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Is it the end of the road for tax havens?
October, 16th 2017

The problem of black money stashed in tax havens (TH) has always been a serious issue for tax authorities across the world. Tax evaders who stashed their money in TH were always very confident that their tax authorities could never get any information about their foreign assets from TH. There were several reasons for this.

First, powers of tax authorities are confined to their national borders. Second, there was very limited cooperation among different tax authorities of the world. There were very few legal tax treaties with TH through which tax information could be obtained. Third, there were strict bank secrecy laws in TH. Fourth, TH would get substantial revenues from the money of other countries, amounting to a substantial part of their GDP. Providing any information about assets of foreign citizens would lead to reduction in their revenues and GDP. And finally, there was no universally accepted institutional mechanism to deal with this problem.

How it works
To tackle this problem, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) was constituted in 2009. Currently, Global Forum has 146 member countries. The aim of the Global Forum was to ensure that all countries fully implement the international standards on tax transparency and exchange of information (EOI). These standards require that tax information should be exchanged by a requested country on requisition from a requesting country where it is relevant to the enforcement of the domestic laws of the requesting country. Every country is peer reviewed on these standards. After review, a rating is awarded which may be ‘Compliant’, ‘Largely Compliant’, ‘Partly Compliant’ or ‘Non Compliant’.

It is this peer review of countries through which Global Forum has brought about radical changes in tax transparency across the world. How does this actually work? Suppose country X has domestic bank secrecy laws which prohibit the sharing of banking information with other countries. As this is against the international standards, an adverse rating will be awarded to country X during peer review. Country X will then be persuaded to amend its legal systems. The peer review process has already led to elimination of bank secrecy in a large number of countries. According to the Tax Transparency Report 2016, at the start of the review process, there were 65 countries which had bank secrecy laws and so could not exchange banking information. This number has been reduced to a meagre five countries at the end of 2016.

Let us take a different case. Country A wants to obtain tax information from country Y but in the absence of a tax treaty with country Y. Country A, therefore, initiates a tax treaty negotiation with country Y. But country Y is not responding properly and delaying the negotiation. During peer review of country Y, this aspect will be examined and an adverse rating given. Hence, all global forum members are persuaded to increase their bilateral EOI relationships with all relevant countries. At the start of review process in 2009, there were approximately 4,500 bilateral EOI relationships at the international level, which increased to 7,000 by the end of 2016.

Effective process
So far, Global Forum has assigned ratings to 116 countries. The whole process has been very efficacious. There were many countries (including tax havens) that were initially rated non-compliant. These countries were persuaded to amend their legal and practical systems. The adverse rating also has a reputational effect. International organisations such as World Bank and IMF do not grant assistance to a country if the rating is adverse. Such countries have quickly made the recommended changes in their system and upgraded their ratings. As a result of these developments, only one country has a ‘non-compliant’ rating. As per the Tax Transparency Report, due to work of the Global Forum, 32 countries (for which data is available) could recover taxes of €520 million in 2012, €745 million in 2013 and €667 million in 2014. For 21 countries for which comparative figures are available, the average amount of tax recovered from each EOI request was over €127,000.

India has immensely benefited from the work of Global Forum. Starting from the LGT (private banking and asset management) bank leaks in 2009, HSBC data leaks, ICIJ (International Consortium of Investigative Journalists) leaks and finally Panama Paper leaks in 2016, India has used the EOI mechanism in a big way to successfully obtain tax information from several countries. On this basis, various actions are being taken across the country, including assessment and prosecution of tax evaders. India has also contributed a lot towards the Global Forum. India is a member of all three main working bodies of the Global Forum — Steering Group, Peer Review Group (PRG) and AEOI Group. In fact, India is vice-chair of PRG and AEOI Group.

Challenges ahead
The Global Forum has been substantially successful in curbing the menace of tax evasion; however some challenges remain. It does not have the power to take direct action against any country, which is not following the tax transparency standard. It can only award an adverse rating. Second, tax evaders are inventing new techniques of evasion. This can only be addressed by adopting transparency standards on a real time basis which, due to its multilateral nature, is difficult for the Global Forum to target. Third, Global Forum operates on the principle of “consensus” implying that all countries should agree, which sometimes leads to less than optimal decision-making while deciding complex tax issues. Fourth, there are still countries which are outside the purview of Global Forum and are being used by tax evaders. And finally, there has been tremendous increase in work which has put stress on the limited resources of Global Forum.

Global Forum is trying to address these issues by taking several measures, such as updating transparency standards in 2016, working in close coordination with G20 which may take coercive measures against non-complaint countries, and encourage non-member countries to join. It is essential that countries like India, which are plagued by black money concerns, actively support the work of Global Forum in order to check cross-border tax evasion.

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