OECD moves forward on tax transparency

Last September G20 leaders moved towards greater transparency to crack down on tax evasion. They promised a “new global standard” to increase the exchange of financial information between countries.

Whereas today tax authorities have to chase information from others authorities if and when they suspect foul play, this new standard will require any jurisdiction signing up to exchange the information automatically on an annual basis.

This measure is direly needed. Lost tax revenue from the undeclared assets of individuals (not including companies or other legal arrangements) which are held outside of their country of residence is estimated at US$ 255 billion. This amounts to about half of the total 2010 education spending of every country in the European Union.

This Automatic Exchange of Information standard is now shaping up. The G20 mandated the Organisation for Economic Cooperation and Development (OECD) to take on the job and they launched the draft framework this month. G20 finance ministers took a look and endorsed it this weekend (23 February 2014) in Australia in their first ministerial meeting of the current G20 cycle.

The positives are clear:

The previous “upon request” method was cumbersome, costly and meant you had to know what kind of information you were looking for before making the request. Those shielding money could often slip through loopholes unnoticed.

The impact of the new standard could be very wide and there would be no need for specific bilateral agreements. More than 40 countries have signed up so far.

But in order for this standard to truly be global, it needs to work for developing countries. As it stands though, in order to join and benefit from the scheme, you need to be able to deliver the same standard of information.

Developing countries lose a lot more assets out of the country than they shelter, but they don’t have the same capacity to gather, process and share this information yet.

The OECD has already promised capacity-building to developing countries, but a delay in demanding reciprocity may offer a real incentive for their involvement.

A final concern is the lack of sanctions for non-compliance. It would be a missed opportunity if this turned into an international standard that lacks implementation.

All in all, the G20 has pushed forward on the issue substantially in the last few years, and this standard, if and when it becomes truly global, offers to have real impact on the global nature of illicit financial flows.

Carousel image: Creative commons, Flickr / Images_of_Money