The ‘End of Tax Havens’ – But Will Developing Countries Benefit?

News broke on April 9th of agreement between the UK, France, Germany, Italy and Spain to pilot “multilateral automatic tax information exchange.” In France, President Hollande went further – announcing a draft law aimed at ‘moralising’ French public life, as former budget minister Jerome Cahuzac was expelled from the governing party for repeatedly denying the existence of his Swiss bank account. Hollande was explicit about his intentions at a press conference: “tax havens must be eradicated in Europe and worldwide.”

We interrupt this blog to bring you this diversion from your work, entirely in keeping with the ramped-up rhetoric. (h/t @benphillips76)

Rhetoric around shutting down tax havens – most famously, at the 2009 London meeting of the G20 group of nations – is not new. There are two reasons for wariness. First, the language implies that there is a group of jurisdictions which are the problem – so that by implication all others are unblemished. The Financial Secrecy Index, published by the Tax Justice Network and Christian Aid, presents a different point of view: that there is a spectrum of financial secrecy, including major powers as well as the usual suspects, and that we can use a set of objective criteria to consider the relative importance of each in contributing to what is a global problem. Needless to say, G20 nations also feature on the FSI.

The second reason for wariness is of course the absence of appropriate practical steps to follow. And that is why current developments are promising. Rhetoric on shutting down or eradicating anything aside, a multilateral tool for automatic information exchange would be the central element to ending tax secrecy (and with it, the core element of the tax haven offer).

The 5-way agreement announced yesterday is intriguing, however. The question is, why not use the EU Savings Tax Directive which is by some distance the biggest multilateral, automatic information exchange instrument in the world, and in which all these countries participate, and which is being enhanced even as we speak; or the Mutual Administrative Assistance…[name continues for some time but I’ve lost the will]… Convention, which does not mandate automatic exchange but explicitly condones and allows for it, and has a broader than EU membership, so could be the basis for a global auto exchange instrument. 

Two thoughts occur. 

1. Glass half-empty: It’s basically political and pragmatic: the respective governments mainly wanted to be able to announce something, and as they’re all already making this commitment (and accepting any associated compliance costs) in their FATCA agreements with the US, it may have seemed most straightforward simply to agree to the same terms with each other.
2. Glass half-full: It’s a bit more considered: recognising that (a) a very great many jurisdictions, including lots of the ‘usual suspect’ havens, are signing up to FATCA with the US, and (b) that the Mutual etc Convention and the EUSTD have their own, rather cumbersome processes for change and for including other countries, perhaps the signatories here decided that having a straight FATCA replica was the best way to create something that could quickly grow: ‘everyone’ has already to meet these terms with the US, so it’s most straightforward just to demand the same multilaterally in a new, specifically-created vehicle; and the absence of cumbersome arrangements may mean the founding group can drive through extension to multiple jurisdictions in a short space of time.

Itai Grinberg, a law prof at Georgetown and formerly a tax man at the Treasury, has a fascinating paper from early last year on the way that different processes do and don’t fit together. Today, the Tax Justice Network welcome the momentum but raise an associated concern that the new process might take the wind out of the sails of the EUSTD reform.

Here’s my worry. In neither case (1) or (2) is there any reflection of the importance of including developing countries in automatic information exchange. Case (2) looks better, again, for this, but in fact there are currently no developing countries among those listed by Treasury as having negotiated bilateral treaties to make FATCA work. (As an aside, it’s also worrying that the FATCA treaty options include a non-reciprocal one: so that countries would not necessarily get any benefit in terms of US transparency from signing up.)

So it’s not clear how quickly developing countries could join. And that is the question that the G8, and perhaps the UK chair in particular, should be asked. And then the ball passes to the G20…