Offshore Financial Centres: The irreversible march towards tax transparency

By Jeffrey Owens, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (13/12/2011)

Discussions in the G20 show that it is not always easy to agree on common actions by all G20 countries.  Yet when the G20 speaks with one voice, it is a powerful force for change.  Nowhere is this clearer than on the G20 initiative on offshore financial centres and bank secrecy.

When the G20 took up this initiative at its Washington summit, the first time heads of government met, few believed that we would get countries (both OECD and non-OECD) with long traditions of bank secrecy to change their ways.  Yet, with strong political support, this is what has happened.

Bank secrecy is no longer a barrier to effective exchange of information.  Many jurisdictions, including financial centres such as the Cayman Islands, the British Virgin Islands, Belgium and Switzerland, have changed their legislation to permit better access to information.  There are over 700 exchange agreements now in place.  The Global Forum on Transparency and Exchange of Information (Global Forum) has completed almost 60 peer reviews.  Many of the recommendations made in these reviews have already been acted upon.

But from the perspective of the wider international community, the key question is not how many agreements have been signed or even how this initiative has changed attitudes in the financial community (which it has).  The key question is has it made a difference.  Has it made a difference to the budgets of governments and the fairness of tax systems?

The short answer is yes.  Individual countries, many of which are readers of this Review, have taken advantage of an environment where the risk of detection for tax evaders has increased to put in place offshore compliance initiatives.  A recent OECD survey of 20 countries showed that already almost  €13 billion of extra revenue has been assessed.  More than 100,000 wealthy taxpayers have come forward to declare their assets held offshore.  These figures refer only to what we can measure.  What we don’t know is how many potential tax evaders were deterred.  And this is just the start: discussions in our Forum on Tax Administration suggest that over the next two years we will see a significant increase in the yield from better offshore compliance.  So from the perspective of governments, this initiative is already paying off.  It is helping to consolidate budgets but perhaps of even more importance, it is helping to show honest taxpayers that the wealthy are paying their fair share of taxes.

Much has been achieved but much remains to be done.  In 2012 the Global Forum will complete the reviews of the legal framework of its original membership (44 reviews remain to be done).  It will then focus on examining the actual application of agreements.  It will also reach out to developing countries to encourage them to become members.  At the same time, it will be vigilant towards the creation of new offshore financial centres to ensure that the respect the new standards.

Another significant step towards better tax compliance was that at the G20 Summit in Cannes, 13 G20 countries joined the six G20 countries that have already signed the Convention on Mutual Administrative Assistance in Tax Matters. This sent out a powerful signal that the G20 intends to lead by example and expects other financial centres to sign the Convention, which provides for all forms of assistance in the assessment and collection of tax.  At the same time as progress is being made on exchange of information on request, the OECD is also working on improving the effectiveness of automatic exchange of information.  For over two decades, the OECD has been working on automatic exchange of information.  Today, the vast majority of OECD and G20 countries already use automatic exchange of information for certain income flows, whether under their bilateral agreements or in the context of multi-country agreements (eg, the EU Savings Directive, the abovementioned multilateral Convention).  The OECD and the EU are working to improve the effectiveness of these exchanges by developing standard formats, by improving countries’ ability to match information, helping tax administrations to use the information more effectively and by reinforcing provisions that protect the confidentiality of the information exchanged.  With an increasing number of countries showing an interest in this form of cooperation, the OECD will intensify its work to remove practical barriers that may impede such exchanges.

To advance the global fight against tax evasion, the OECD’s Forum on Tax Administration (FTA) has established a dedicated network of specialists, led by France and the US, and open to all FTA countries, to tackle offshore evasion. This network held its first meeting in Paris in September 2011.  The network will identify the methods used to evade taxes and develop co-ordinated responses to leverage off the G20 initiative, including the risks posed by e-commerce and new internet based payment methods and the ways that non-residents use opaque corporate structures established in offshore jurisdictions.  As a basis for sharing knowledge and experience, the network has already compiled a catalogue of some 200 separate initiatives that tax administrations have taken to tackle offshore evasion.

The FTA is changing the dynamics of the dialogue between MNEs and revenue bodies. Large corporations, the source of growth in our economies, need to respect the letter and the spirit of our tax laws and need to see good tax compliance as part of their good governance agenda.  We have also developed a code of conduct for banks (over 200 banks have signed up to the UK code).

The OECD is also moving forward to put tax compliance in the broader context of countering illicit activities.  Earlier this year developed and developing countries came together in Oslo to launch a new OECD initiative aimed at facilitating cooperation between tax authorities and law enforcement agencies to counter financial crimes and illicit flows. This initiative recognises that tax administrations have a key role to play in the fight against corruption, money laundering and bribery (two of the biggest European corruption cases in history were uncovered in the course of a tax investigation).  The next steps are to ensure that countries have in place the legal and practical framework needed to intensify interagency co-operation. The deliverables will be guidelines for inter-agency cooperation, a catalogue of legal instruments and an action plan for assisting Developing Countries.  These outcomes will be discussed at a June 2012 meeting, which will be hosted by Italy back to back with the FATF meeting and which would reinforce the G20 initiative in combating tax fraud, corruption and the FATF’s efforts to counter money laundering.

[1] The views expressed should not be taken to represent those of the OECD or its member countries.