Historic OECD document supports automatic information exchange


Dramatic news from the OECD: after years of insistence that its woefully inadequate “on request” system for exchanging information between jurisdictions was the ‘internationally agreed standard,’ the OECD has taken the historic step of wholeheartedly endorsing the far better system of “automatic” information exchange (see below for a fuller explanation).  The new OECD document, which has been briefly analysed here, says:

Automatic exchange of information proves to be a useful way to implement enhanced international tax co-operation as shown in the attached report.”

This could have profound implications for, among many other things, Switzerland’s tax deals with Germany, the United Kingdom and Austria.Not long before this announcement, the Economist explained the difference between ‘on request’ and ‘automatic':

“The big goal is automatic information exchange between countries’ fiscal authorities. This would spell the end of Swiss banking secrecy and be a fatal blow to other tax havens. For now, the standard imposed by the Organisation for Economic Co-operation and Development, a Paris-based good-government club, is “information on request”. Switzerland agreed to this only when threatened with blacklisting. A government can ask for data about specific offenders; but no fishing expeditions are allowed, and the number of requests permitted each year is capped. “It’s as if the OECD has been asked to drain a swamp and they’re handing out drinking straws,” says Nicholas Shaxson, a former Economist journalist and author of “Treasure Islands”, a book about tax havens.”

With the ‘on request’ system, you essentially have to know what you are looking for before you ask for it; but under the principle of automatic information exchange, the information is supplied as a matter of routine. But the new OECD document changes all this, and it explains how automatic information exchange is superior, since it:

“can help detect cases of non-compliance even where tax administrations have had no previous indications of non-compliance.”

The tax havens of Switzerland, Luxembourg and Austria have for years been clinging to the ‘on-request’ system as the only acceptable method of penetrating their financial secrecy, and these countries have recently been involved in a complex political chess game, in alliance with the United Kingdom, to sabotage European efforts to promote greater transparency through the EU Savings Tax Directive.The Directive is a system of multilateral automatic information exchange, albeit with specific exceptions for some players like Luxembourg and Austria which are levying anonymous withholding taxes instead of ponying up information, while making limited concessions to accepting the OECD’s ‘on request’ system of information exchange which is to be (very occasionally) allowed to pierce the secrecy.

The European Savings Tax Directive is currently full of loopholes but is in the process of being revamped with some serious amendments, with real teeth. It is these amendments that are the subject of the sabotage discussed above: (essentially, the Swiss deals, signed with selected countries, allow Luxembourg and its allies to cry that the playing field is not level, and therefore provide a pretext for rejecting automatic information exchange under the Savings Tax Directive.)

The OECD, we know, was already quite unhappy with the Swiss-German and Swiss-UK tax deals (which I have pilloried several times on this blog,) and this new document will draw much sharper lines between the OECD and the European defenders of secrecy. They will find it a lot harder to defend their positions than in the past. Switzerland’s entire approach, for example, is predicated on (grudging) acceptance of OECD standards.

The new OECD paper also concedes that the ‘automatic’ approach is in fact already quite widespread:

“Results of a recent survey on automatic exchange conducted by the OECD show widespread use of automatic exchange of information regarding country coverage and income types, transaction values and records exchanged.”

(Which is something the Tax Justice Network and others have been pointing out for some time.)

The intellectual and practical arguments in favour of automatic information exchange are clear; you can find one set of arguments here, and another set of arguments in favour of information exchange instead of merely applying anonymous withholding taxes, come from a more surprising quarter, here.)