Tackling Tax Evasion—Transparency and Exchange of Information

This article aims to analyze the role of tax transparency and international tax cooperation in helping governments fight tax evasion and other illicit financial flows, in order to generate much needed revenues in the Covid-19 crisis and beyond.

It is extremely important for every government to be aware of the complex causes of tax evasion and other illicit financial flows, since this is the only way to develop a strategy for combating it. The issue is extremely complex, but undoubtedly is an exercise which all countries must undertake.

Today, many of the causes of tax evasion are linked directly to the globalization of economic activities and new ways of doing business in the digital economy.

Corruption is also a very important issue. Abuse of the public function for personal benefit reduces the people’s trust in the government and institutions, undermines the effectiveness and equity of public policies, and misappropriates taxpayers’ money originally intended for schools, roads and hospitals.

An International Monetary Fund study, “The fight against corruption in the State,” notes that no country is immune from corruption. Over 180 countries were analyzed and the interesting conclusion was that the most corrupt countries collected less tax, because people pay bribes to avoid them—for example, through tax gaps conceived in exchange for payment. In addition, when taxpayers believe that the state is corrupt, tax evasion becomes more likely.

The study also states that, globally, less-corrupt governments collect 4% more GDP in tax revenues than those countries having the same level of development but with the highest levels of corruption.

These problems equally affect developed and developing countries; according to recent data collection, it is estimated that countries lose from 4%–10% in income tax annually, around $100 billion–$240 billion.

Exchange of Information

One of the most important areas that currently reflects the international cooperation between tax administrations is exchange of information (EOI).

In a recent report, the Organization for Economic Cooperation and Development (OECD) concludes that the international community continues to make tremendous progress in the fight against offshore tax evasion, as implementation of innovative transparency standards by the Global Forum on Transparency and Exchange of Information for Tax Purposes moves countries ever closer to the goal of eradicating banking secrecy for tax purposes.

The Global Forum is a key international body working on the implementation of international standards for tax transparency. It ensures that these high standards of transparency and EOI for tax purposes are in place around the world through its monitoring and peer review activities.

Nearly 100 countries carried out automatic EOI in 2019, enabling their tax authorities to obtain data on 84 million financial accounts held offshore by their residents, covering total assets of 10 trillion euros ($11.8 trillion).

This represents a significant increase over 2018—the first year of such information exchange—where information on 47 million financial accounts was exchanged, representing 5 trillion euros. The growth stems from an increase in the number of jurisdictions receiving information as well as a wider scope of information exchanged.

International Developments

Africa

Tax Transparency in Africa, in its Progress Report for 2021, highlights the crucial role of tax transparency and EOI in helping African governments stem illicit financial flows and increase domestic resource mobilization. Improved EOI infrastructures have helped tax administrations collect more revenue: In 2020, two African countries identified nearly 35 million euros of additional taxes as a direct consequence of the requests sent.

In total, since 2009, EOI has enabled African countries to identify over 1.2 billion euros of additional revenue (tax, interest and penalties) through offshore tax investigations, including EOI on request, and voluntary disclosure programs launched prior to the first automatic exchanges of financial account information.

Latin America

Tax Transparency in Latin America 2021 analyzes the magnitude of offshore tax evasion in relation to tax collection and explores the role of tax transparency and international tax co-operation in helping governments fight tax evasion. Sixteen Latin American countries are covered.

Progress in the region is reflected by concrete achievements:

• Thirteen Latin American countries have signed and ratified the Convention on Mutual Administrative Assistance in Tax Matters, the most comprehensive multilateral instrument available for all forms of tax cooperation to tackle tax evasion and avoidance, thus considerably expanding their EOI relationship networks.
• Six out of eight jurisdictions reviewed up to 2020 under the second round of peer reviews of the EOI on request were rated “Largely Compliant,” showing that Latin American countries are making important strides in their implementation of the standard, which includes advanced beneficial ownership requirements.
• Nine countries already participate in the automatic exchange of financial account information (AEOI).

The region has been a net sender of EOI requests between 2014 and 2020, with 3,949 requests sent and 2,343 requests received. Since 2014, at least 12 billion euros in additional revenue (tax, interest and penalties) has been identified in Latin America through voluntary disclosure programs and offshore tax investigations using EOI.

Forums and Agencies Involved in Exchange of Specialized Information

There are currently several forums and/or tax administration agencies that act as mechanisms for the exchange of specialized information. They vary in the number of members, their conditions, their activity levels, language and culture and operating history as organizations. These forums and/or organizations offer diverse and extensive experience in dealing with tax administration topics.

There are a number of such important forums and/or organizations, including:

• the Inter-American Center of Tax Administrations (CIAT);
• the Commonwealth Association of Tax Administrators (CATA);
• the Exchange and Reflection Forum for Tax Administration Leaders (CREDAF);
• the Inter European Organization of Tax Administrations (IOTA);
• the OECD Forum on Tax Administration (FATA); and
• the African Tax Administration Forum (ATAF).

I am convinced that developing strong relationships with forums and/or tax administration organizations will yield key benefits, including:

• a fast, efficient and inexpensive medium for the exchange of information and best practices in the field;
• a means of achieving consensus on issues of strategic importance to tax administrations globally;
• the possibility of applying best management practices in the field;
• opportunities to work in areas of mutual interest, thus exploiting synergies and minimizing duplication of efforts.

A Global Challenge

Tax evasion and other illicit financial flows are a global challenge that requires a global response. International tax cooperation must be part and parcel of a set of effective and well-coordinated multilateral actions to respond to the crisis.

It is more urgent than ever to work together to fight tax evasion and tax avoidance, including illicit financial flows. International tax cooperation should be scaled up in a way that is universal in approach and scope and fully takes into account the different needs and capacities of all countries.

However, despite its growing importance and the attention being paid to cooperation and administrative assistance between tax administrations, there is still a long way to go before we can achieve optimal cooperation at international level, as well as internally for each country.

In short, it is now more than ever vital that tax administrations obtain information about the relevant actors and their economic activities, that they develop the regulatory capacity to determine their obligations and the management capacity to implement legislation efficiently.

This is not an easy road, but it is certainly necessary to follow it because, as described above, the fruits can clearly be observed.

This column does not necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Alfredo Collosa is a consultant and tutor in Tax Administration at the Inter-American Center of Tax Administrations (CIAT), professor, investigator, author of books and publications, and lecturer. He holds an Official Masters in Public Finance and Tax Administration (UNED-IEF).

The author may be contacted at: aecollosa@gmail.com