So are the French, the British, the Americans, the Germans and others.
Under pressure from their citizens after the financial crisis of 2008, the G20 countries – a club of the major economies of the world, including India – compelled offshore tax havens to sign bilateral treaties to share information on bank deposits held by their nationals. More than 300 information exchange treaties were signed between April and December 2009.
But these treaties were not very successful in bringing back the funds, a new study has found.
Neils Johannsen of the University of Copenhagen and Gabriel Zucman of the London School of Economics studied bilateral bank deposit data for 13 major tax havens from 2003 to 2011.
They found that the treaties had "a modest impact on bank deposits in tax havens: a treaty between say France and Switzerland causes an approximately 11% decline in the Swiss deposits held by French residents."
Second, rather than repatriating funds, "tax evaders shifted deposits to havens not covered by a treaty with their home country. The crackdown thus caused a relocation of deposits at the benefit of the least compliant havens."
Part of the reason why the treaties failed to work was that they provided for information “upon request”, which meant governments had to first gather leads on possible tax evaders to identify accounts for which they could place requests. Given the nature of tax evasion, gathering such information was extremely difficult.
Another reason for the failure was that the treaties were bilateral – signed between two countries – and hence allowed for movement of countries not covered by treaties.
Johannsen and Zucman suggest that instead of bilateral treaties, "a comprehensive network of treaties providing for automatic exchange of information" might help make tax evasion impossible.
Network of treaties
This is precisely the direction in which the world is moving.
It started with the United States of America passing the Foreign Account Tax Compliance Act in 2010. Under FATCA, foreign financial institutions must report information on accounts held by US taxpayers or risk being charged a punitive 30% withholding tax on payments cleared through the US banking system.
FATCA was initially greeted by consternation – it was seen as an American law with extra-territorial reach. But with America offering to share reciprocal information, several countries lined up to sign intergovernmental agreements. As many as 48 countries – including India – have either signed or agreed to sign the agreement.
Last year in April, inspired by the FATCA, France, Germany, Italy, Spain and the UK decided to exchange information amongst themselves. They further endorsed the proposal of the Organisation for Economic Cooperation and Development for a new global standard for automatic exchange of tax information.
The OECD defines automatic exchange of information as "systematic and periodic transmission of 'bulk' taxpayer information" by the source country to the residence country of the account holder.
“With the signing of the OECD Ministerial declaration in May 2014, more than 60 jurisdictions have committed to implement the new single global standard on automatic exchange of information," said Monica Bhatia, head of the OECD's Global Forum on Transparency and Exchange of Information for Tax Purposes , in an email to Scroll.in. "These jurisdictions include all OECD countries, all G20 countries and other significant financial centres such as Switzerland, Singapore, Liechtenstein and the Cayman Islands. More countries are expected to commit to this standard over the next few months. This ensures that the standard will be truly international and implemented across the globe
What does this mean for India, which has agreed to adopt the standard?
“The advantage of automatic exchange is that India would receive the information on its residents automatically without having to make a specific request and without having first identified instances of non-compliance," Bhatia said. "This is expected have a significant deterrent effect on taxpayers who seek to hide money abroad and will help enforcement efforts of the tax administration.”
Disadvantage for developing countries
But there are concerns that the condition of "reciprocity" in such exchanges would disadvantage developing countries. "Anyone who participates in AEOI has to put on place the legal framework and the infrastructure to collect and provide information to treaty partners as well the infrastructure to receive and use the information received," she said. "One of the most important requirements is the ability to safeguard the information exchanged and ensure its proper use."
Creating such infrastructure might be costly and unaffordable for poorer countries, which could get excluded. This is problematic – for one, more illicit funds flow out of developing countries than the developed ones.
“To understand why reciprocity is a problem, consider first how many wealthy Nigerians are likely to stash assets secretly in Switzerland – then consider how many wealthy Swiss are likely to have located their secret stashes in Nigeria," says the UK-based advocacy group, Tax Justice Network, in its critique of the OECD standard. "Nearly all the active tax havens are located in rich countries, and the flow of illicit money is in one direction only: from poor countries to rich."
Two, the failure to include all countries would leave open room for illicit funds to move to places that have not participated in the new standard.
Lastly, as Tax Justice Network points out, the new standard does not fully take on arguably the biggest vehicles of tax evasion: trusts and foundations that hold assets and make investments without disclosing the names of those who have put in money. "The standard only requires a single settlor to be named, instead of all settlors and contributors of assets to trusts." To end the tax evasion of the rich, TJN says the veil of secrecy of trusts and foundations must be lifted.
What does this mean for India's fight against black money?
The flow of illicit money is an international problem and cannot be tackled by one country alone. A new global architecture is needed to fight illicit funds.
But while that architecture takes shape, there is something that India can do on its own: reform and regulate the sectors within its domestic economy that create, multiply and store black money. That neither requires an international treaty nor a high-powered special investigative team.
The first story in this series examined where India's black money is stashed away: not in Switzerland, as is popularly believed, but in real estate in the subcontinent. Read it here.
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