Article on the Emerging Consensus for Taxing Offshore Accounts (1/3/13)

Itai Grinberg, The Battle Over Taxing Offshore Accounts,  60 UCLA L. Rev. 304 (2012), here.

ABSTRACT 

The international tax system is in the midst of a contest between automatic information reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts.  At stake is the extent of many countries’ capacity to tax investment income of individuals and profits of closely held businesses through an income tax in an increasingly financially integrated world. 

Incongruent initiatives of the European Union, the Organisation for Economic Cooperation and Development (OECD), Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts.  The growing consensus that financial institutions should act as cross-border tax intermediaries represents a remarkable shift in international norms that has yet to be recognized in the academic literature. 

The debate, however, is about how financial institutions should serve as cross-border tax intermediaries, and for which countries.  Different outcomes in this contest portend starkly different futures for the extent of cross-border tax administrative assistance available to most countries.  The triumph of an automatic information reporting model over an anonymous withholding model is key to (1) allowing for the taxation of principal, (2) ensuring that most countries are included in the benefit of financial institutions serving as cross-border tax intermediaries, (3) encouraging taxpayer engagement with the polity, and (4) supporting sovereign policy flexibility, especially in emerging and developing economies.  This Article closes with proposals to help reconcile the emerging automatic information exchange approaches to produce an effective multilateral system.

AUTHOR 

Itai Grinberg is an Associate Professor at Georgetown University Law Center.  Until the summer of 2011, he served in the Office of International Tax Counsel at the U.S. Department of the Treasury.  In that capacity, he was substantially involved in the Obama administration’s legislative and regulatory efforts to address offshore tax evasion, and he also represented the United States at the OECD and at the Global Forum on Transparency and Exchange of Information for Tax Purposes.  

In the opening of the article (pp. 311-313), the author states:

This Article makes three key contributions.  First, it highlights the commonality between automatic information exchange and anonymous withholding, and it argues that we are witnessing the birth of a new international regime in which financial institutions act as cross-border tax intermediaries with respect to offshore accounts.  Second, it explains why automatic information reporting solutions are preferable to anonymous withholding solutions.  Finally, this Article begins to address how to reconcile the emerging and incongruent proposals for automatic information reporting in a manner that will promote the emergence of a multilateral automatic information reporting system.

And the Conclusion:

CONCLUSION 

In just a few short years, the world has gone from assuming that financial institutions generally do not support residence country cross-border taxation to arguing about how they should act as tax agents for residence countries.  This represents a remarkable shift in international norms.  Focusing exclusively on the contest between the information reporting and anonymous withholding models for a new regime inappropriately obscures the growing consensus.  The competing initiatives for cross-border tax administrative assistance put forth by the United States, the European Union, the OECD, and Switzerland, and the response of financial institutions to those proposals, all highlight the development of a new international regime in which financial institutions will be cross-border tax intermediaries.  

Nevertheless, a great deal is at stake in the choices currently being made between partial anonymous withholding and a broadly available automatic information reporting regime for cross-border administrative assistance.  The choice between the two approaches is real even if the consequences of choosing between the available alternatives seem somewhat distant for most jurisdictions.  Path dependence and the tendency for institutional structures in this area to become embedded suggest that suboptimal decisions made by a small number of powerful actors may dictate outcomes for both those actors and the rest of the world for a prolonged period.  

Anonymous withholding is not likely to be made available to most countries.  In contrast, information reporting provides a workable architecture for an emerging regime of financial institutions acting as cross-border tax intermediaries in which most countries may reasonably aspire to participate.  Even though some jurisdictions can be counted on to resist a broadly available automatic information reporting system, if these countries become outliers, international regimes will evolve around them, and eventually pressure may make noncompliance with the regime unsustainable.  

Emerging-economy governments and other stakeholders, including civil society, have many reasons beyond sheer revenue to weigh in on the choices being made by the major actors in this evolutionary moment.  Information reporting can help sustain tax morale in a financially integrated world.  Information reporting may also allow capital income taxation to play a role in building a liberal democracy that is accepted as legitimate by its people and to encourage taxpayers to engage with the polity and demand government accountability.  Anonymous withholding, in contrast, institutionalizes differentiated treatment for the most sophisticated taxpayers from the rest of society.  Further, anonymous withholding systems leave open the possibility that asset management jurisdictions may one day decline to implement a country’s changes in its own tax regime, thereby undermining domestic authority as well as policy flexibility, especially for less powerful states. 

 Together, the emerging models presented by the European Union, the OECD, and the United States hold within them the seeds of a workable automatic information reporting regime.  Multilateral vehicles also already exist to work toward a multilateral system.  For instance, the Coordinating Body of the Multilateral Convention has the authority to study methods and procedures to increase international cooperation in tax matters, and the Multilateral Convention provides the legal authority for multilateral automatic information exchange.  International tax policymakers should seize the present evolutionary moment and push for the emerging automatic information exchange approaches to be reconciled in a manner that can support the tax administration needs of developed and emerging economies alike.