Should tax authorities across the globe automatically exchange information?

Posted: 17/09/2012

The automatic exchange of information between tax authorities in different countries would not be without its problems, as partner Chris Lintott explains in an interview with LexisNexis:

'Parliament's International Development Committee has published a report looking at the importance of tax as an issue for development. The report says that if developing countries are to escape from aid dependency and poverty, it is imperative that they are able to effectively collect taxes, which are a more predictable and sustainable source of revenue than aid.

The report goes on to say that global-level regulatory issues play a major role. In order to reduce cross-border tax evasion, it proposes that tax authorities in different countries should automatically exchange information and that multinational corporations should report their financial information on a country-by-country basis.

To achieve both these objectives, the report calls on the UK government to enact unilateral legislation based on the US Foreign Account Tax Compliance Act (FATCA) and to persuade other countries to follow suit.

Is the EU Savings Directive fit-for-purpose in the global tax world?

By definition, the EU Savings Directive (Council Dir (EC) 2003/48) only applies within the EU. It was devised and implemented by a body representative of the various members of the EU, all of whom had implicitly abnegated a degree of national sovereignty by joining the EU in the first place. Thus, imposing on the various member states a duty to notify other member states about income arising to their citizens or authorising the state in which the income arose to impose what could be seen as a penal rate of tax is merely one of the incidents of membership.

Imposing a similar system globally would, irrespective of any other considerations, simply be impractical - the negotiating process would never end. That is not to say that worldwide imposition is not an attractive end, but simply that it is unattainable.

What are the advantages of the automatic exchange of information? What problems would it create?

The very obvious advantage of automatic exchange is that it is systemic; in other words, the duty of compliance is placed on institutions holding and paying money, and will be inbuilt in their systems. There is thus no voluntary element of disclosure, in contrast to the theoretical position of the taxpayer, whose submission of returns for tax purposes is at least to some degree optional.

In theory, therefore, this should simplify the whole taxation process: the revenue system of country X, the jurisdiction in which a multinational company, Multico, is based, will receive information from all the other jurisdictions in which Multico operates. So, when that information is combined with the information that X has through operations carried on within its jurisdiction, it should be a simple matter to assess Multico's liability to tax. In practice, this is not going to be the case. X will receive information, but will it be consistent across the board, in terms of detail and format? Almost certainly not. A very obvious example is the different taxation periods that different jurisdictions apply: contrast the 6 April - 5 April of the UK with the calendar year applying in most other jurisdictions.

I think it is also worth drawing attention to a point on which most practitioners are focusing, and that is the sheer volume of information which is going to be flying about. Who is going to be processing this information? How is it going to be stored? And most importantly, the more information that is travelling ever more widely, the greater the risk of that information being obtained by criminal elements.

Would FATCA on a global scale benefit developing countries as the report suggests?

Conceivably it might, but anyone who believes that this is the motivating factor presumably posts a letter to Santa Claus in early December each year. The only motivation behind FATCA, the EU Savings Directive and any similar arrangements is to ensure that revenue systems the world over receive the tax that is due to them. To suggest that such legislation is promulgated to benefit emerging economics is extremely disingenuous.

I would also be interested to know the source of the Committee's figure of $1 trillion for 'illicit capital flight for the purposes of tax evasion'. Given that we are talking about money which, by definition, has not been declared, how can anyone come up with any figure? And it is interesting to note the degree of purported accuracy.

What would a British FATCA mean for businesses in the UK and worldwide?

The short answer is an unacceptable increase in the administrative burden imposed by law on UK businesses. This would lead to greater costs, which are then passed on to the consumer, in turn reducing competitiveness both within the UK and worldwide. The alternative would be for industry to absorb some or all of the costs. I doubt that this would be feasible or acceptable.

In this context, I would also make a more general point. Most individuals and corporate entities are pre-pared to pay a fair amount of tax; they regard it as a toll charge for living and operating in their chosen jurisdiction or, as Oliver Wendell Holmes put it, 'taxes are what we pay for civilized society'. But when it is deemed to be unfair or the time and costs spent in compliance are felt to be out of proportion to what is necessary, people will vote with their feet. Witness the 'brain drain' in the late 1970s and the current situation in France. Similarly, if the information sought is seen to be irrelevant to the taxing process, or unnecessarily intrusive, people will simply not co-operate, and will not supply required information, thus leading to a paradigm shift in the social contract. One would not wish the climate in the UK to change from one in which most people make proper declaration, to that which applies in Italy, for instance, where evading tax is regarded as the norm.

What should lawyers do next?

Lawyers can and should only advise on the basis of present legislation - advising on the basis of what is anticipated is a recipe for disaster, and a disgruntled client. They should also advise on a strict compliance with the law as it currently stands. That said, clients should be made aware that advice is based on a snapshot in time, and the background can change quickly, so that the ability to change should become inbuilt in their systems.'

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