Increasing [Amicable] Cooperation on Offshore Tax Evasion
August 8th, 2013
August 8th, 2013
There is an old proverb that goes something like this: “one finger cannot lift a pebble.” And while reducing cross-border tax evasion is not like lifting pebble—it’s more like hauling a boulder—it is true that it cannot be achieved unilaterally. No single country can stop, stem, or slow offshore tax evasion by its own citizens without the help of at least one other nation. This is true by definition.
Historically much of the bilateral cooperation on tax evasion has been less than amicable. That is changing. Increasingly, we are seeing that the cooperation in matters of tax between nations—particularly wealthy ones—is neither begrudging nor forced. These nations are not just cooperating to stem tax evasion abroad; they are doing so willingly and proactively.
The countries which have begun to cooperate on these matters mainly includes wealthy Western nations, including the United States and most of the European Union. The most notable recent occurrence of this cooperation, at least symbolically, occurred at the G8 summit in June of this year. It was at this summit that the leaders of the world’s wealthiest countries agreed to work towards sharing “information automatically to fight the scourge of tax evasion.” An admirable goal, if even a symbolic gesture.
Cooperation among wealthy nations has not only been symbolic. The signed bilateral agreements between the United States and Germany, Norway, Denmark, Mexico, the UK, and four other nations under FATCA (the Foreign Account Tax Compliance Act) are a notable example of cooperation on this issue. Other examples are anecdotal. For example, the Justice Department recently reported that “federal courts in six U.S. states have allowed the IRS to issue summonses to U.S. banks at the request of the Norwegian government.” Kevin Packman, an attorney with Holland & Knight LLP, noted that this development is indicative of the increasing cooperation between nations on matters of tax, and, in particular, the willingness of the United States to reciprocate. As John Harrington, a partner with Dentons, put it: “It’s fairly unusual that you see this, but it’s becoming more common as you see governments cooperate.”
In recent years, we have also seen increasing begrudging cooperation between nations who would rather not cooperate (in large part because it’s in their interest not to). On this front, Switzerland is an obvious example. In the latest instance, we saw Switzerland pass a law allowing Swiss banks to cooperate with American authorities to save the industry from criminal charges of helping Americans evade taxes.
This tale has two caveats. First, it is important that developing countries share in this cooperation. In a relative sense, they are the countries who stand to gain the most. They are also the ones who most need the revenues. A truly global system of automatic tax information exchange would allow developing countries to have a seat at this table. In the near term, developing countries should join the Convention on Mutual Administrative Assistance in Tax Matters, which is open to all countries and provides a legal basis for automatic exchange of information.
My second caveat is that the world isn’t as simple as I described above. We can’t truly divide the globe into “winners” and “losers” from offshore tax evasion. As a result, it doesn’t really make sense to talk about the world as though there is a set of nations which benefit from increased cooperation and a set of nations which don’t. The United States, for example, has an incentive to cooperate on these issues because it loses a great deal of money in tax revenue every year to offshore tax evasion and avoidance. On the other hand, the United States is home to some of the world’s worst tax offending jurisdictions. In many ways, the United States benefits from the status quo. To varying extents, the same is also true of other nations including the United Kingdom, Russia, Spain, and Germany.
The good news is that increased cooperation will, by and large, mitigate these complications. On a net basis there will be some nations who gain more from increased cooperation than others. Yet tax cooperation is not a zero sum game. One country’s loss is not, by definition, a gain for another. In large part, the reason for this is that lost tax revenue is not as helpful—from an economic perspective—as increased banking deposits. As a result, cooperation is in the world’s interest. Fortunately, the momentum is going that way.