Europe heralds new era of tax transparency

December 14th, 2010

Eric Chan/Wikimedia

While the headlines are full of information that governments did not intend to release, European ministers of finance including UK Chancellor George Osborne last week agreed to a draft directive outlining a powerful new basis for the automatic exchange of tax information between jurisdictions – a directive which, if it does what it says on the tin, would be a dramatic step towards the end for European tax havens.

This Tuesday 7 December there was a meeting in Brussels of the Economic and Financial Affairs council (EcoFin, effectively Europe’s council of finance ministers). The press release (still provisional) shows an agenda that covered everything from the Irish bailout to climate finance, but importantly included the following: “political agreement on a draft directive aimed at strengthening administrative cooperation in the field of direct taxation so as to enable the member states to better combat tax fraud. [The Council] will adopt the directive without further discussion at a forthcoming Council meeting, after finalisation of the text.”

The significance of this agreement should not be understated. The additional press release devoted specifically to this item contains further detail. The draft directive will “overhaul… directive 77/799/EEC, on which administrative cooperation in the field of taxation has been based since 1977.” And how! According to the Ecofin press release, the changes represent nothing less than a fundamental rethink of the approach to information exchange.

As a first step, the OECD model tax convention on income and capital [3MB pdf file] will be implemented. This is a valuable step, but the Council makes clear, however, just how weak the convention is in terms of information exchange, by explaining how the draft directive will exceed the convention’s requirements.

First, the exchange of information on request will be made much more effective. New measures include extending cooperation to taxes of any kind; imposing time limits for jurisdictions to respond to requests; allow officials from one jurisdiction to participate in investigations in another; and ease the process through standardisation, including importantly of the format for information to be exchanged.

A major aspect will be to reduce the burden on the requesting state. The OECD model of information exchange ‘on request’ has been criticised for effectively requiring the requesting state to know all the information already about the specific case of tax abuse. Unsurprisingly, the quantity of actual information exchange resulting has been low. The new draft directive will apparently only require requesting nations to provide “the identity of the person under investigation and the tax purpose for which the information is sought”, which could dramatically increase actual information exchange.

The second and—if anything—more powerful way in which the OECD convention will be exceeded by the new European arrangements is in the automatic nature of some information exchange. Specifically, “The Council agreed on a step-by-step approach aimed at eventually ensuring unconditional exchange of information for [the eight major] categories of income and capital.” This will involve automatic exchange of five of these categories by 2015, with a view to a proposal by 2017 to extend to all categories. The categories are as follows: income from employment; directors’ fees; dividends; capital gains; royalties; certain life insurance products; pensions; and ownership of, and income from immovable property.

There can no longer be any question that automaticity is the new standard for information exchange to combat tax abuse. Including developing countries in this system, to stem their massive tax losses, must now be the priority.

Quite apart from the benefits that the draft directive would have for citizens of the EU in terms of greater revenues and less corruption in the form of tax abuse, the potential benefits for developing countries are huge. Leading international figures such as the OECD Secretary-General now share Christian Aid’s view that developing countries’ revenue losses to international tax dodging are substantially in excess of all aid receipts. For that reason, the last UK government led the way and ensured that the London G20 meeting of 2009 committed to including developing countries in a new climate of transparency and cooperation in the field of tax – a commitment which has yet to be meaningfully realised.

The draft directive does not herald the absolute end of European tax havens, for some issues of secrecy will (of course) remain, and there remain weaknesses about the expectation on states to hold information for exchange—a problem for a number of U.S. states too. It is, nonetheless, a dramatic step towards tax transparency.

European finance ministers have laid down some clear markers: that multilateral information exchange agreements are necessary for tax transparency; that the OECD standard for information exchange ‘on request’ is unfit for purpose in a number of ways; and that automatic exchange is the future. The critical issue now should be about establishing a process and a schedule to further ‘multilateralise’ the agreement so that developing countries can finally benefit from greater cooperation as the G20 committed.

Written by Alex Cobham

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