Why Tax Information Exchange Agreements Are 'Toothless'

Despite the ominous messages being communicated to the public, taxpayers have little to fear from the tax information exchange agreements (TIEAs) to which most tax havens have rushed to commit.

July 16, 2009
by Kristofer Neslund, CPA/DBA

.... the flaws in the Model TIEA overwhelm its positives.

Weaknesses

The OECD has frequently noted that havens that had agreed to adopt the TIEA failed to implement it. There is a real concern that some or many of the haven jurisdictions that rushed to announce their commitments to the TIEA were simply playing for time, hoping the furor will die down before they actually have to implement the agreements.

Domestic bank secrecy laws trump these agreements. Indeed, UBS has raised Swiss bank secrecy laws as its primary defense in the current John Doe summons enforcement proceeding.

Havens are exempt from supplying information they do not collect and they often collect little. The British Virgin Islands, for example, has more than 400,000 registered corporations but requires neither the identification of shareholders or directors nor the maintenance of financial records.

Severe procedural restrictions are imposed to preclude "fishing expeditions" — i.e., broad, general inquiries. Automatic information sharing is expressly excluded.

The requesting jurisdiction must:

- Identify a specific person,
- Identify the specific information sought and the tax purpose for seeking it,
- Identify why it believes the information is within the requested jurisdiction and
- Demonstrate that it has exhausted all other means for obtaining the information.

The result is a slow and unwieldy process that precludes serious real-time help to tax authorities. Offshore tax cases are complex and labor-intensive, taking 500 days longer than normal to develop. The cumbersome, low-yield information exchange process contributes to these delays and deters the IRS from aggressive enforcement. Even when the government has proven criminal activity, the process is ineffectual. The U.S. sent tax information requests to Switzerland after UBS admitted to criminal activity; it received back only 12 names (out of an estimated 52,000 U.S. accounts holding $15 billion). It is not surprising that there are only a few dozen TIEA requests each year. To be of genuine value, information sharing needs to be comprehensive, real-time and automatic.

Critics argue that the havens' rapid adoption of Model TIEA is little more than public relations, allowing them to make a show of cooperation while going about business as usual, supported by governments that are more than happy to have their taxpayers believe that offshore tax evasion has become much more dangerous.

The OECD's Model TIEA seems to have adopted a lowest-common-denominator approach — offering minimal effectiveness to gain widespread acceptance by havens, in turn allowing world leaders to proclaim a global assault on offshore tax evasion. Given the sharply opposed interests of some of their members, the TIEA's endorsement by the G-7, G-8, G-20, United Nations and EU is supportive of this view.

The establishment of a low information exchange standard for the international community could backfire. Tax havens — little deterred by their TIEAs — are likely to assert that, by having implemented the benchmark standard, they have ceased to be "tax havens." The Bahamas' ambassador to the U.S. has suggested as much on behalf of the Caribbean TIEA adopters. This assertion may be hard to counter without embarrassment; and it may become very difficult to sanction adopting havens when it becomes obvious that their behavior has not changed.

Conclusion

There are many reasons not to engage in offshore tax evasion, but the Model TIEA is not one of them.

The public has been led to believe that all it takes now to open the international information floodgate is a simple request by a tax authority. Not so. The Model TIEA is a slow, largely ineffectual, resource-intensive process that seems unlikely to be used much more in the future than it has been in the past, despite the increased number of haven jurisdictions adopting it.

Tax practitioners should be rendering advice based on the reality, not the perception, of these agreements.

Kristofer Neslund, CPA/DBA, LLM, JD, is an associate professor of taxation at the Golden Gate University.
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