The need for automatic tax information exchange in the context of 21st century globalization trends
Countries are coming into terms with one difficult side of globalization. It is that people and business entities are keeping income and profit in foreign countries to escape from taxation. Tax payers operate cross border whereas tax administration is limited to national borders. This has helped tax evasion by shifting money to other countries by citizens. Both tax evasion and tax avoidance have escalated; facilitated by quick transfer of income from one country to another.
Vast amounts of money are kept offshore and go untaxed to the extent that taxpayers fail to comply with tax obligations in their home jurisdictions. Jurisdictions (means countries) around the world, small and large, developing and developed, stand united in calling for further action to address the issues of international tax avoidance and evasion.
Tackling this cross national transfer of money to avoid and evade taxes indicate that national efforts are not enough to fight black money. Hence there is the need for tax cooperation and tax information exchanges between countries. Many efforts are now launched globally to promote tax information exchanges. The G 20 – OECD- Global Forum promoted Automatic Exchange of Information (AEOI), the US sponsored Foreign Account Taxpayer Compliance Act (FATCA), and many provisions under bilateral Double taxation avoidance agreements are the major attempts.
Automatic Exchange of Information (AEOI)
An important outcome of such a coordinated effort is multilateral/bilateral tax information exchange agreements like the proposed Automatic Exchange of Information (AEOI) initiated by the G20 along with OECD.
What is automatic information exchange?
Automatic exchange of information involves the systematic and periodic transmission of “bulk” taxpayer information by the source country to the residence country concerning various categories of income (e.g. dividends, interest, etc.). It can provide timely information on non-compliance where tax has been evaded.
The information which is exchanged automatically is normally collected in the source country on a routine basis, generally through reporting of the payments by the payer (financial institution, employer, etc). Automatic exchange can also be used to transmit other types of useful information such as changes of residence, the purchase or disposition of immovable property, value added tax refunds, etc. As a result, the tax authority of a taxpayer’s country of residence can check its tax records to verify that taxpayers have accurately reported their foreign source income.
In addition, information concerning the acquisition of significant assets may be used to evaluate the net worth of an individual, to see if the reported income reasonably supports the transaction. As tax evasion is a global issue, the model needs to have a global reach so that it addresses the issue of offshore tax evasion and does not merely relocate the problem rather than solving it.
Towards AEOI: the signing of Multilateral Competent Authority Agreement
After the G20 has ratified the global standard on AEOI, countries are signing the Multilateral Competent Authority Agreement for introducing exchange of information. The agreement specifies the details of what information will be exchanged and when, as set out in the Standard for Automatic Exchange of Financial Information in Tax Matters. By June 2015 sixty one countries including India have signed the Multilateral Competent Authority Agreement. More countries are expected to sign. This agreement will facilitate exchange of information across countries.
Several facilitating steps like adoption of a Common Reporting Standard (CRS), confidentiality measures to be taken by the governments to implement AEOI. India and other countries are in the course of making such arrangements. It is expected that India will be ready for AEOI by 2017. But countries like Switzerland, which has a dubious record of banking secrecy laws, will implement it only by 2018.this means that the government can get the details about the black money holders in Swiss Banks by 2018 ONLY.
Once this AEOI works to transfer of information, it is very easy for governments like India to track resident tax evaders and black money hoarders overseas. If it happens (by 2018), people who refused to disclose overseas black money under the UFIA 2015, will pay a price.