1 Introduction
1.1 Picture of the Problem
It is estimated that the offshore banking industry shelters over $7.5 trillion, which costs governments lost revenues of at least $200 billion a year.1 Another estimate puts the amount of money in offshore tax haven accounts in 2010 at $21 trillion (such a figure is comparable to the size of the economies of the United States and Japan combined).2 A recently announced “big data” leak containing over 2.5 million tax haven documents revealed dealings of over 70,000 taxpayers and also of over 120,000 offshore corporations and trusts.3 The big data (which was followed by an even bigger data leak in 2016) was uncovered by over eighty-six journalists in forty-two countries.4 Commenting on the leak as part of his ground-breaking research on big data and tax haven secrecy, Professor Arthur Cockfield observed, “For the first time, the secret world of tax havens was revealed in great detail.”5 He notes that offshore service providers — such as trust and finance companies — take advantage of tax haven secrecy to help individuals engage in global financial crime through various tactics including assisting clients to launder or “normalize” illegal income so that funds can be repatriated to their home.6
As discussed in Chapter 2, such practices interfere with tax policy objectives that many nations have adopted to promote equity in the administration of their tax system. Countries like Canada and the United States, which tax their residents (and citizens in the United States) on income that they earn throughout the world, rely on the ability to exchange information with tax havens and other countries to administer their tax system, and combat tax evasion.7 During the past eight years, countries have signed hundreds of single-purpose treaties to exchange information, known as tax information exchange agreements (TIEAs). Canada has signed twenty-two of these TIEAs. In 2013, the G20 and the OECD decided to move to adopt a standard to combat offshore tax evasion: automatic exchange of information (Automatic Exchange).8 International crime, international terrorism, and money laundering also benefit from bank secrecy and the ability to hide billions of dollars in offshore accounts. TIEAs were created by the OECD in 2002 to bolster information exchange as a means to fight tax evasion.9 Since 2002 more than 1,500 exchange of information (EOI) relationships (including TIEAs) have been entered into by governments.10 Very little has been published about these special treaties, including about Canada’s own growing TIEA network. Moreover, how Canada and the United States exchange taxpayer information with other jurisdictions and with each other is poorly understood, especially at a time of arguably the most significant developments in the field such as Automatic Exchange and the Foreign Account Tax Compliance Act.11 The global effort toward Automatic Exchange, described in Chapter 8, is likely to result in increased use of TIEAs as fiscal agencies ramp up their offshore tax examinations.
1.2 Objectives of This Research
The primary objective of this book is to evaluate the capacity of TIEAs specifically and EOI more generally to be an effective tool against offshore tax evasion. This book does so, first, by reviewing the policy objectives of TIEAs to later determine their performance against these stated objectives. Second, it reviews domestic and international alternative legal mechanisms to obtain foreign-based taxpayer information to later evaluate the effectiveness of TIEAs in combatting offshore tax evasion as compared with these alternative legal mechanisms, particularly those used by the United States. The central argument of this research is that in their current form TIEAs offer fiscal authorities like CRA and other fiscal agencies around the world a very limited capability to uncover existing tax evasion by residents of Canada and other OECD member and developing countries. This research reviews the TIEA network in Canada, the development and implementation of TIEAs by the OECD and the Global Forum on Transparency and Exchange of Information (Global Forum) from 1998 through 2014, and recent experiences in EOI between the United States and Switzerland.
Recently, the United States observed that bank transparency for tax purposes is necessary to restore integrity and stability to financial institutions.12 This appears to be a new policy objective for transparency and information exchange in international taxation, one echoing the troubled international economic times of the present. In examining the complex subject of EOI, this book evaluates the effectiveness of strategies like TIEAs, Automatic Exchange, and FATCA as tools in the war against tax evasion. The research identifies deficiencies in TIEAs and more generally in EOI with tax havens that will impact Automatic Exchange and prescribes more effective arrangements to deal with these problems.
For governments and fiscal agencies the world over seeking to beat back tax cheats, this research analyzes the collective efforts of the OECD and the 121 nation members of the Global Forum from 1998 to 2014 to combat bank secrecy and offshore tax evasion. In so doing, this book offers insights into why TIEAs did not work and why Automatic Exchange is not the magic bullet that the G20 and OECD say it is, and provides strategies for governments that will help them win the war against tax evasion.13
For financial institutions and financial service providers, this book first and foremost offers a fundamental understanding of the new legal regimes surrounding global EOI and explains their interrelationship and policy objectives. The Common Reporting Standard for automatic exchange of information contains some of the most complex concepts and definitions used today in international tax law, and they will need to be well understood by employees in financial institutions and their professional advisers. Knowledge of and education about the sweeping legal regimes that surround EOI must be the first line of defence for institutions seeking to comply with the law. Reliance on technology alone (e.g., software programs to implement FATCA) will not suffice to prepare global organizations to understand how these legal regimes and their extraterritorial enforcement by the United States may interact with their products, services, technology, systems, and clients. It is hoped that armed with the foundational knowledge in this book, banks and financial service providers in Canada, the United States, the European Union, and the 132-member Global Forum will be in a better position to develop new strategies so that they may avoid being the subject of a criminal investigation by the IRS and costly sanctions (which may potentially be in the millions or billions of dollars) imposed by the US Department of Justice. As explained further in the recommendations in Chapter 11, the key to success for banks and financial service providers is recognizing that the challenges they face are both multijurisdictional and multifunctional across their vast organizations.
For banks, law firms, accounting firms, trust companies, and other organizations in the wealth management industry, this book also provides critical insight into the international enforcement powers of CRA and the IRS in light of the new era of EOI. For wealth management organizations with US clients, in particular those located outside the United States, this book underscores the imperative to create professional practice policies around advising delinquent US account holders and their executors and heirs. The preparation of wills and testamentary trusts for high net worth families is no longer sufficient where the client’s family members include US persons. Today, preserving wealth demands that estate planners and financial planners advise their clients to take an expert look at the integrity and efficiency of their tax and foreign-reporting affairs, in particular where there exists a legal structure with foreign entities. Many e...