Introduction
Tax Information Exchange Agreements (TIEA) are agreements developed by the Organization for Economic Co-operation and Development (OECD). The purpose of the TIEAs was mainly to reduce the harmful tax practices. They also seek to facilitate international cooperation with the help of exchange of information surrounding tax matters such as details about tax evaders who hide money in offshore places/tax havens which fall under banking secrecy jurisdictions such as countries like Cayman Islands, and Argentina etc. British Virgin Islands, Bermuda, Bahamas, Cayman Islands, and Argentina etc.
These agreements are more important than ever, as countries are losing out a big chunk of money in tax mainly due to international tax abuse and evasion by multinational corporations. Estimates reveal that globally nations collectively are incurring losses worth approximately $427 billion. India alone incurs losses amounting to $10.3 billion which around Rs 75,000 crores. Therefore, it was pertinent that India takes up this challenge against global tax abuse and tax evasion head on by entering into Tax Information exchange Agreements.Owing to the silent crises going, India has enforced TIEAs with multiple countries over the years, as an effort to extract sensitive information about tax evaders.
This paper first will explore the origins and current status of TIEAs in the global context, then shift the focus to the Indian context. We will also touch upon the crises of global tax abuse and tax evasion. Further the paper will analyze to what extent has India been successful in this feat. The paper will also discuss the current Information exchange mechanism that India follows and will draw a comparative analysis with Information exchange models of other countries. The main question which the paper seeks to address is whether the TIEAs actually work or is just an arrangement which looks good on paper.
Origins of Tax Information Exchange Agreements
Tax Information Exchange Agreements (TIEA) is a bilateral or multilateral agreement between the competent authorities of the respective countries for the specific purpose of exchange of information and to promote international co-operation and transparency in tax matters. The quintessential motive of these agreements was to curb harmful tax practices such as global tax abuse, corporate tax avoidance, transnational criminal activities and other forms of illicit financial flows. According to a report India’s illicit financial flows stood at 83.5 billion dollars, ranking India 3rd out of 135 countries and another study revealed prominent personalities, NRIs unaccountably held approximately 420 billion dollars in Tax havens.[1]
This scale of money laundering and global tax abuse has to be mainly credited to the existence of tax havens and bank secrecy jurisdictions scattered around the world, such as the Cayman Islands, Bahamas, Switzerland, Marshall Islands etc. A secrecy jurisdiction provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool. According to the Tax Justice network (TJN), “A secrecy jurisdiction provides facilities that enable people or entities escape or undermine the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool.”[2] In these offshore financial centers, the country’s tax laws are structured in such a way that it avoids any sort involvement from local law enforcement and there is little or no regulation on the bank transactions. This anonymity is a big incentive for MNCs, politicians, businessmen and criminals to stash their unaccounted wealth also known black money from the tax and law enforcement authorities.
For example, Banking secrecy jurisdictions such as Switzerland, Luxembourg used to often refuse disclosure of any information on the ground that disclosing personal account details is a punishable offence under their domestic laws and any disclosure of information of bank account holders a punishable offence. Art 47, Swiss Banking Law of 1947 makes it a federal crime to disclose the information or activity of clients to foreign entities, third parties or Swiss authorities without consent or for a criminal complaint. After the 2008 global financial crisis the issue of corporate tax avoidance and global tax abuse came into limelight putiing tax havens and bank secrecy jurisdiction under political pressure to comply with the global tax transparency standards. Major internet leaks such as the Panama Papers or the Pandora Papers tend to disclose the identity individuals and the amount hidden, that being said these leaks of no official and legitimate backing.
This is a problem in almost all the countries around the world, which in turn as long lasting and sometimes irreparable damage on the global Economy. There was a desperate need for world powers to come together and start breaking down in these harmful tax practices. This led to the creation of Tax Information Exchange Agreements, an international regime developed by the Organization for Economic Cooperation and Development (OECD). The OECD Global Forum Working Group on Effective Exchange of Information in 2002 addressed over the rising problems of harmful tax practices mainly due to the lack of an efficient exchange of information system.[3]
India’s path so far
Exchange of Information in India has been a priority for quite some time now, India signed its first TIEA in 2010 with the Bahamas and has entered into a total of 21 such agreements with countries like Argentina, Bahamas, Bahrain, , Bermuda, British Virgin Islands, Cayman Islands, Isle of Man, Jersey, Liberia, Sar, Maldives, Seychelles, Liechtenstein and Marshall Islands.[4] Tax Information Exchange Agreements is a subset of Exchange of Information (EOI), India’s first EOI was signed around 1965 itself, making India one of the first developing democracies to back the International tax cooperation movement. India also an Automatic Exchange of Information framework in place where after a period of 9 months the information is automatically transferred. Even though India was an early proponent of this regime, India’s current EOI framework does face challenges with respect to effective implementation. We have signed multiple TIEAs and there hasn’t been any notable breakthrough in extracting information about the billions stashed in number of offshore banks. It is also important to note that these agreements are not binding in nature, making it a more a challenging process than it is.
