U.S. Should Expand Automatic Exchange of Tax Information to Mexico

flickr / chadedwardus

The U.S. government frequently raises the issue of smuggling of bulk shipments of currency from the U.S. to Mexico as a major economic and security issue, one that demands greater effort by Mexican authorities to detect and deter.

However, as a report released this week by Global Financial Integrity reveals, bulk cash smuggling is not the only form of illicit financial transfer taking place in staggering volumes across the U.S. – Mexico border.

The report’s findings indicate that the Mexican economy lost $872 billion to illicit financial outflows between 1970 and 2010. These non-cash outflows from Mexico serve to feed Mexico’s underground economy, enabling the spoils of illicit activity to be stashed abroad. Notably, the vast majority of capital leaving Mexico, including illicit transfers, is destined for banks in the United States, and a significant increase in illicit outflows from Mexico was observed in the wake of the coming into force of NAFTA, suggesting even more strongly that the bulk of illicit outflows from Mexico is placed in U.S. accounts.

As a result, there is a clear window of opportunity for U.S. policy initiatives to make this country less inviting to criminals and tax evaders from our Southern neighbor, which would benefit economic stability and national security in both the U.S. and Mexico.

There is one most obvious way that the U.S. could make its financial system a less attractive destination for Mexico’s illicit outflows – through the introduction of automatic tax information exchange agreement with Mexico on U.S. deposit accounts held by Mexican residents.

The Mexican government formally requested such an agreement with the Treasury Department in 2009, in order to help counter the laundering of Mexican criminal proceeds and tax evasion through U.S. banks, but it has yet to receive a reply. While Mexico and the U.S. do exchange tax information on a case-by-case basis in instances of suspected tax evasion, moving to automatic exchange would greatly simplify the exchange process, and would curtail unreported cross-border interest income by citizens of both countries.

Such a policy change would not be unprecedented. Though the U.S. does not currently collect information on interest payments made to most non-resident account holders, U.S. financial institutions are required to provide the IRS with such information regarding account holders that are residents of Canada. This information is in turn automatically supplied to the Canadian tax authority under an exchange agreement. The IRS benefits from the receipt of similar tax information in return.

In addition to the automatic exchange of tax information on non-resident account holders between Canada and the U.S., Mexico and Canada also have a similar agreement in place. This leaves the U.S. as the only NAFTA country that has not fully committed to the systematic, dynamic exchange of deposit account information with its major regional trading partners.

An agreement on automatic exchange of tax information on accounts could be readily implemented between the U.S. and Mexico, drawing on the experience in administering the existing agreements in North America, and in accordance with OECD standards. Given the likely volume of illicit funds being covertly transferred from Mexico to the U.S., such an agreement would go a long way towards interrupting the illicit outflows from Mexico, and would demonstrate the U.S. Government’s commitment to combating illicit financial activity on the Southern border in all its forms.