Taxes

The Overshadowed OECD Tax Project

How much global offshore tax evasion exists? It’s a difficult number to pin down.

One thing some parties can agree on — from academics to civil society — is that the OECD’s exchange of information frameworks, especially its automatic exchange of information (AEOI) standard, has reduced banking secrecy over the past several years. Recently, the EU Tax Observatory calculated that offshore tax evasion has decreased by a factor of nearly three in less than a decade because of AEOI. Now, only a quarter of offshore household wealth evades taxation, the report says.

The IMF reached a similar conclusion a few years ago; it said there’s “strong evidence” that deposits in offshore jurisdictions drop by an average of 25% after an AEOI agreement enters into force.

There are caveats — reduced deposits in one jurisdiction could create an increase in another. And not all offshore deposits are made to evade taxes.

The takeaway — according to the EU Tax Observatory — is that governments can quickly and substantially reduce tax evasion if they have the political will to do so.

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has been saying this for years, particularly in the context of developing countries. The OECD doesn’t shy away from the fact that the earliest AEOI adopters from developing countries did so because it asked them to.

Many of those countries were either financial centers or jurisdictions that the OECD felt posed a threat to financial transparency. And the OECD was worried about their effect on the global system. These days, there’s less of that going on because some governments are approaching the OECD and asking — without any prompting — for assistance in implementing AEOI.

These conversations are occurring within an increasingly fraught period of tax multilateralism. Now that U.N. countries, in committee, have voted to move forward with a framework convention on international tax, there are questions about what this could mean for existing international tax projects at the OECD.

African countries led the U.N. effort, and their campaign reflects the deep triage situation that they, and other developing countries, find themselves in. For example, their governments must broaden their tax bases. They should terminate or renegotiate outdated treaties that do not serve them.

But the ongoing debate over international tax policymaking should not distract from the work that the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes is conducting.

Why? The OECD Global Forum’s new 2023 annual report shows how patience, and playing the long game, is beginning to pay dividends. And transparency standards are important from both a corporate and individual income tax lens; the latter is particularly important for developing countries with low individual income tax collections and low tax-to-GDP ratios.

Transparency standards are important for governments considering wealth taxes, like the ones that have appeared within some Latin American countries. They are important for the rank-and-file work of assembling voluntary disclosure programs. Temporary VDPs, that is. The OECD does not think it’s a good idea for taxpayers to get comfortable with the idea of flouting their tax obligations because they anticipate that a VDP might be on the horizon to save them.

They are also important for the technical, bureaucratic work of linking tax and anti-money-laundering regimes to improve tax compliance and boost domestic revenue mobilization. Some IMF experts are appealing to governments on this front, and this strategy best works in tandem with strong transparency frameworks.

It’s not the alluring, headline-grabbing digital tax work. It’s not chasing after Meta and Google with a tax stick. But there is room to tie the Global Forum’s work into discussions about international tax policymaking.

In an unprecedented move, the OECD released a report on international tax and Africa this fall. Most of that report discusses the inclusive framework, with the Global Forum getting a few short paragraphs. This was a missed opportunity to highlight the African experience with exchange of information, the challenges African countries are facing, and ways in which the OECD Global Forum can work to improve the experience for its African members.

The OECD already does this in its Tax Transparency in Africa reports, but it would have been helpful to link that work to the broader conversation about African experiences in international tax policymaking.

It would have been particularly interesting to discuss AEOI within that context. The reality is that AEOI is complex, and several developing countries — including African ones — are trying to develop the capacity to implement the standard. Year after year, the Global Forum’s reports detail how developing countries are grappling with these capacity constraints. That needs to change.

That said, if AEOI wasn’t working or potentially valuable, India wouldn’t have singled out AEOI as a priority issue for developing countries, as it did during its recent G-20 presidency. Nor would it have suggested — as it did this spring — that the OECD expand AEOI to real estate and other nonfinancial assets.

2023 in Review

Below are a few noteworthy items from the Global Forum’s 2023 annual report.

AEOI

First, the quality of information that countries are exchanging automatically has improved. The OECD reached this conclusion because it found that jurisdictions are having an easier time matching exchanged information with their domestic taxpayer databases. In 2022 the matching average hovered around 80%, compared to 68% in 2019.

What factors are enabling countries to improve the quality of their exchanges? Zayda Manatta, head of the Global Forum Secretariat, told Tax Notes that peer review input has been fundamental in helping authorities learn what data is most useful for their international peers.

“I think they learned from the process — and countries have been acting upon the feedback they received,” she said.

“Some countries made a huge effort to convey these messages to their financial institutions to guide them, they provided hotlines for the financial institutions, and they checked the information they received before sharing with their peers,” Manatta said.

Countries also made more use of AEOI data in 2023. Historically, countries have largely used AEOI data for activities like tax audits, risk assessments, taxpayer notifications, and tax collections. All of this remained the same in 2023, but it appears they are using the same data for more functions.

The most popular way to use AEOI data is in tax audits; 88% of AEOI countries used it for this purpose in 2023, which is a 10 percentage point increase compared with 2022. Risk assessments are also popular; 80% of AEOI countries used the data for this reason, which is a 5 percentage point increase compared to 2022.

Taxpayer notification landed in a distant third place, as 48% of AEOI countries used the data for this purpose, a 7 percentage point increase over 2022. A minority of AEOI countries are using the information for tax collections — only 34% said they did so in 2023. However, this fast-growing use increased 14 percentage points compared with 2022.

