. It’s time we delivered on the promise. Nothing else will do.

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