Financial Transparency Coalition

This week, the Organization for Economic Cooperation and Development released the full version of its new standard for automatic tax information exchange. Under the standard, governments would collect data from financial institutions on investment income, financial assets, and account balances paid to non-resident accountholders. On an annual basis, participating governments would exchange that information automatically with other jurisdictions.

In a statement, OECD Secretary-General Angel Gurria said the launch “moves us closer to a world in which tax cheats have nowhere left to hide.”

The impetus for this new standard came from a mandate by G20 nations and the OECD will formally present the plan to the next meeting of the world’s leaders in September. The standard also follows after a great deal of bilateral and multilateral progress made by the United States and European Union on automatic tax information exchange.

For any of these efforts to have a real impact on economic development and reductions in poverty, it must translate to action in the developing world. That’s because tax revenues are, and will continue to be, the world’s most sustainable source of development funds. Yet if these systems and agreements exist only between developed nations and tax havens—and until developing countries participate in a similar system or agreements of their own—the progress we’ve made will have little effect on economic development and acute poverty.

In theory, the world’s leaders understand this. For example, in its meeting last year, the G8 promised to develop “a single truly global model for multilateral and bilateral automatic tax information exchange building on existing systems.” In a statement on the subject, the leaders noted that it is “important that all jurisdictions, including developing countries, benefit from this new standard in information exchange [emphasis mine].”

The story is not straightforward, but in some ways the OECD’s new standard does leave developing countries behind. On the one hand, there are a number of developing countries—including Argentina, Colombia, India, and Mexico—in the group of “early adopters” who intend to begin implementing the Common Reporting Standard in the next couple years.

On the other hand, the OECD standard leaves open the possibility for countries to participate by signing bilateral agreements, rather than a single multilateral agreement. As Porter McConnell, Manager of the Financial Transparency Coalition, has noted, this possibility opens “the door to further exclusion.” In large part, this would occur as wealthy nations, who have more political clout and resources, to sign agreements with each other and tax havens. Developing nations, particularly small ones, may find themselves left out.

Some have argued that developing countries do not have adequate resources, software systems, or skilled staff to fully participate. Gurbachan Singh, a tax lawyer in Singapore, put it this way: “Some developing countries lack the administration to deal with it. In places like Indonesia you may have a tax officer but not a proper tax office.” Even the director of the OECD Centre for Tax Policy and Administration, Pascal Saint-Amans, has said that “Most (developing countries) are not yet ready and most of them don’t want [automatic tax information exchange.]”

By extension, they argue, it is appropriate to leave developing countries out of this conversation.

Yet exactly the opposite is true – developing nations who are not ready to fully implement the Common Reporting Standards should be given the flexibility to do so in a way that recognizes their constraints. For example, the OECD could allow developing nations to join on a “non-reciprocal” basis. That is, the OECD could, in the beginning, allow developing nations to receive, without requiring them to supply, tax information. To ensure compliance later, the OECD could negotiate a timetable for those nations to being exchanging that information on their own non-residents.

In fact, the OECD has already granted non-reciprocity provisions for tax havens. The fact that they have not done so for developing countries is “disappointing,” as Pooja Rangaprasad of the Financial Transparency Coalition and the Centre on Budget and Governance Accountability in Delhi put it. Rangaprasad added: “Developing countries would potentially benefit greatly from being able to receive information from developed economies and tax havens, rather than the other way around.”