There are increasing policy concerns that aggressive international tax avoidance and offshore tax evasion significantly reduce government revenues. In particular, for some low income countries the amount of capital flight (where elites move and hide monies offshore in tax havens) exceeds foreign aid. Governments struggle to enforce their tax laws to constrain these actions, but are inhibited by a lack of information concerning international capital flows. The main international policy response to these developments has been to promote global financial transparency through heightened cross-border exchanges of tax information. The paper discusses elements of optimal cross-border tax information exchange laws and policies by focusing on three key challenges: information quality, taxpayer privacy, and enforcement. Relatedly, the paper discusses how the exchange of automatic ‘big tax data’ combined with data analytics can help address the challenges.Cockfield seeks to find a solution that balances the need of the state for extensive information in order to protect the integrity of the income tax system against the need of the individual for protection from abuse by the state. That is no easy balance to strike. From the paper:
All of [the recent information gathering and exchange] efforts seek to provide governments with more and better tax information, and reduce costs through agreement on underlying EOI rules and principles. The reforms, however, largely do not address how financial secrecy laws subvert global financial transparency initiatives. Nor do they address legal technical complexity that raises transaction costs, and makes it even harder for low and middle income countries to implement and enforce EOI. While the EOI reforms are positive steps, given an environment of high transaction costs it may be difficult to make progress in addressing key policy challenges....
Data availability, usefulness and verifiability are three components of high quality information that can help governments pursue their cross-border investigations and audits. In particular, transferred information should be relatable to domestic tax identification measures, and checked against third party reporting, and withholding tax disclosures. Once this is done, governments can conduct analysis to determine audit risk by focusing on issues such as taxpayer segmentation, dealings between the taxpayer and offshore service providers, and cross-indexing tax and financial information against non-tax data (e.g., insurance policy disclosures).
Against this desire for high quality tax information stands (shrugs?) taxpayer privacy concerns. The apprehensions arise from the varied levels of domestic legal protection afforded to privacy rights, along with the risk of abuse or misuse of transferred information. Accordingly, broader multilateral agreement on privacy protections is likely a prerequisite to effective EOI. This hoped-for cooperation is hindered by the fact that many countries refuse to abolish their financial secrecy laws, which stands as one of the main barriers to optimal reform.My view is that maintaining the integrity of the income tax system appears to require building the panopticon, and much more besides. The steady decline of support for coherent corporate income taxation makes greater and greater individual surveillance necessary, while also making personal income taxation harder. I am not sure where the point lies at which the costs and risks attendant to building the necessary compliance and enforcement infrastructure exceed the benefits of maintaining personal taxes based on income.