Taxpaying made easier

How do you spell it?

Prawo Jazdy was the most reckless driver Ireland had ever known, travelling at unlawfully high speed around the country, pausing only to park illegally. And yet despite getting caught innumerable times, he avoided prosecution simply by changing address. Then one day a particularly gifted member of the Garda began to wonder if it all might not be a hideous mistake and looked up the Polish bandit’s name, not in the Interpol database, but a dictionary. Imagine his surprise when, as the Irish Times relates, he learned that Prawo Jazdy means “driving license”. Case solved.

Here we’re talking about minor traffic offences committed by people who were actually cooperating with the police and not trying to avoid paying, and yet the basic information wasn’t getting across. A few studies published recently deal with the far more complicated and expensive business of international tax paying, or tax dodging, depending on how you look at it.

The Tax Justice Network estimates 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 ($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. The usual term for these places offering low or zero taxes is tax haven, but TJN 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 core of the problem is that taxes are a national affair while finance is international. The OECD has been working for years to help tax administrations cooperate across borders and the OECD Model Tax Convention serves as the basis for the negotiation, application, and interpretation of over 3000 bilateral tax treaties in force around the world, and its Commentaries have been cited by courts in virtually every OECD member country, as well as in many non-OECD countries. The Convention has just been updated to allow tax authorities to ask for information on a group of taxpayers without having to name them individually, as long as the request is not a “fishing expedition” launched in the hope of netting a few tax dodgers in a batch of honest citizens.

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

Automatic Exchange contains plenty of practical advice on implementing agreements. For instance, as Prawo Jadzy shows, it’s essential to get the basics right by using a standard format to make sure each side of the exchange understands what it’s looking at in different languages, when multiple first names and family names may be involved or addresses may include both flat number and street number.

Information on taxes is sensitive, and Keeping it safe: the OECD guide on the protection of confidentiality of information exchanged for tax purposes sets out best practices related to confidentiality and provides practical guidance, including recommendations and a checklist, on how to meet an adequate level of protection.

I to by było na tyle. Jedź ostrożnie!

Useful links

OECD work on exchange of information for tax purposes

OECD Centre for Tax Policy and Administration

Patrick Love

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  1. henry1941 - 18/08/2012 Reply

    Like the case of the Polish taxi driver, the solution to this problem is absurdly simple. Most governments raise most of their revenue through taxes on persons and companies. This is asking for trouble. People are mobile and companies are abstract entities.

    If governments raised the bulk of their revenue from a tax on fixed property, the problem would go away. Land cannot be hidden or removed to a tax haven and its value is readily ascertainable public information. To those who argue that it could not raise enough revenue, it is important to understand that all other taxes are ultimately at the expense of land value. If those taxes are phased out, then land values go up and the tax base grows, making it possible to raise more revenue from that source. If the continued validity of a land title is conditional on payment of the tax, there can be no avoidance.

    Organsations like the Tax Justice Network are performing a great disservice in failing to draw attention to this reform, which they ought to be campaigning for instead of focussing on the peripheral issues which are consequences of dysfunctional tax systems.

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