Offshore tax havens and secret Swiss bank accounts have long allowed for foreigners to hide assets and evade taxes as states tended to take an apathetic approach to helping each other rescue revenue.
But in the past three years, as sovereign debt levels skyrocket, jurisdictions have increasingly entered into agreements to share tax information in an attempt to ramp up capacity for revenue collection.
This week representatives from almost 60 countries and international organizations met in Rome for the second global event promoting international co-ordination, which the Organization for Economic Co-operation and Development said is needed to reduce financial crimes and restore faith in the global economic system.
“A coherent, co-ordinated and effective commitment to fight corruption, money laundering, tax crimes and other illicit flows and promote integrity and transparency is now crucial to restore citizens' confidence,” Richard Boucher, OECD deputy secretary general, said in his opening speech in Rome Thursday.
In Toronto, tax lawyer Richard Hay of Stikeman Elliott LLP told a conference of lawyers last week that record-high sovereign debt levels have put pressure on governments in recent years to prevent tax evasion.
“It is the simple fact that governments are spending more money than they are collecting and the debt is unsustainable,” Mr. Hay said at a conference in Toronto this week.
An increasingly interconnected global business environment makes it harder to keep track of who owns what assets where and who owes taxes to whom. “If you're in the revenue-collection business,” Mr. Hay said, “a globalized world is a more complicated one to operate in.”
The number of tax information exchange agreements is growing worldwide, with 50 agreements concluded in 2008, and roughly 500 signed in 2011. Since 2009 Canada has signed 16 TIEAs with such tax haven nations as Bermuda and the Cayman Islands and is currently negotiating another 14.
Canada and the G20 have supported the agreements since the G20 Leaders' Summit in April 2009.
“By assisting the Canada Revenue Agency in obtaining the information necessary for the administration and enforcement of Canadian tax laws, the tax information exchange procedure helps ensure that Canadian residents report and pay tax on their income from all sources and thus guards against international tax evasion by a small minority of Canadian taxpayers,” said an official from the Department of Finance.
Most international agreements, including Canada's, are based on the OECD's model law, which outlines a process for jurisdictions to request and provide information to one another to prevent tax evasion.
The OECD model law seeks to balance privacy rights by requiring jurisdictions to make requests for specific information, prohibiting jurisdictions from “fishing” for extensive information.
“This is not about exposing people or gathering information that is not necessary for that purpose. It's about also levelling the playing field domestically,” said OECD spokesman Matthias Rumpf.
But since the agreements are so novel, Queen's University tax law professor Arthur Cockfield said it is yet to be seen if there will be any real impact, especially since agreements to share info are useless if the country in question doesn't collect info.
“I am skeptical that these TIEAs will bring in many revenues to Canada,” Mr. Cockfield said. “Part of the problem is that, again, these tax havens don't have income tax systems, so the governments and even the banks don't keep the same kinds of records that our banks do.”
But Mr. Cockfield said multilateral agreements are preferential to unilateral laws that impose obligations on other nations, such as the U.S.-proposed Foreign Account Tax Compliance Act, which has received criticism in Canada.
“I believe it's an illegal attempt to access tax information from Canadians. It doesn't comply with the Canada-U.S. tax treaty and it doesn't comply with the American obligations under NAFTA,” he said.
The Canadian banking industry has also condemned the proposed legislation for the burden it would place on Canadian banks with U.S. customers, but supports the use of information exchange agreements.
“We just think it makes more sense to leverage that existing structure,” said Darren Hannah, director of Banking Operations for the Canadian Bankers Association.
Internationally, the future of tax co-ordination may be automatic sharing between jurisdictions, Mr. Hay suggested, which already exists in some treaties.
“For a tax lawyer, I have to say this is a revelation, the notion that we would construct a global tax environment is really quite remarkable,” Mr. Hay said.