When asked if the improved quality of information played a factor in these increases, Manatta said it may have to a small extent. However, she believes it stems from countries’ growing confidence in using AEOI information.

“They are learning the process, they feel more confident in using the information, and we have conducted several meetings to share good practices on using the CRS data,” Manatta said.

Beneficial Ownership

Some Global Forum members, particularly developing ones, have long faced challenges in ensuring the availability of beneficial ownership information on relevant entities and arrangements and bank accounts.

In response, the OECD has been using this metric to evaluate countries in its second round of peer reviews on the exchange of information on request standard. And it is evaluating them closely.

According to the report, one third of the nearly 750 recommendations the OECD has issued in the second round involve the availability of beneficial ownership information. It found that nearly 50% of the jurisdictions reviewed lack a satisfactory level of availability.

That said, countries are largely taking this feedback seriously: This year’s report reveals that countries are tightening their beneficial ownership requirements as part of their annual follow-up review.

Several are achieving this by creating beneficial ownership registries, Manatta said. “This was not a requirement before, but in our annual reviews we have seen that this is a very successful approach,” she said. She also noted that some countries improved their supervision of registries.

“It’s not enough to just establish a register, if you don’t have someone to oversee the practice and ensure that updates are made,” Manatta said. “As concerns finance institutions, some countries didn’t have rules or requirements that the information be updated in a specific frequency. There was guidance for risk entities but there was no specific guidance for non-risk entities.”

“We still have a long way to go to get fully compliant,” she said. However, she expects that recent beneficial ownership transparency updates issued by the Financial Action Task Force (FATF) could help countries meet this requirement.

In March 2022, the FATF revised and strengthened its beneficial ownership standards for legal persons under recommendation 24. There, it urged countries to rely on public authorities to maintain beneficial ownership registers and suggested that countries explore the use of public registers.

And in February, the FATF agreed to update recommendation 25, which addresses legal arrangements, and broadly brings its requirements in line with recommendation 24.

India Asks for a Status Check

India, during its G-20 presidency, asked the OECD Global Forum for a status check on how developing countries are faring with the AEOI framework. Notably, India didn’t ask for a status check on pillars 1 and 2 but did for AEOI.

That should raise some attention about how important the Indian presidency found this work for developing countries.

Here are some top lines from the report, released in July.

Developing countries are gradually adopting AEOI — they represent just under a third of implementing jurisdictions. However, they account for nearly 40% of the roughly €95 billion in additional revenue like tax, interest, and penalties that all AEOI countries identified between 2014 and 2022.

Developing countries are also receiving far more information than they are sending. The reciprocity of exchanges has long been a concern, but in 2022 developing countries received information on more than double the number of accounts than they shared information.

In 2022 they received more than 33 million financial accounts. In comparison, they sent information on more than 16 million financial accounts.

It appears developing countries are experiencing some fairly quick progress once they overcome the technical and capacity hurdles of implementing AEOI. That said, progress is not uniform. Although AEOI is particularly helpful in the context of VDPs, which aren’t as robust in developing countries, and their share of global VDP revenue is less than 15%.

All told, over 52% of the Global Forum’s developing country members have committed to start AEOI by a specific date. And the OECD says countries that make that commitment are largely following through. If they are delayed, it’s mostly by a year or two.

That said, it’s important to acknowledge the historical context for some countries’ participation in AEOI. Up until 2019, the overwhelming majority — nearly three quarters — of developing countries that committed to AEOI had one of the following characteristics: They were G-20 countries, they hosted a financial center, or the OECD had identified them as a jurisdiction of relevance. In all three cases, they were asked to commit to AEOI. Their success may stem from the fact that the stakes of their compliance were higher than usual.

On the other hand, most developing countries that have committed to AEOI past that date — some 80% — did so voluntarily, the OECD says. An increasing number of these countries are so-called low-resource jurisdictions that need enhanced technical support from the Global Forum. Given their capacity constraints, it remains to be seen how their experiences might affect future Global Forum statistics.

What are some paths forward for developing countries? Now that some are receiving significant amounts of data, they must use it effectively. But this is a challenge for all Global Forum members — developed and developing — and the OECD noted that it could enhance its technical support in that area.

The OECD has already started helping some countries design their AEOI portals, but additional bespoke assistance would pose some challenges given the secretariat’s full roster. Manatta said that her secretariat responded to every request for assistance that it received in 2023.

Meanwhile, it remains to be seen how the G-20 might continue to advance this work. The report requested by the Indian G-20 presidency was the first of its kind, and the question is whether the new Brazilian G-20 presidency might take a similar interest in AEOI.

Manatta said she expects the Brazilian presidency to be very much interested with ensuring developing countries are engaged in tax transparency, because they have been very vocal about it.

Looking at the CARF

In October 48 jurisdictions pledged to implement the OECD’s Crypto-Asset Reporting Framework (CARF) by 2027, but these early adopters are largely developed countries.

As for enabling developing countries to participate, Manatta said the Global Forum will follow a similar approach to the one it used when initially implementing AEOI and the common reporting standard: “Those countries that do not present a risk for the level playing field would not necessarily be asked to commit to it, but they will be encouraged to implement it if they want to do so, and we will support them.”

In the meantime, the Global Forum is preparing guidance for all members. And Manatta stressed that countries should join the framework as they feel ready. “They don’t need to step in now; it’s not a closed group so at any point they want to join, they can join,” she said.

“But in principle, those countries who have implemented or are thinking of implementing the CRS would more easily come to CARF because of the information technology requirements. It would go hand in hand,” she said.

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