The Organization for Economic Cooperation and Development has developed a new global standard for automatic exchange of tax information among nations in response to a mandate from finance leaders of the G20 countries to combat tax avoidance and evasion.
Developed by the OECD together with the G20 countries, the standard calls on jurisdictions to obtain information from their financial institutions and exchange the information automatically with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, along with common due diligence procedures to be followed by financial institutions.
The OECD plans to formally present the standard for the endorsement of the G20 finance ministers during a February 22-23 meeting in Australia. The G20 invited the OECD to develop a global standard on automatic exchange of information last fall.
“This is a real game changer,” OECD Secretary-General Angel Gurría said in a statement. “Globalization of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence. This new standard on automatic exchange of information will ramp up international tax cooperation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”
The new standard draws on previous OECD work on the automatic exchange of information, incorporating efforts within the European Union and elsewhere to reinforce global anti-money laundering standards. It also recognizes the role that implementation of the U.S.’s Foreign Account Tax Compliance Act, or FATCA, has played in the G20’s move towards automatic exchange of information in a multilateral context.
More than 40 countries have committed to early adoption of the standard. The Global Forum on Transparency and Exchange of Information for Tax Purposes, hosted by the OECD, brings together 121 jurisdictions worldwide. It has been mandated by the G20 to monitor and review implementation of the standard.
The OECD plans to provide a detailed commentary on the new standard, along with technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September.
The Washington, D.C.-based advocacy group Global Financial Integrity applauded the new OECD standard.
“Automatic exchange of tax and financial information is essential to combating global tax evasion and money laundering,” said GFI legal counsel and director of government affairs Heather Lowe in a statement. “For years, the OECD recommended member countries exchange information only upon request, a process that has proved inadequate to detect and deter cross-border financial crime. This is truly a game-changing policy shift at the highest level.”
The new standard will require countries that sign up to the agreement to notify another signatory country if its banks and other financial institutions have accounts in the name of any of that other country’s citizens or companies. Financial institutions would be required to collect and provide information about all investment income, financial assets and account balances of their foreign account holders, in a manner similar to what FATCA requires. The system also incorporates elements from the European Union Savings and Tax Directive and Financial Action Task Force anti-money laundering standards.
All 34 OECD member countries have already agreed to the standard, and GFI encouraged the G20 to embrace the new standard at its summit in Australia.
GFI cautioned that developing countries will require capacity-building and technical assistance programs to properly utilize the massive influx of information the new multilateral system will generate. While the OECD has said it will provide additional guidance and technical data specifications for the new transparency regime, GFI called on other intergovernmental organizations with a vested interest in curtailing illicit financial flows in the developing world to contribute the assistance needed to effectively implement the new standard in those countries.
“What we have now is a template for a multilateral treaty on the exchange of financial information, but we still have to ensure that this system does not work for OECD and G20 countries alone,” said Lowe. “Developing and middle-income countries must be able to participate in the system as well if it is to be truly effective. If it lacks the flexibility necessary for developing countries to participate, we will simply see the rich countries getting richer while the poor countries continue to suffer exploitation from the same illicit financial practices that this agreement is meant to deter and expose. The G20 finance ministers should consider this issue seriously in their deliberations next week.”
“The new system of financial information exchange must allow for a flexible approach with respect to how and when developing countries are required to provide financial information in exchange for the receipt of financial information under the treaty,” said GFI managing director Tom Cardamone. “The IMF, World Bank and United Nations should get involved to provide technical assistance and help build capacity where it is needed most. We hope Australia will use its position as chair of the G20 in 2014 and begin to organize international action. Just four or five years ago, it was difficult to imagine that the OECD would adopt a policy change this significant in such a short amount of time. When we first started meeting with representatives of the OECD and member-countries in 2009, this issue was not on the agenda. Today, automatic exchange is the official position of the OECD, G8 and G20. All of the individuals and organizations that helped make this happen should be commended.”
Further information on OECD work relating to the exchange of information on tax matters is available here.