The current framework as it stands makes the information received via these agreements to be treated with the highest confidentiality. The information can only be disclosed to relevant authorities and may be disclosed in public court proceedings or judicial proceedings. Moreover, the competent authorities are not obliged to disclose information that is at any variance with administrative practice of the State or against the public policy of the state – a provision which is almost always invoked to escape accountability. Moreover, these secrecy jurisdictions aren’t fully cooperative with developing countries citing reasons such as the confidentiality standards of the respective authorities is not up to the mark.
There exists a long list of strategies used by individuals to exploit the loopholes and dodge the implications of TIEA, such as opening bank accounts or shell corporations in the name of a friend or relative, also known as Benami in the Indian context. According to the Panama Paper leaks, Russian President Vladimir Putin had parked undisclosed wealth under the name of his best friend, this is just one such example. A lot people open accounts in these offshore banks under the names of individuals they have no nexus with. The current TIEA regime will only go as far to provide information of bank transactions with respect to the names requested by the Indian authorities, hence missing out on all the Benami transactions. Another complex method is creating multiple and complicated subsidiaries of companies and scattering them across different tax havens and bank secrecy jurisdiction, if India doesn’t have a treaty will the tax havens it will become an extremely excruciating task to tie up the records to one particular individual. Even if India has TIEAs with the other countries, it won’t be an easy process. Getting a second citizenship in theses jurisdictions is another route opted by many, as the TIEA only has jurisdiction on foreigner and not the citizens of the country.
Comparative Analysis with USA
One of the only countries which has been successful to extract sensitive and meaningful information through bilateral arrangements is the United States of America. They are able to do this under this under their domestic law, Foreign Account Tax Compliance Act, 2010 (FATCA). FATCA obligates every foreign bank is to provide financial information of every account holding US person/citizen directly to IRS. FATCA aims to prevent tax avoidance by American people and businesses who invest, operate, and generate taxable income in other countries. While it is not unlawful to have an offshore account, failing to report it is, because the United States taxes all of its residents’ income and assets on a global scale.[5]
Inter-Governmental Agreements are signed and banks first report information to tax departments of their countries which pass it on to IRS.[6] These agreements require these institutions to report any instances of harmful tax practices such as tax evasion, and also empower these institutions to withhold tax if the documental requirements of any individual are not in compliance.[7] As a result, all FATCA-registered institutions must immediately report such account holders (with all accessible information), making a direct and significant impact on multinational corporations and foreign financial institutions situated in the United States.
Way forward
In a developing country like India, where funds directed at the right channels is of the utmost importance, a large chunk of money is being illegally laundered away from the Indian tax net. One of the key reasons India is not able to take full advantage of these arrangements is the poorly drafted treaties it has with the other bank secrecy jurisdictions. India has to come with a foolproof legal framework, thereby leaving these bank secrecy jurisdictions with little or no loopholes to exploit. India has to invest heavily in its physical infrastructure in order to facilitate these Tax Information Exchange Agreements smoothly. With growing threats of cyber-attacks and in situation where confidentiality is key, India should prioritize in updating its technical infrastructure to support these agreements and revisit it from time to time. Indian Tax departments today have an alarming number of vacancies making the domestic investigation a tedious job. There is an urgent need to bring in more specialists into the department, we have to get the right man for the right job as these tasks require immense administrative support. India needs to develop an institutionalized technical environment rather than depending on few officials, this is very important for a successful implement. In the case of transfers of these officials the entire progress and system comes to a grinding halt.
[1] (“At USD 83.5 Bn, India Has 3Rd Highest Trade-Related Illicit Financial Flow Globally: Report” 2021)
[2] (on behalf of Robert J. Fedor 2021)
[3] (“Tax Information Exchange Agreements (Tieas) – OECD” 2021)
[4] (“India-Marshall Islands Tax Information Exchange Agreement Enters Into Effect” 2021)
[5] (“Foreign Account Tax Compliance Act (FATCA)” 2021)
[6] (“Foreign Account Tax Compliance Act (FATCA) | Internal Revenue Service” 2021)
[7] (“What Is FATCA? Know The Importance Of FATCA For Nris | DBS Treasures” 2021)
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