TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, February 2, 2018

Weekly SSRN Tax Article Review And Roundup: Mazur Reviews Cockfield's How Countries Should Share Tax Information

This week, Orly Mazur (SMU) reviews a new work by Arthur J. Cockfield (Queen’s University), How Countries Should Share Tax Information.

Mazur (2017-2)Arthur Cockfield’s new work examines how tax authorities can better share tax information. In recent years, exchange of information (EOI) between countries has dramatically increased as governments worldwide have sought to protect their tax base from offshore tax evasion, international money laundering and aggressive international tax avoidance. Recent initiatives have ranged from the United States’ unilateral enactment of the Foreign Account Tax Compliance Act to the promotion of bilateral tax information agreements to multilateral efforts to share tax information, such as the common reporting standard and country-by-country reporting. Despite significant progress in this area, it remains questionable how effective these EOI reforms have been in practice.

In his new work, Cockfield persuasively argues that the current international tax regime will likely limit the effectiveness and fairness of these EOI initiatives. 

As Cockfield explains, EOI reform efforts have generally focused on how to obtain the taxpayer data, but for an EOI system to produce optimal results, acquiring data is not enough; it also needs to provide high quality tax information, while providing needed taxpayer privacy legal protections. However, this is difficult to do. Current barriers to sharing high quality data include the high transaction costs created by exchanging bulk taxpayer data, low-income countries’ lack of adequate resources to engage in automatic EOI, conflicting incentives facing governments surrounding possible EOI reforms, and taxpayer privacy concerns.

Recognizing these barriers, the work then focuses on how to improve the quality of the exchanged information. It emphasizes that high quality information requires data to be available, useful and verifiable and that the use of big data analytics can help enhance the information’s quality. Specifically, data analytics can be used to sift through the bulk data that EOI systems already provide, extract the useful information and help identify risks for audit and enforcement purposes, thereby reducing transaction costs for governments and improving the effectiveness of information exchanges. Thus, the work recommends that EOI initiatives should account for possible application of data analytics. It also suggests that transaction costs can be further reduced through the use of a global government financial registry, or possibly even “deputizing” private sector actors to conduct data analytics of publicly available information, but acknowledges the difficulties posed by non-cooperative states and limited resources. 

I am optimistic that data analytics together with further advances in machine learning and other technology will reduce transaction costs, improve the quality of tax data, and better enable tax authorities to use the information to identify untaxed income and collect more revenues. However, it is clear from this work that significant obstacles must still be overcome to have a truly fair and effective EOI system. As Cockfield points out, even with these proposed changes, an optimal EOI system will not be effective unless adequate enforcement accompanies it. For instance, we need to address financial secrecy laws and other measures countries take to undermine global financial transparency initiatives to attract foreign investment. In addition, the rapid rise in the use of cryptocurrencies will likely present (and already do present) a super tax haven that facilitates offshore tax evasion. Although countries have had some limited successes in obtaining account holder information from virtual currency exchange platforms, even the best-designed EOI system may not necessarily be able to directly capture this information. Instead, we may need to increasingly rely on data analytics and other means to indirectly discover this type of tax evasion. Thus, as cross-border tax sharing continues to be a central issue in international tax policy discussion, this work, along with Cockfield’s previous work on this issue, raises important questions and provides valuable insights for governments seeking to develop effective EOI systems that can help improve global financial transparency.

Here’s the rest of this week’s SSRN Tax Roundup:

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