Automatic Tax Information Exchange

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Action Item: Require governments to collect from financial institutions data on income, gains, and property paid to non-resident individuals, corporations, and trusts. Mandate that data collected automatically be provided to the governments where the non-resident entity is located.

Background: Globalization and the liberalization of economic activity has converted the private sector into a world without borders. This creates a major problem for national tax authorities because similar changes in their enforcement powers have not kept pace with industry. National tax authorities continue to be constrained by national borders and collecting tax revenue has been difficult.

Additionally, bank secrecy and other confidentiality laws in many jurisdictions (such as tax havens and international financial centers) prevent disclosure of relevant information by financial institutions to government authorities. Further, lax response by tax authorities in those jurisdictions to information requests from foreign governments often delays or prevents cases against tax cheats.

Tax, not aid, is the most sustainable source of finance for development, and tax havens undermine developing countries’ efforts to pay their way. The United Nations’ 2002 Monterrey Consensus and the 2005 UN World Summit require developing countries to mobilize domestic resources for development. This means tackling illicit capital flight and tax evasion. Moreover, the Commentary to the OECD Model Income Tax Treaty and the Commentary to the UN Model Income Tax Treaty both refer to automatic exchange of information.

Some steps have already been taken on this issue. The EU Savings Tax Directive was adopted to ensure the proper operation of the internal market and tackle the problem of tax evasion. It was approved in 2003 and came into effect on July 1st, 2005. The automatic exchange of data on interest paid has been agreed upon by all member states except Austria, Belgium and Luxembourg. More needs to be done to ensure that all nations, developing and developed, collect a fair amount of tax from both individuals and corporations.

G-20 Jurisdiction: Working Group 1 (Enhancing sound regulation and strengthening transparency) and Working Group 2 (Reinforcing international cooperation and promoting integrity in financial markets).

Executing Authority: European Union; UN Committee of Experts on International Cooperation in Tax Matters.

Benefit: It is estimated that individuals have about $12 trillion of assets in jurisdictions other than their countries of residence and not declared in their countries of residence; the lost tax revenue annually from such undeclared assets is estimated at $255 billion. Tax evasion by corporations and other entities is also a major problem.