TABLE OF CONTENTS I. INTRODUCTION 1093 II. TRANSACTION COSTS AND CROSS-BORDER TAX INFORMATION EXCHANGE REFORMS 1096 A. High Transaction Costs and EOI Reforms 1096 1. Taxpayers' Preference for Global Financial 1096 Opacity 2. Tax Authorities and Mixed Incentives. 1098 B. Overview of Recent Reforms 1101 1. Unilateralism via US FATCA 1102 2. Bilateralism via Tax Information Exchange 1104 Agreements 3. Multilateralism via the Common Reporting Standard 1105 4. Multilateralism and Tracking Multinational Firm Tax Payments 1105 C. Summary 1108 III. ASSESSING THE CENTRAL LEGAL AND POLICY CHALLENGES 1109 A. Information Quality 1109 1. Available Information 1109 2. Useful Information 1111 3. Verifiable Information 1113 B. Taxpayer Privacy 1114 1. Taxpayer Privacy as a Human Right 1114 2. Addressing Privacy Challenges 1117 C. Enforcement 1119 1. Reducing the Underground Economy 1119 2. Financial Secrecy Laws and Misaligned Incentives 1120 D. Summary 1122 IV. ADDRESSING KEY CHALLENGES THROUGH DATA ANALYTICS 1122 A. Information Quality and Risk Analysis 1123 1. Sources of EOI 1124 2. Sources and Data Analytics 1126 3. Data Analytics with Integrated Risk Analysis 1127 B. A Global Government Financial Registry 1127 1. The Proposals: Public versus Government Access 1127 2. Promoting Information Quality via a Government Registry 1128 C. Deputizing Private Sector Actors 1129 D. Summary 1130 V. CONCLUSION 1131 I. INTRODUCTION
Civil war has raged in South Sudan since 2013. Since the beginning of this war, corrupt elites and war profiteers have illegally diverted and hidden hundreds of millions of dollars through anonymous tax haven investments. (1) At the same time, roughly five out of ten million citizens remain and subsist in near-starvation circumstances. (2) As long as elites can profit from war and hide the monies offshore, they may not have incentives to end the conflict. International tax and finance laws allow for these secret offshore accounts and hence contribute to international human rights violations in South Sudan and elsewhere. (3)
Relatedly, a 2014 report by the United Nations Special Rapporteur for Extreme Poverty and Human Rights notes that international tax policy serves as a significant contributor to global poverty and income inequality. (4) In support, analysis of the first major tax haven data leak shows how elites in low and middle income countries move and hide money offshore and how special tax incentives allow firms to greatly reduce their global tax liabilities. (5) Capital flight from some low income countries exceeds the amount of inward foreign aid, reducing available resources and leading to devastating consequences, including starvation, disease, and human rights violations. (6)
In addition, multinational firms, which are often based in wealthier countries, operate and exploit natural resources in developing countries, at times without paying any significant tax. This leads to the so-called resource curse where resource-rich countries in the developing world frequently do not benefit from economic growth or tax revenues as a result of resource exploitation. (7) This outcome is attributable to corruption that occurs within some developing countries where bribes or gifts are provided by nonresident multinational firms to local government officials in exchange for tax concessions. (8)
The main policy response thus far to all of these challenges is to encourage countries to exchange tax and financial information so that home countries can better enforce their tax laws to inhibit undesired activities. Accordingly, designing optimal exchange of information (EOI) laws and policies for cross-border tax purposes is one of the main challenges for contemporary international tax law and policy. (9) While the roots of EOI go back to the post-World War I environment, the process began to gather real policy steam with the 1998 Organization for Economic Cooperation and Development (OECD) report on Harmful Tax Competition that threatened to blacklist any noncooperative tax haven. (10) In particular, governments now seek to encourage more and better EOI to inhibit a host of revenue-depleting activities, including aggressive international tax avoidance, offshore tax evasion, and international money laundering. (11)
Since the OECD's opening shot in the late 1990s, there has been a series of ambitious EOI reforms, a somewhat stunning development in the normally glacially paced world of international tax law (see Part II.B). Recent reforms include the US unilateral Foreign Account Tax Compliance Act (FATCA); bilateral tax information exchange agreements (TIEAs); and multilateral efforts to share bulk cross-border tax information on an automatic basis called the Common Reporting Standard (CRS) and Country-by-Country Reporting (CBCR).
