If you have mercifully avoided TIEAs thus far in your life, you may not be able to avoid them much longer. That's especially true if you invest or do business offshore. The reason: purportedly to establish a "level playing field" for international investment, high tax countries have forced low tax jurisdictions to sign dozens of TIEAs in recent months. These agreements make it much easier for revenue authorities in high tax countries to obtain banking records and other financial records in numerous low-tax jurisdictions.
The Organization for Economic Cooperation and Development (OECD) leads this ongoing jihad against low tax jurisdictions. As they labor in a sumptuous palace in Paris, OECD bureaucrats enjoy diplomatic status. Unlike most of us, they receive a tax-free salary and benefits. And while working tax-free, they prepare lists of countries they deem insufficiently cooperative with revenue authorities in OECD—and mostly high-tax—countries.
Earlier this year, the OECD issued its latest "grey list" of countries that have promised to boost cooperation in tax investigations, but have not yet done so. One of the most important demands the OECD made to countries on this list is to ratify at least a dozen TIEAs. Countries that fail to do so may eventually find themselves on an OECD "black list." And that could result, according to the OECD, in potential isolation from the global financial system. (Think North Korea or Iran.) Not surprisingly, countries on the grey list are trying to get off of it as quickly as they can.
OECD efforts to end what it calls "harmful tax competition" began in the 1990s. But it wasn't until 2009 their efforts came to fruition. Citing the need to uphold OECD "standards," several high-tax countries pressured Switzerland and other offshore havens on the grey list to amend their laws to require information exchange with foreign revenue authorities.
The United States led this effort. And the results have been a spectacular success, at least from the U.S. Treasury's perspective. First, U.S. prosecutors persuaded the Swiss government to release the names and account records of nearly 5,000 alleged tax evaders from Swiss banking giant UBS. But that was just the beginning. The United States also forced Switzerland to sign a TIEA.
The U.S.-Switzerland TIEA isn't that bad, as TIEAs go. It only obligates Switzerland to release information if U.S. investigators give Swiss authorities a specific name or names of suspected tax evaders. The agreement doesn't allow the IRS to engage in "fishing expeditions" and ask, e.g., for account records of unnamed U.S. taxpayers in one or more (or all) Swiss banks. (Earlier this year, the IRS tried, but failed, to get the account records of 52,000 unnamed UBS depositors via a so-called "John Doe" subpoena.)
To get off the OECD's most recent grey list, Switzerland signed this TIEA and 11 other TIEAs with high-tax countries. All the TIEAs require Switzerland to lift bank secrecy laws in tax investigations of named taxpayers. None of them permit fishing expeditions by revenue authorities. And yesterday, Sept. 23, the Swiss government announced that it expects the OECD to promptly remove it from its latest grey list.
Austria, another country with strict bank secrecy laws, completed a similar process. The OECD dutifully removed it from the grey list on Sept. 22.
But the devil, again, is in the details. Numerous smaller jurisdictions also find themselves on the grey list. And because they lack the diplomatic clout of Switzerland or Austria, it's much harder for them to get off of it.
Case in point is a small independent low-tax jurisdiction that, for the moment, will remain nameless. I recently had the opportunity to review internal government correspondence from on its progress in meeting the OECD's demands. This jurisdiction already has signed, or is about to sign the requisite dozen TIEAs. But it's still on the OECD grey list, because it hasn't been able to come to terms with the U.S. Treasury Department.
In negotiations with this jurisdiction, the U.S. Treasury has demanded a sort of super-TIEA. The proposed agreement would allow IRS authorities to automatically enter the jurisdiction to conduct interviews and gather evidence. It would also authorize use of John Doe subpoenas for the same purpose.
Naturally, this jurisdiction doesn't want to sign the agreement. However, if it fails to do so, the United States may prevent the OECD from removing this nation from the grey list. Forget the fact that this country has complied with all the OECD's demands. If it doesn't submit to IRS blackmail, it may stay on the grey list.
By the way, you might be wondering: what's the world's largest tax haven with the highest degree of secrecy? Surprise, surprise: it's the United States. If you're a non-resident alien investor, you can arrange your U.S. investments so that you pay little if any tax. Except in the case of Canada, the IRS won't tell your home country about the income you earn in the United States. And you can still set up essentially anonymous banking relationships, perfectly legally.
Why isn't the United States at the top of the OECD grey list? That's a no-brainer: it's a matter of might makes right. And it shows how the game really works, behind the scenes. The devil, after all, is in the details.
Copyright © 2009 by Mark Nestmann
Update: Since I originally posted this blog, low-tax jurisdictions have ratified hundreds of TIEAs with high-tax OECD members. The TIEAs are very one sided and provide little if any benefit to the low-tax jurisdictions bullied into signing them. But under threats of blacklisting and isolation from global funds transfer networks, they have had little choice but to comply. Bank secrecy has now effectively ended, at least with respect to investigations by tax authorities in OECD member countries.
(An earlier version of this post was published by The Sovereign Society, https://banyanhill.com/)
