Six-Country Plan for Information Sharing Could Attract Big Offshore Hubs, Owens Says

By Rick Mitchell

PARIS--The proposed tax information-sharing agreement announced Feb. 8 by the United States and five European countries could prove attractive for major offshore financial centers in two key ways, the former tax chief of the Organization for Economic Cooperation and Development told Bloomberg BNA Feb. 9.

The United States, France, Germany, Italy, Spain, and the United Kingdom said Feb. 8 they are working on a framework for automatic transnational exchange of information on foreign-held bank accounts as an alternative way to implement the controversial Foreign Account Tax Compliance Act (FATCA).

Jeffrey Owens, who retired Jan. 31 after directing OECD's tax policy for 20 years, said large non-OECD financial centers might be drawn into the proposed framework because it could allow them to get reciprocal benefits for information they provide to the United States and could also help their financial institutions avoid FATCA's stiff noncompliance penalties.

“From the perspective of governments, it's a positive development and from the perspective of financial institutions it's also positive, because if there is one standard it would minimize their compliance burden,” said Owens.

Progress Faster as a Group

Enacted in 2010, FATCA requires foreign financial institutions to report U.S.-owned accounts to the U.S. Internal Revenue Service or risk a 30 percent punitive withholding tax.

According to a joint statement by the six countries, France, Germany, Italy, Spain, and the United Kingdom support FATCA's goals of fighting tax evasion, but have concerns that data privacy and other legal restrictions could make it difficult for banks inside their borders to provide information to U.S. authorities.

Observers said the proposed arrangement is largely aimed at responding to these concerns as well as worries that FATCA is a one-way street for information exchange for the benefit of U.S. authorities.

The proposed deal would work around these potential barriers by letting foreign banks report information on U.S.-held accounts to their own governments, which would then share the information with the United States. The United States would reciprocate by automatically collecting and exchanging information on accounts held in U.S. banks by residents of those five countries.

“The new announcement shows the six governments recognize that trying to achieve better offshore compliance is much easier when a group of countries move forward together,” said Owens.

Different Models

Owens said the next stage is to extend the arrangement to bring other countries in and perhaps move it toward having all the financial centers participating in one system.

A U.S. Treasury official said the U.S. government is discussing similar arrangements with other countries, for which the proposed agreement could serve as a model.

Owens cited several existing models for improving offshore compliance. The OECD and Group of 20 countries have been promoting, through the Global Forum on Transparency and Exchange of Information for Tax Purposes, tax information exchange agreements based on the exchange-on-request standard.

The forum's 107 members, which include OECD's 34 members as well as non-OECD members, have signed more than 800 agreements and those are beginning to take effect, he said.

Some critics have complained that information exchange on request is ineffective because tax authorities can only ask for information they already know about.

Pascal Saint-Amans, who took over from Owens Feb. 1 as head of OECD's Center for Tax Policy and Administration, has said this argument overlooks significant progress made by the Global Forum on improving information exchange.

EU Savings Tax Directive

The model of automatic exchange of information underpins the EU Savings Tax Directive, while under the FATCA model, one country imposes reporting requirements on financial institutions. The German, Swiss, and U.K. information exchange agreements are essentially bilateral agreements.

“I think all of these models try to achieve better offshore compliance, but adopt somewhat different approaches,” said Owens.

“It may be that with this [six-country] announcement we are moving toward a general group reporting standard backed up by effective automatic exchange of information,” he said.

OECD Role

Owens said an increasing number of countries want to move toward automatic exchange, not just OECD countries but also non-OECD countries like India.

“Essentially what this depends upon is getting a common standard and achieving effective automatic exchange of information,” he said, noting that OECD has for many years been working on developing technical building blocks to eliminate practical barriers to automatic exchange.

The six countries cited OECD's work in the area in their joint statement.

Saint-Amans said the new proposed FATCA framework complements work already undertaken in the context of OECD's Tax Relief and Compliance Enforcement (TRACE) project.

The TRACE project aims to develop a unified information reporting system on a multilateral basis.

“The OECD stands ready to work on a multilateral model to facilitate implementation of [the new six-country proposal] by enhancing the effectiveness of automatic exchange of information,” said Saint-Amans.

Existing Work Important

Owens stressed that existing multilateral projects on improving offshore compliance should continue, particularly the Global Forum's work to ensure that all 107 member jurisdictions comply with the information on exchange standard.

He said the EU's work on the EU Savings Tax Directive should continue too.

Owens noted that at the Cannes, France, G-20 leaders' summit in November 2011 all G-20 members committed to signing the updated multilateral Convention on Mutual Administrative Assistance in Tax Matters.

The convention, aimed at improving international tax cooperation in the fight against tax avoidance and evasion, covers a lot more than information exchange, also addressing tax assessment, audits, collection, and other issues, he said.

Owens noted that India recently signed the convention, and he expects China to follow through on its G-20 commitment to sign it soon.

“I think it's important that more countries sign the convention, and that countries that sign it ratify it to bring it into play,” he said.

(Appeared Feb. 10, 2012)