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Turning Straws of Information Into Real Gold

Posted on March 7, 2017 by Gibson, Stuart

The disclosure and sharing of tax and financial information has grabbed much public attention over the past few years. Some of that information has been shared under government-to-government protocols like the U.S. Foreign Account Tax Compliance Act, the OECD's common reporting standard, and automatic exchange of information agreements. Still other information has come to the public's attention through leaks from private citizens and journalists.

Thus far, the fallout from the disclosures has been mixed. Publication of the Panama Papers led to a few high-profile political scandals, including the resignation of Iceland's prime minister. But government officials and wealthy individuals were not the only victims. The repercussions have also hit the leakers, as Luxembourg decided to prosecute the LuxLeakers, ironically ignoring its complicity in encouraging corporate tax avoidance and rubber-stamping sweetheart tax rulings. Fortunately, it appears that Europe is poised to extend protection to whistleblowers.

Perhaps the most significant result of the leaks has been to get governments around the world to focus on attacking corporate tax avoidance and financial secrecy. For example, the European Union has adopted a new antiavoidance directive; Panama has finally agreed to comply with the common reporting standard; and HM Revenue & Customs has begun to collect information on beneficial ownership in the crown dependencies and overseas territories, to be used for tax administration. And HMRC recently made two arrests based on information leaked in the Panama Papers (p. 890).

Those actions seem to be prodding others to act. The European Parliament is considering a proposal to develop a public register of beneficial owners (an idea it had once considered and scrapped), and to set up a Europe-wide financial intelligence unit (p. 877). Even Greece -- long a bastion of tax avoidance -- has published a list of noncooperative states, which will lead to increased scrutiny for transactions between entities in those countries and Greek taxpayers (p. 883).

But where is the money? Shouldn't all this newly disclosed information lead to more tax revenue for cash-strapped governments? The good news is that it is. The Australian Taxation Office is not just conducting criminal raids based on information leaked in the Panama Papers. It also anticipates collecting more than AUD 2 billion in additional taxes, after it completes ongoing audits of just seven large multinationals (expected by June 30) (p. 874). Canada's 2016 decision to spend about C $90 million per year to crack down on tax evasion is already reaping benefits. The Canada Revenue Agency is on track to recover more than C $13 billion from audit efforts, and is increasing the number of auditors assigned to detect offshore noncompliance (p. 876).

The prospect of raising revenue without imposing additional taxes on middle-class taxpayers must certainly motivate the architects of any U.S. tax reform proposal. One relatively painless way to raise additional revenue is to tax the $2.5 trillion of foreign earnings held offshore by subsidiaries of U.S. corporations. Another way, one fraught with significant peril for politicians and U.S. consumers, is the border adjustment tax proposed in the House GOP tax reform blueprint. A collateral issue that requires thoughtful consideration is whether adopting a border adjustment tax will jeopardize information exchange provisions in existing U.S. tax treaties (p. 898). If a border adjustment tax ends up cutting off the flow of information to the IRS from other countries, new avenues for tax avoidance may open, reducing revenue and encouraging noncompliance.

Stuart Gibson is editor of Tax Notes International.