What sort of automatic information exchange do we need?

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I’ve published a discussion paper on information exchange today. The full report is here (only 6 pages). The key question is what data do all countries but developing one in particular really need to receive, automatically, to ensure the smoking gun is available to ensure Tax Information Exchange Agreements work.

My answer is this:

The key concern when tackling capital flight is the illegal, disguised nature of the illicit fund flows. Ignoring transfer mispricing, the key mechanisms used for this illegal purpose are offshore financial structures such as trusts, companies and foundations.

There is at present no automatic information exchange with regard to such structures within the EU, let alone elsewhere.

The automatic information exchange arrangements which currently exist relate only to interest income paid to accounts held in individual’s names. The European Union Savings Tax Directive (EUSTD) is the key example of this arrangement.

Suggestion has been made that the EUSTD should be extended to developing countries. If and when the EUSTD is extended, as the Commission plans, to trusts and companies in offshore locations this might provide some benefits if extended to developing countries but in its current form the EUSTD is unlikely to do so: it is quite unlikely that significant deposits resulting from illicit financial flows are held in individuals own names. It is relatively easy, and cheap, to set up trusts and corporate structures that can hide these flows from view.

This does, however, suggest exactly what information is required to trigger an effective information exchange request by a developing country. Those countries do not need to know the precise details of interest, profits, gains or other income accruing to offshore structures created by, owned by, or which benefit people resident within their jurisdictions to enable them to make an effective enquiry under a tax information exchange agreement. They simply need to know:

1. That such a structure exists (a bank account qualifying by itself as a structure for this purpose);

2. What each component (trust, company, or foundation) is called;

3. Who manages it;

4. Where it banks;

5. Who in their jurisdiction benefits from it.

If this data were available it is likely that almost every country in the world could and would substantially increase the number of tax information exchange requests that they might make using the proposed network of Tax Information Exchange Agreements.

What is therefore required is that this information, which the regulatory authorities of every single jurisdiction subject to IMF /FATF regulation must have available to it, be automatically exchanged with the jurisdictions in which the beneficiaries of those structures are located; that location to be identified by both the place of main residence of a beneficiary and by the country which issues them with their passport (with those places issue passports of dubious repute to be specifically blacklisted for anti-money-laundering identification purposes).

If this data were to be automatically exchanged then no further information on income need be exchanged, at least in the early stages of any information exchange process. That is because sufficient data to firstly disincentive use of such arrangements and secondly to allow information exchange requests to be made would exist. Pragmatically, that is most of what is desired of the automatic information exchange process. This does, however, have the benefit of massively reducing the risks inherent in automatic data exchange by removing entirely from that process, at least in its initial stages, any reference to specific income details.

With this data Tax Information Exchange Agreements become meaningful: the ‚Äòsmoking gun’ required to make them useful would exist.

I offer this personally: it does not represent the opinion of any organisation I work with, but I think it is a solution focussed answer to information exchange, and that is its relevance.