Tax Analysts Blog

G-20: "The Era of Banking Secrecy is Over."

Posted on Apr 3, 2009

Yesterday the G-20 summiteers released their official communiqué and among many other important things it included a new agreement to crack down on tax havens. The world’s leaders would like you to believe because of their action you can no longer evade taxes by hiding assets offshore. But their actions will most likely prove ineffective.

The agreement provides for the creation of a blacklist of countries who do not meet agreed-upon standards for information exchange. Ultimately countries on the list may be subject to sanctions. But only four small and insignificant tax havens are on it: Costa Rica, Malaysia, the Philippines and Uruguay. The reason for the low turnout is that it is easy to get a pass. All you have to do is set in motion procedures to meet the G-20 agreed-upon standard for tax information exchange.

It is important to understand the standard of disclosure. They are agreeing to disclose information on request. That means the tax authority doing the investigating has to know the name of the person being investigated and show good cause why the information needs to be disclosed. Making these requests over international borders is time consuming and cumbersome.

Information exchange on request—when it is eventually put into place (in some cases after several years)--will help tax authorities close cases on tax evaders already under suspicion. It will not help tax authorities open cases and catch tax evaders they don’t already know about.

Here’s the OECD explanation:

    The internationally agreed tax standard, which was developed by the OECD in co-operation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.

Although the OECD and the havens like to make a big deal out of this type of standard it is limited in its effectiveness. For example, the United States has had a tax information exchange agreement with the Caymans Islands since 2002 that follows this standard but no one is suggesting that it had put a serious dent in evasion by U.S. citizens in Cayman.

What would be effective would be some variation of information exchange on demand that is now in place among the nations of the European Union.
We are being set up for a replay of recent history. Between 1998 and 2002 the OECD declared war on tax havens. There was a black list. There was a threat of sanctions. A few tax havens signed a few highly-publicized bilateral agreements. But the net result was more delay and obfuscation by havens and only a marginal reduction in tax evasion.

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