Logistics Brief



A Paradigm Shift Seeking Transparency in Global Tax Law

August 10, 2013

By Susan Grbic, Stephen Brecher

After an era of banking secrecy defined by unreported offshore accounts and abusive transactions, a tangible shift in policy is rapidly taking shape. Spearheaded by the Organization for Economic Cooperation and Development (OECD) and supported by the U.S. Foreign Account Tax Compliance Act (FATCA), nations and international financial centers alike are being left with little choice but to join the tide of tax transparency, as new international standards and agreements are forged.

Leading the charge is the OECD with its Global Forum on Transparency and Exchange of Information for Tax Purposes. The Global Forum, in which 120 countries are participating, has extracted a commitment from all involved to exchange bank information upon request in a bid to end bank secrecy.

Pursuant to this commitment, over 900 bilateral agreements have been signed, and the OECD has acknowledged its intent to push for the implementation of automatic information exchange. Such cooperation between nations is fundamental to effectively combating tax evasion and rolling back the secrecy that has pervaded international finance for too long.

The U.S. has been remarkably active in the transparency arena since UBS’s admission of conspiracy to hide U.S. taxpayer assets in February 2009. In addition to working with the OECD, the U.S has pursued increased reporting of offshore accounts, and unveiled domestic transparency initiatives such as Schedule UTP for the reporting of uncertain tax positions.

Perhaps the U.S.’s most significant and ambitious development in transparency is FATCA, with its unprecedented scope, and global implications. Enacted on March 18, 2010, FATCA aims to crackdown on offshore tax evasion through increased information reporting and withholding. Through the implementation of inter-governmental agreements negotiated with Partner countries, FATCA facilitates the automatic exchange of information between the IRS and partner countries or foreign financial institutions.

Indications are that FATCA will not be a one-way street. A footnote found in the revenue tables of President Obama’s 2014 Budget Proposal describes an entry as “Provid[ing] for reciprocal reporting of information in connection with the implementation of the Foreign Account Tax Compliance Act.” This signals the administration’s intention that U.S. financial institutions will share in the FATCA burden and collect additional information on foreign account holders.

The impending institution of FATCA is having a profound effect on international financial centers around the world. Jurisdictions commonly considered “tax havens” for their favorable tax treatment and commitment to secrecy have shown a willingness to negotiate with the U.S. on the implementation of FATCA, a signal that the change in paradigm carries true potential for lasting global change.

Taking a cue from FATCA, France, Germany, Italy, Spain and the United Kingdom have announced their intention to pursue a similar model in Europe. This is in addition to the “Son of FATCA” agreements entered into by the United Kingdom with its crown dependencies, and signals the breadth of appeal for international arrangements aimed at facilitating the automatic exchange of information in an effort to eliminate tax evasion and secrecy.

Further U.S. initiatives are also in effect, with the IRS active in its pursuit of aggressive tax positions, unveiling Schedule UTP in 2010. Schedule UTP is a disclosure initiative that aims to identify overly aggressive tax positions by mandating disclosure of uncertain tax positions for which an entity has recorded a reserve in its financial statement. While the efficacy of the program has been questioned, it is clear that the intent of the IRS is to identify aggressive tax positions and hold the entities that engage in them accountable.

From an idealistic perspective, it is difficult to argue that increased transparency is not an admirable goal to be pursued. However, the cost of such pursuit, and the collateral infringement, may be substantial. Since the OECD set out to establish international “information on request” treaties, it has become clear that the ultimate goal is in fact the automatic exchange of information.

Establishing the necessary infrastructure and procedures to facilitate this automatic exchange will be costly, but there is no doubt that in light of the initiatives being undertaken both in the U.S. and abroad, that policy has taken a strong step in the direction of eliminating secrecy and the tax evasion it supports.


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