FATCA/CRS: Promises, Promises

These days countries all around the world are agreeing to Automatic Information Exchange systems to share taxpayer information with each other.   The United States kick-started the trend with FATCA (the Foreign Account Tax Compliance Act), and early last year the OECD unveiled the CRS (Common Reporting Standard).  

No nation-state gives up sovereignty unless there is a perceived gain. The larger context, and the way Automatic Information Exchange has been sold to electorates, is the worldwide War on Tax Evasion.
It's a simple message that resonates with voters everywhere:  If we sign up for these systems, politicians promise, we will catch the traitorous tax-evading 1% ,  Not only will that bring in lots and lots of cash, but we will have struck a mighty blow on behalf of justice and fairness.  Who could possibly argue with that? (Citizens who have something to hide is the usual response.)

People should know better than to believe the promises of politicians.  George Orwell put it beautifully when he said,  "Political language... is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind."

So where is the wind?  The fact that the information to be exchanged under FATCA and the CRS is not about taxes owed, it's about chunks of money sitting out there in the world with names and nationalities attached to them.  If X has 50,000 Euros sitting in an account in Y country, it does not automatically mean that he or she owes taxes on that money, or that the account was not reported to the relevant authorities.

The CRS asks for the following information:  Name, address, taxpayer identification number, date and place of birth, account numbers, account balances, the total gross amount of interest, dividends or other income, and mortgage payments.

There is no field in CRS (or FATCA) that says, "Tax compliant/Not tax compliant."  From these raw data it is simply not possible to draw a straight line from an existing account to a tax evader.  The information provided must be checked against tax records, and double-checked with the individual's citizenship and residency records to determine if the person really is eligible for an audit by a country's tax authorities.

The exchange of information by itself is no guarantee that tax money will be flowing like water into a country's coffers from abroad. It is perfectly possible that a country will receive information from another country, and, after investigation,  discover that most of the high-value accounts have (with the help of international tax attorneys) been reported and all taxes paid, and the only accounts left on the table are ones that are low-value and won't yield much revenue.

Everyone should understand this:  countries have no idea right now how many reportable accounts are out there, how much money is in them, and how much of that money is taxable.   They are making promises based on guesses.

But there other ways that this information exchange systems can be used that have nothing to do with tax evasion in a globalized world.   Two that come to mind are:

Tracking migrants and controlling global mobility:  In principle, with a unique international identification number, people become trackable wherever they or their money go in the world.  A US Person moves from Sacramento, California to Shanghai, China to  Paris, France and every time he opens a bank account, there he is with a local address.  That's not a bug; it's a feature.

Many countries like the US do not have a reliable means of tracking where their citizens go, and what they do, when they leave the home country.  FATCA/CRS serves as a kind of extraterritorial census and a way for governments to track emigrants.  Or where they suspect that some homeland citizens have connections to other countries (not always ones they like), these agreements give governments yet another way to keep an eye on them.  With that in mind, it might be very interesting for the French government to know that someone in France has a house and a mortgage in  Algeria.  Or that a citizen has authority over the accounts of an NGO in Latin America or Africa.

Taxing the diaspora:  Most countries in the world have residence-based tax systems.  What that means is that only residents of their country get chased for taxes either in that country itself,or passive or active income earned abroad.  The US is unique in that it has a citizenship-based tax system which means a US citizen is taxed on his income wherever he lives. If he lives in Japan, he must file tax returns locally and with the United States on whatever he made in both countries.

There are countries that dream of doing the same thing.  Imagine all those French in California.  Or all the Chinese in Canada.  Or the Japanese communities in France. So far, citizenship-based taxation US-style has been something of a bust because there has never been a reliable system for tracking Americans abroad, much less what they were doing or earning.

So we could look at FATCA/CRS as an experiment:  Has the US finally found an efficient enforcement mechanism for their citizenship-based tax system?

International migrants everywhere should be very concerned if the answer turns out to be "yes".  Because if CBT works, then there is every incentive for states to say to their diasporas, "You may have emigrated, but as long as we claim you, you will share your fortune by paying taxes to the home country in addition to the ones you pay locally."

Everyone is shouting so loudly about tax evasion that it's hard to think clearly over the din.  So many vague promises on one hand, and so little evidence on the other.  One way to cut through the self-righteous rhetoric is to ask some simple questions:   What are the success criteria for an Automatic Information Exchange system?  How much tax money will each country recover if FATCA and CRS "work"?  Not back-of-the-envelope guesstimates, but hard data and real numbers backed by serious studies.

So, is it the money or the information that make FATCA and CRS attractive?

Both.

Politicians' promises of  money, money, money may be so much hot air; but the information itself is solid gold.