Since the global financial crisis in 2007, the fight against tax avoidance, banking secrecy and tax havens has made great advances. In Berlin, German finance minister Wolfgang Schäuble is hosting the OECD’s Global Forum on Transparency and Exchange of information for Tax Purposes, bringing together 122 countries and jurisdictions to discuss new strategies for improving international cooperation to prevent tax avoidance.
However, the main focus of attention will be on the signing of the agreement on the automatic exchange of fiscal information by more than 50 countries and jurisdictions from 2017, including the EU28, Switzerland and Singapore. “It is a big deal that Switzerland and Singapore sign the agreement – countries which attracted a lot of the money in question,” says Kristina van Deuverden, research associate from the Department of Forecasting and Economic Policy at the German Institute of Economic Research (DIW). This exchange of information between the different authorities will make it significantly easier for revenue authorities to obtain financial accounting information from abroad and ensure that taxation is fair and will cover a broad number of aspects e.g. account holder, account values, incomes, etc. In particular, all kinds of capital income will be recorded in a bid to close possible loopholes.
Ralph Brügelmann, a senior economist for Financial and Tax Policy at the Cologne Institute for Economic Research (IW), thinks that the new standard is a great advance compared to existing rules in Europe. “It exceeds the European Savings Taxation Directive by far. In fact, the new Common reporting Standard (CRC) is similar to the foreign account tax compliance rules (FACTA) which apply between the G5 countries (Germany, France, Italy, Spain, UK) and the United States,” he explained. Thus far, the EU Savings Taxation Directive has been applied within the EU and extended by bilateral treaties with the UK and The Benelux territories and 5 other countries (Switzerland, Liechtenstein, Andorra, San Marino and Monaco). Consequently, the EU Savings Taxation Directive needs to be revised to meet the new standard of information exchange- in addition to the new signatories, who will all have to transfer the common standard into domestic law.
As a result of the agreement in Berlin, banking secrecy could well become a problem of the past. This is exactly what Schäuble has been championing in various interviews over the last few days. However, tax havens may persist for some time, even within European borders. Here the role of the UK comes to the fore, Downing Street having endorsed the new standard. Britain already belongs to the G5 countries that signed the FATCA agreement with the US. “The role of the British government is somewhat ambivalent since there are several tax havens among the crown dependencies and the commonwealth,” says Mr. Brügelmann from the IW institute based in Cologne. “Those jurisdictions are under pressure from the administration to give up their special tax regimes and in the long run they won’t be able to keep them up. It might be the case that there will be a compromise that allows British tax havens the longest transitional time possible to adopt the new information exchange standard,” Mr. Brugelmann stated.
However, there will be further challenges after the signing at the conference. Kristina van Deuverden notes that although the signing can be viewed as a success, the international community needs to see how these commitments will be put into practice, warning that poorer countries might be tempted in the future to attract foreign capital by favoring tax avoidance.
Regarding the implementation of the new global standard, IW economist Mr. Brügelmann points out that each signature country will have to provide its tax authorities with sufficient resources for the information exchange. “The more countries sign the agreement on the information exchange, the more resources will be needed. The information exchange will not automatically trigger taxation. So each country has to enforce the taxation policy and implement national laws that enable them to tax foreign capital income. This is even more important since source taxation abroad will be given up once the information exchange is working,” warns the expert from Cologne.