Tuesday, August 14, 2012

ITR: TJN-study unveils progress on automatic information exchange

Very shortly we are going to publish a new study into the experiences made with automatic information exchange. International Tax Review has reported today about the key findings and with permission we reproduce the full Q&A below:

Salman Shaheen, ITR

International Tax Review: What has your study told you about how AIE is already operating in various jurisdictions?

Markus Meinzer: For our study we reviewed the experiences with AIE of 12 countries and also analysed research by the EU-Commission into the functioning of the European Savings Tax Directive (EUSTD).
Our study confirms some of OECD’s findings from June 2012 that AIE is now common practice not only among, but also beyond OECD nations. We looked at 12 countries and found that only one, Austria, does not participate in AIE on bank interest. Every other reviewed European countries plus the US and Australia engage in AIE on bank interest, and Argentina at least collects all the relevant information for transmission of this data, and is likely to send AIE records, too.
Scandinavian countries are champions of AIE. They use this data to prefill tax returns and thus save their citizens valuable time on filing. Denmark excels as a champion of AIE, not only for the number of countries it exchanges data on capital income with (69), but also for the quality of data it is sending. For interest payments, it was the only country reviewed which was found to always collect beneficial owner information for non-resident investors, and sends this information in all of their AIE-processes.
An evaluation and analysis by the European Commission into the functioning of the EUSTD suggests that compliance issues arise with British Overseas Territories and UK Crown Dependencies as well as with Switzerland. More importantly, the Commission found extraordinary and unexplained low ratios of interest payments being reported by the UK.
The question about the supervision and sanction regime in place to ensure compliance with reporting obligations has been largely ignored by the international community. There is no public and comparative information available on what happens if banks fail to properly comply with routine reporting obligations, either as required by law or in statistical terms as empirically observed. The latter information appears not even to be available in meaningful breakdowns in the national context. The EUSTD does not prescribe any sanction mechanism for failure to report even if economic operators acted in bad faith, and the proposal for amending the EUSTD still fails to amend this omission.
As a result, banks are negligent in complying with the EUSTD: for example in Germany where the maximum fine for a failure to properly report EUSTD payments is €5000 even for willful misreporting. A recent study by an economics professor underlines the relevance of criminal sanctions for bankers who fail to comply with reporting and other obligations.
ITR: What systems are most effective? Is AIE more effective when there is a multilateral system in place such as under EUSTD? 
MM: It is of overwhelming importance to have a clear and strict common protocol for data exchange, and the only existing and working protocol today that to some extent fits this requirement is a multilateral protocol, the EUSTD. It seems that the political cost to create enough clarity through a strict protocol is only assumed if this effort is embedded in a multilateral process. Furthermore, when an agreement is merely bilateral, legal structures involving third countries can easily be deployed to hide the true recipients of payments.
But it would be wrong to portray the EUSTD as being the best possible solution. The existing loopholes are widely known, and though effective remedies have been on the table since 2008, these have been consistently blocked by vetoes of Austria and Luxembourg, aided by UK and German bilateral Swiss deals which were designed to undermine EU positions.
ITR: What do you think would be the most effective way to move forward with AIE on a global level? 
MM: There is no single quick fix, so we need to remain flexible and pragmatic. Three possible multilateral platforms and processes are underway. The first is the Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters. However, this platform only allows, but does not require, its members to engage in AIE. There is also no indication that this Convention is used for AIE, nor that it would develop multilateral structures for AIE. Rather, it seems to rely on optional, additional bilateral agreements to implement AIE. As such, it is vulnerable to being undermined by structures stretching across multiple jurisdictions. Furthermore, transparency and governance questions about the Convention remain unaddressed.
The second and third existing initiatives are the EUSTD and the efforts to multilateralise FATCA. Technically and politically speaking, both have strengths and weaknesses. As a matter of principle and good practice it is important to involve emerging economies such as India and Argentina, to find out whether they are happy to proceed on the basis of either of these two mechanisms, or whether we need a political process at the UN instead. Also, it is important to draw the right lessons from the recent banking scandals. It must be acknowledged that banks need strict frameworks for operating, including for operating financial accounts. Whichever multilateral system is tougher in ensuring that all accounts opened at a bank are actually covered by reporting obligations should be given preference, subject to the involvement of developing countries.
While the opportunities for making progress appear promising, the location of FATCA efforts at the OECD’s Committee of Fiscal Affairs risks creating an unacceptably slow political process, as their record on AIE and creating international protocols on taxpayer identification numbers, indicates. The outspoken and implacable opponents of AIE are members of the OECD’s Committee (Austria, Luxembourg and Switzerland) and are therefore well placed to play a fatal delaying role. The OECD also lacks proper representation of developing country interests, yet OECD countries continue to block attempts to give the UN Tax Committee a more prominent role in formulating measures for strengthening international tax cooperation.
ITR: What are the main obstacles to AIE?
MM: It is sad but unavoidable that this question can only be answered by naming names. There is no doubt that Austria, Luxembourg and Switzerland act as an unholy trinity, with support from other countries like Germany. The means through which these countries have colluded to delay or derail AIE involve the bilateral deals proposed initially by the Swiss Bankers’ Association, and later by the Swiss State Secretary for International Financial Matters, headed by Michael Ambühl. As our analysis has shown, these bilateral treaties are riddled with subtle, but powerful loopholes and were launched as a means to divide the EU to delay and derail the far better EUSTD amendments. It is similar to siblings who quarrel about getting a soft drink in a restaurant: if the other gets one, I also want one. These bilateral deals have given Austria and Luxembourg a convenient pretext for vetoing progress on the EUSTD, arguing that they want an anonymous withholding tax instead of AIE to avoid conceding an unfair advantage to Swiss banks.
In addition, there seems to be a sentiment among those German-speaking bank secrecy havens that they have been duped by Anglo-Saxon secrecy jurisdictions through the G20 crackdown on banking secrecy since 2008, because the main change allegedly came at their cost, by removing their reservations on Article 26 on the exchange of banking information. While there may be a kernel of truth in this statement, in so far as there has not been a strong determination and little success in requiring the public registration of trusts and limited liability companies, and to exchange this information automatically, it appears rather hypocritical since the envisaged EUSTD amendments, for instance, would require the creation of such trust registries and therefore would address their concerns. 
Why are these nations then vetoing progress on the EUSTD and devising a strategy to derail the EUSTD through the bilateral Swiss deals? It is inconsistent, and sadly shows the determination of Austria and Luxembourg to preserve their secrecy industry.

The full study will be available here


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