OECD lifts the lid on how tax treaties work

By Tax
OECD lifts the lid on how tax treaties work

Unguarded comments in a blog on the Organisation of Economic Co-operation and Development (OECD) have lifted the curtain to shine some light on how countries around the world are collaborating to swap tax information.

The blog, part of a financial insights series by Patrick Love, explains the OECD has drafted a model tax treaty that has just been updated  to let tax authorities ask for information on a group of taxpayers without naming them individually, as long as the request is not a fishing expedition.

“These are so-called targeted requests, but the OECD is also looking at how to make automatic exchange of information more efficient,” writes Love.

What countries tell each other about taxpayers

“Some countries call this ‘routine’ rather than ‘automatic’ exchange. This is the systematic and periodic transmission of bulk taxpayer information collected by the source country to the country of residence concerning income from dividends, interest, royalties, salaries, pensions, and so on.

“Denmark has the most relationships of this kind, sending information to 70 other countries.

“According to a survey carried out for the OECD’s Centre for Tax Policy reported in Automatic Exchange of Information: What It Is, How It Works, Benefits, What Remains To Be Done the sums represented range from a few million to over 200 billion euros. Automatic exchange seems to work both to detect tax evasion and as a deterrent.

“European Union experience with the Savings Directive suggests that without automatic exchange, over three-quarters of taxpayers may not have complied with their tax obligations in their country of residence.

Absent-minded taxpayers

“Denmark helped 440 of its absent-minded citizens to remember foreign income after the tax administration carried out 1000 audits and sent out 1100 letters announcing that it received automatic information from abroad.”

Putting the problem of international tax management in to perspective, Love quotes two recent studies – one by the Tax Justice Network that reckons that individuals hold about $21 trillion of unreported wealth offshore, the equivalent of the combined GDP of the US and Japan.

“They think the figure may be even higher at $32 trillion but even a previous, far lower estimate of $11 trillion still represents around $250 billion dollars in lost tax revenue each year – five times what the World Bank calculated was needed to address the UN Millennium Development Goal of halving world poverty by 2015,” said Love.

Secrecy jurisdictions

“The usual term for these places offering low or zero taxes is tax haven, but the Tax Justice Network thinks that ‘secrecy jurisdiction’ is a better description, since they provide facilities to get around the rules of other jurisdictions using secrecy as their prime tool.”

The OECD has worked for years to help countries stamp out tax abuse by drafting tax treaties. Around 3,000 bilateral agreements based on the OECD model are in force worldwide.

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