I continue to be intrigued at the reaction to my blog on the OECD conference scheduled for 1-2 September that I posted yesterday. This reaction reached the Wall Street Journal this morning, a heavily reduced version of what they said being:
The Organization for Economic Cooperation and Development is proposing to greatly strengthen an informal tax-information body as a way to crack down on tax cheating internationally
At a Sept. 1 session in Los Cabos, Mexico, the OECD will press to turn the Global Forum on tax-information sharing, a loose grouping of 84 nations, into a formal international institution with a permanent staff of examiners.
"We hope to put in place a restructured Global Forum," said Pascal Saint-Amans, who heads the OECD's international tax-cooperation division. The forum would use "a peer-review process to put peer pressure [on countries] to increase transparency and [promote] the full exchange of information for tax purposes," he said.
Under the OECD plan, Global Forum examiners would review a country's compliance with its tax-information-sharing agreements and issue a report, which would be discussed in sessions with other forum members. The idea is to pressure recalcitrant governments to be more forthcoming.
The U.S. is lobbying for the measure, but it is far from clear that many developing nations, and especially tax havens, would back a more powerful role for the Global Forum.
"For the Global Forum to maintain a strong leadership role," the OECD draft said, "it is critical that jurisdictions which refuse to make progress toward full transparency and effective exchange of information would not be in a position to block the work." The OECD report suggests that such countries could be thrown out of the Global Forum. That could be a strong deterrent if the U.S. and countries in Europe reduce legal ties with such outliers.
Richard Murphy, director of Tax Research LLP, a consulting firm outside London, said a more muscular Global Forum could become "an embryonic world tax authority." But OECD officials said their goals are more modest, and the Global Forum wouldn't try to make tax rates consistent globally or take up other issues of tax reform.
Even a souped-up Global Forum would have a difficult time in making a difference. Under tax-sharing agreements, authorities from one country must make very detailed requests before the tax authorities in another nation are obligated to turn over information.
The standard is so high, argues Mr. Murphy, that the authorities in the home government would probably have enough information to prosecute a tax cheat even without the help of the other jurisdiction. He says that basic information on financial accounts ought to be automatically shared among nations.
But Mr. Saint-Amans, the OECD official, said tax-sharing agreements will help investigators who otherwise wouldn't be able to follow a trail overseas.
The OECD effort builds on an April initiative by leaders of the Group of 20 industrialized and developing nations. At the G-20 meeting in London, the OECD published a blacklist of countries that didn't meet international standards on sharing tax information, and singled out Costa Rica, Malaysia, Philippines and Uruguay. Since then those four countries, as well as several others, have made progress, by signing agreements to share tax information.
I have a high regard for Pascal Saint-Amans, but the fact is (and tax officials from a wide range of countries have confirmed this to me) that Tax Information Exchange Agreements will not work without a smoking gun. This week’s agreement between the UK and Liechtenstein proves that; an additional agreement with Liechtenstein, over and above the TIEA was required to create real action.
That’s not to say TIEAs cannot work: it’ just that they won’t if nothing more is done. And this is the point I was making to the WSJ. With Automatic Information Exchange (AIE) TIEAs can work really well. Without — well, I think there’s a real risk that the effort put into signing thousands of them will cost more than the tax they will recover. And that does not appeal to me.
So, as I explained to the WSJ, what the OECD needs to do now is think big and issue a route map. The September conference is clearly noise to suggest something is happening pre the G20. That’s what happens, but I want this to be constructive noise.
We do need better international tax regulation. Not of rates: I guess that’s a complete red herring by Pascal. He should know I wouldn’t ask for such a thing. But there’s lots of evidence that the OECD needs to overhaul a lot of mechanisms that are now out of date:
- Transfer pricing rules — which need radical overhaul and a rethink
- The interaction of tax and accounting - country-by-country reporting is part of that
- Whether unitary apportionment has a role
- International taxpayer identification has been on the OECD agenda for decades and has appeared to get nowhere
- Automatic Information Exchange (AIE)
- Assisting developing nations by knowledge transfer
- And then, maybe, making information exchange work.
There’s plenty to do. But the OECD is putting all its focus on promoting a not very good agreement developed in the dark ages of information exchange prospects way back in 2002, with far too much input from secrecy jurisdictions at the time, and is even now giving us no clue as to how the actual processes can work given the impossible hurdles Tax Information Exchange Agreements place in the path of effective information exchange.
All of which means this new Global Tax Forum will be overseeing very, very little data exchange in my opinion. After all, if the US and Cayman exchange maybe 80 bits of data a year under a Tax Information Exchange Agreement how much do you think will flow between Belgium and San Marino — who now have one?
That’s my point: the OECD is seeking to do good work, has done good work, could do more good work — but it needs to make clear what its strategy is, where it thinks it is going and how it plans to get there to create the confidence that is needed that all this investment of effort will yield results. And right now it’s not delivering those messages: it’s not even clear it has them worked out. That’s what’s needed. When that happens expect me to be singing its praises. I won’t be alone.
I’m just not confident it’s going to do that in September.