This Article discusses EOI initiatives with an eye toward optimal law and policy. By providing a transaction cost perspective, it shows how governments can reduce taxpayer and government costs by focusing on (a) the exchange of high quality tax and non-tax data; (b) the provision of training and resources to low and middle income countries to facilitate international tax administration; (c) the application of data analytics to exchanged and domestic sources of tax and non-tax information; and (d) the development of taxpayer privacy safeguards.
The Article is organized as follows: Part II provides context by reviewing how taxpayers and tax authorities have mixed views on the need for global financial transparency, and how the recent and varied EOI reforms reflect this state of affairs. Part III reviews the central policy challenges involved in efficient and fair EOI: (a) the need to transfer high quality information (that is, information that is available, useful, and verifiable for tax authorities); (b) how to protect taxpayer privacy interests, which vary from country to country; and (c) how to ensure meaningful enforcement of EOI by countries that have strong financial secrecy laws and/or lack tax administration resources. Part IV discusses how the application of data analytics to transferred tax and non-tax information can help authorities audit and investigate offshore tax evasion and aggressive international tax avoidance. Part V concludes.
TRANSACTION COSTS AND CROSS-BORDER TAX INFORMATION EXCHANGE REFORMS
This Part provides context first by setting out the main information and incentive problems facing tax authorities when they seek information concerning international investment income, and second by discussing the main US and international law and policy responses to these problems.
High Transaction Costs and EOI Reforms
This subpart outlines the main transaction cost (12) challenges confronting EOI reforms and calls for legal and policy solutions that reduce transaction costs facing taxpayers and tax authorities. Depending on the context, laws and policies (and accompanying bureaucracies) can either reduce or increase these transaction costs, promoting or discouraging efficiencies. (13) Unlike the private sector, there are no competitive markets for most goods and services supplied by the public sector. As a result, "high transaction cost issues gravitate to the polity." (14) As subsequently discussed, this is certainly the case with respect to EOI initiatives within the international tax regime.
Taxpayers' Preference for Global Financial Opacity
Under the current international tax regime, governments generally do not know anything about a resident taxpayer's global activities beyond taxpayer self-disclosure. (15) Enhanced EOI would seek to change this state of affairs by providing governments with more and better sources of tax information about their resident taxpayer's global activities. Taxpayers engaged in offshore tax evasion and international money laundering clearly prefer the status quo, which makes it difficult or impossible for authorities to investigate and track their criminal activities.
Less obviously, many taxpayers engaged in legitimate cross-border economic transactions and investments also prefer the current regime with its high transaction costs and lack of global financial transparency.
Information asymmetries raise transaction costs facing taxpayers engaged in cross-border transactions and investments. (16) A taxpayer does not know what sort of assessment will take place after a tax return is filed. In particular, multinational firms pay a hedge price to guard against risks that they will be overtaxed by domestic and foreign tax authorities on their sources of cross-border income (including the risk that a public revelation of any tax plan may harm the firm's reputation and reduce the value of intangible assets like brand or goodwill). (17)
All of this hedging takes place in an environment of highly complex technical rules, making it difficult for taxpayers to predict how domestic tax laws and tax treaties will mesh with foreign tax laws. In particular, many governments now deploy increasingly technical rules--Specific Anti-Avoidance Rules (SAARs), General Anti-Avoidance Rules (GAARs), judicially promoted anti-avoidance rules, and so on--to thwart aggressive tax avoidance strategies. This technical complexity contributes to high taxpayer transaction costs due to resources deployed to assess how the rules interact as well as how they will be enforced. Many taxpayers with the resources to engage in cross-border tax planning are actually financially better off under this regime as long as their transaction costs are outweighed by global tax savings. (18)
Moreover, under the current approach taxpayers have an informational advantage over tax authorities as the latter "ex ante lacks information about the true facts and circumstances on the taxable case, whereas the taxpayer has strong incentives not to disclose all available information...," (19)
As revealed by accounting works in this area, taxpayers involved in legitimate businesses at...