Tax Analysts Blog

Should the U.S. Adopt the OECD’s Common Reporting Standard?

Posted on Jun 24, 2016

Evolutionary changes typically occur at a glacial place. In the tax world, however, we are witnessing a paradigm shift that’s occurring far more rapidly. I’m referring to the rise of automatic information exchange between national revenue bodies. This was unthinkable just a few short years ago.

According to OECD Secretary General Angel Gurría, the fledgling movement has already shrunk the global tax gap by more than €50 billion. He made the comment during a reception at the OECD’s Washington Center earlier this month.

Gurría observed that this “found revenue” was approximately 125 times the OECD’s annual operating budget, implying that effective tax administration essentially pays for itself. It’s worth noting that this phenomenon should not be mistaken for a tax hike. It’s a tax gap issue, pure and simple. The point is not to increase anybody’s tax burden, but to enhance the collection of taxes due under current law.

The revenue uptick is impressive given that the OECD’s common reporting standard (CRS) has yet to take effect. No information will be exchanged under CRS until September 2017 at the earliest, but some taxpayers are already coming forward to normalize their affairs with tax authorities.

Apparently these people were previously willing to play fast-and-loose with the taxman when it came to disclosing offshore assets. But today, with the onset of CRS just around the corner, they’ve realized continued noncompliance is ill-advised. One obvious implication is that treaty-based information sharing (i.e., exchange on request) was not the strongest deterrent to cross-border tax evasion.

It’s easy to understand the limitations of treaty-based information exchange. The country making the request often must possess specific details about the taxpayer in question because tax treaties generally prohibit “fishing expeditions.” Mind you, treaty-based information exchange is not going away. But its practical usefulness is being superseded by automatic information exchange regimes like CRS or FATCA -- the Foreign Account Tax Compliance Act, which has been on the books in the U.S. since 2010.

More than 100 countries have formally agreed to participate in CRS, including places with less-than-stellar reputations for fiscal transparency (e.g., Panama). But the U.S. has declined to jump on the CRS bandwagon. There are two reasons for this.

First, it’s widely assumed that the IRS is statutorily barred from engaging in the type of mutual information sharing envisioned by CRS. IRS Commissioner John Koskinen recently acknowledged this point when he appealed to Congress to enact authorizing legislation. Second, and more importantly, the U.S. doesn’t need CRS to obtain critical information about U.S. taxpayers who maintain foreign bank accounts. We already receive that information through FATCA.

Note the principal difference between the two systems. CRS is premised on reciprocity. The information flow is a two-way street, so to speak. By contrast, FATCA represents a one-way street in which the IRS is the recipient, not the provider, of tax information. Other countries begrudgingly comply with FATCA because the alternative would expose their financial institutions to unacceptably harsh withholding obligations.

FATCA has few friends in the international community. Other governments complain that it smacks of fiscal imperialism. The global banking sector hates it because it forced them to incur heavy compliance costs. Privacy advocates oppose it because they see virtue in citizens being able to shelter assets from the government’s prying eyes.

Despite these flaws, FATCA is helping to narrow the U.S. tax gap. According to Gurría, approximately 20 percent of the revenue gains from automatic information exchange have accrued to the U.S. government. Does our public fisc stand to gain more by repealing FATCA and adopting CRS? If not, what exactly is the case for altering the status quo? The argument seems to be that we’d be a kinder, gentler player on the international stage were we to assist other countries in addressing their tax gaps.

That may be true, but consideration should be given to the chilling effect CRS might have on domestic capital formation. If you can imagine a world in which the U.S. adheres to FATCA while every other country participates in CRS (which is where things are currently headed) there’s an incentive for foreign capital to flock to U.S. banks. We’d enjoy a competitive advantage to the extent that we are less transparent. Replace FATCA with CRS and that incentive goes away, although global transparency is presumably enhanced.

The question for policymakers is how to strike an appropriate balance between promoting fiscal transparency and protecting our national economic interests. I like to think these priorities are not in conflict, but the tension between adopting CRS and sticking with FATCA may challenge that belief.  

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