Trying to evade taxes and conceal money off-shore is about to get a whole lot harder to do. Forty-seven countries, including a substantial number of well-known tax havens, have banned together signing a pact that will revolutionize the way the world shares tax information. These 47 countries have stepped up their ongoing hunt for individuals stockpiling undisclosed money overseas. Switzerland and Singapore are the most notable members of the pact, as Switzerland was at the center of the scandal that gave rise to FATCA (the United States’ 2010 Foreign Account Tax Compliance Act). Both countries, with reputation of ironclad bank confidentiality, now have been forced to bend on their strict banking privacy policies due to intense international pressure.

FATCA, the driving force behind the pact, was specifically designed to increase compliance by U.S. taxpayers rather than trying to enforce collections from foreigners. The US requires that all Americans pay U.S. taxes on foreign income. FACTA requires foreign financial institutions to report information related to the ownership of assets held overseas by U.S. persons. Once the US began pressing for the automatic declarations, other big countries followed suit. It is speculated that countries will try to set up “special reduced penalty “agreements with suspected tax evaders to encourage them to move money back to their home country now, rather than waiting to be caught by the new system scheduled to roll out in 2017. A global information exchange was thought to be impossible just a short time ago, but with today’s technology it’s attainable. The pact will also increase the pressure on foreign banks to identify the owners of shell companies and trusts, which tax evaders usually hide behind.

Currently, the system forces countries to submit requests to each other for specific data on suspected tax evaders. Often reasonable enquiries are denied because they are thought to be “fishing expeditions”. However after 2017 the co-signers of this pact, and potentially many others that will succumb to the pressure to sign on, will automatically exchange information. The information, scheduled to be shared on a yearly basis, will consist of bank balances, interest income, dividends and the proceeds of sales, which can be used to assess capital gains tax.

There are still many details that will need to be ironed out to ensure the automatic information exchange can become a reality. For the data exchange to work, data collection systems need to be improved and harmonized. The huge influx of information that will need to be processed could become an immense task for even the most cutting-edge tax authorities. And unless poor countries receive assistance with the information processing, they will surely miss out on the benefits of such a system. Furthermore, additional tax havens will need to be brought on board for this exchange to work. Unless they sign on, others may have an excuse to not implement the new rules.
Tax evaders will always try to come up with new and inventive ways to hide money, but with the new information exchange the opportunities for them to do so are receding rapidly.


This blog was developed after reading “The Data Revolution”, The Economist Magazine, May 10, 2014 (on-line Edition)