Sunday, November 15, 2009

Automatic information exchange is the emerging standard

The OECD works hard to get member states to tout its woefully flawed information exchange scheme as "the internationally agreed tax standard." Yet to assert that this is the internationally agreed standard is pure nonsense, as Bob and Michael J. McIntyre, two top U.S. tax experts, noted in testimony last week to the U.S. Senate Committee on Foreign Relations:

"The emerging international standard for effective exchange of information requires information not only on specific request but also automatic and spontaneous exchanges.

They explain further:

In a spontaneous exchange, a country provides its treaty partner with information about likely tax cheats if it happens to uncover such information during its own audits. An automatic exchange, sometimes called a “routine exchange” can take many forms. One of the most useful forms is the exchange in electronic form of information regarding various items of periodical income (e.g., dividends, rents, royalties, interest) received in one Contracting State by residents of the other Contracting State."

And they note of the OECD standard for its Tax Information Exchange Agreements (TIEAs):

That standard is obsolete. It is common knowledge that the OECD TIEA (2002) has been ineffective in limiting international tax evasion and aggressive tax avoidance. . . . The United States needs to shoulder some of the responsibility for the weakness of the OECD TIEA (2002).

Quite so. Speaking about three income tax treaties that the U.S. is proposing signing (with France, Malta and New Zealand,) notes that:

"At a time when our European allies are working hard to reach agreement within Europe for an effective exchange of information, the United States, in its treaty policies, is lagging behind the times."


Much of the problem dates from May 2001, when U.S. Treasury Secretary Paul O'Neill, "under pressure from U.S. banking interests and anti-tax zealots," said that the OECD had gone too far in combating tax evasion, and saying that the Treasury Department was only willing to support the OECD initiative if it was limited to “exchanging specific and limited information necessary for the prosecution of illegal activity.”

Our recent blog notes how widely automatic exchange is already being used - and we are planning to update this with more information soon.

The McIntyres add, by way of conclusion:

"We respectfully suggest that the committee return the proposed treaty and treaty protocols to the Treasury Department with a stern request that it negotiate an effective information exchange provision in each of these agreements. If it should turn out that these three countries are not interested in such a provision, so be it. The chances are high, however, that one or more of these countries would join the United States in endorsing the emerging international standard for transparency and effective information exchange.

By encouraging a codification of that standard in U.S. tax treaty policy, this committee will have taken a significant step in combating the widespread international tax evasion that is undermining the U.S. tax system and the tax systems of countries all around the globe."

NB TJN supports not only automatic information exchange, but multilateral information exchange too. Read more here.

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