Grey matters

We start with three intriguing papers that focus on the future of offshore financial centers, two quite critical of the role of OFCs but previewing important arguments that are likely to be heard again and one looking at the data on the types of banking transactions done offshore and examining the impacts of the changes in regulatory regimes on them. A fourth paper makes an argument that private hedge funds are in fact public funds, opening them to regulation and undercutting some of the arguments for the different regulatory approach taken in OFCs towards such funds.

Developing Country Perspectives on Automatic Exchange of Tax Information
Vokhid Urinov
Law, Social Justice & Global Development Journal, Vol. 1, Warwick School of Law Research Paper, Oct. 30, 2015. Available at


In 2013, the G20 made a major policy shift in international taxation by endorsing automatic exchange of information as a next global standard for tax information exchanges between states. Within a year, the OECD introduced the standard entitled “Standard for Automatic Exchange of Financial Account Information on Tax Matters.” The new standard essentially requires financial institutions in the participating countries to report information on financial accounts held by non-resident individuals and entities to their local tax authorities on a regular basis. The tax authorities then securely transmit this information to these individuals and entities’ countries of residence.

Overall, the new regime is intended to address a long-endured problem in international taxation – offshore tax evasion – and help the states to better enforce their tax laws on the foreign-source income of their residents. However, a closer analysis of the global standard, its adoption process, and the recent practice indicate that the initiative on automatic exchange of information are intended to establish a platform for regular flow of information mainly between tax havens and some developed countries. It, by and large, ignores the developing countries’ participation in the new regime. In fact, some strict requirements of the standard would prevent most developing countries from joining the regime anytime soon.

This paper argues that the new regime still offers invaluable benefits to developing countries and encourages them to join the regime. Considering and accommodating their needs in this process, must be an integral part of the initiative, and proposals for facilitating this process are offered.

CFR Comment:

Building on (in our view) the flawed estimates of the Global Financial Integrity and Tax Justice Network studies of cross-border flows, this paper argues that tax information exchange eligibility requirements and budget, technical, and administrative constraints combine to make it hard for developing countries to participate in information exchange agreements. The solution it proposes (for the OECD and G20 to “convince all secrecy jurisdictions to make a public disclosure of the aggregate value of potentially reportable accounts held by the residents of developing countries in their financial institutions) is (in our view) wildly implausible, but the analysis of the problems developing countries face in coping with the new international regime of information exchange is valuable. The proposed remedy is also likely to surface in the future when, inevitably, the existing information exchange projects fail to deliver the promised benefits.

Big Data and Tax Haven Secrecy
Arthur J. Cockfield
Florida Tax Review (forthcoming), Queen’s University Legal Research Paper No. 062, (Oct. 6, 2015). Available at


While there is now a significant literature in law, politics, economics, and other disciplines that examines tax havens, there is little information on what tax haven intermediaries — so-called offshore service providers — actually do to facilitate offshore evasion, international money laundering and the financing of global terrorism. To provide insight into this secret world of tax havens, this article relies on the author’s study of big data derived from the financial data leak obtained by the International Consortium for Investigative Journalists (ICIJ). A hypothetical involving Breaking Bad’s Walter White is used to explain how offshore service providers facilitate global financial crimes. The article deploys a transaction cost perspective to assist in understanding the information and incentive problems revealed by the ICIJ data leak, including how tax haven secrecy enables elites in non-democratic countries to transfer their monies for ultimate investment in stable democratic countries. The approach also emphasizes how, even in a world of perfect information, political incentives persist that thwart cooperative efforts to inhibit global financial crimes.

CFR Comment:

This thoughtful, extended discussion of the implications of the ICIJ data is worth a read, as it summarizes the key arguments being used by critics of international financial transactions to argue for more regulation. It also suggests how the ICIJ database can be deployed to bolster those arguments. It also provides a preview of how the data being amassed under FATCA and its analogues may end up being used.

Global Taxation after the Crisis: Why BEPS and MAATM are Inadequate Responses,
and What Can Be Done About It
Reuven S. Avi-Yonah and Haiyan Xu
U of Michigan Public Law Research Paper No. 494 (January 15, 2016) available at


In the early 21st century most cross-border income is untaxed. In the case of multinationals, this is because the source jurisdiction either lacks the authority to tax because in the age of electronic commerce it is easy to avoid the required physical presence in the source country; or because source jurisdictions grant tax holidays to multinationals. Residence jurisdictions do not tax active income currently for fear that multinationals will establish their headquarters elsewhere, as the current US inversion saga confirms. In the case of individuals, exchange of information has not proven effective in deterring tax evasion via offshore secrecy jurisdictions, and no withholding taxes are levied by source jurisdictions. The problem with this state of affairs is that in the absence of taxation of cross-border flows, the progressive income tax cannot be maintained, because it is easier for the wealthy to earn cross-border income. The result has been a world-wide shift to taxing consumption rather than income.

But consumption taxes are regressive, and cannot by definition reach the unconsumed income of the rich. And without progressive taxation, it will not be possible to maintain the public’s commitment to social insurance that is globalization’s main defense against growing inequality. While both the MAATM and the BEPS projects are helpful, neither is likely to solve the underlying issues described above. In both cases the problem is that too many countries need to cooperate for the regime to be effective. In the case of MAATM, every tax haven has to sign on because otherwise all the funds can be routed through the non-cooperating haven.

We are far from there, and the US has not implemented MAATM (it has implemented FATCA, but that applies only for U.S. residents and can be avoided by using financial institutions with no U.S. presence.) In the case of BEPS, the project only addresses artificial profit shifting, not tax competition, and it only applies to the OECD and G20, not to the many source countries outside these two organizations. Thus, it is likely that multinationals can avoid BEPS by sourcing income in countries that are not subject to it. Fundamentally, if the income tax is to be preserved in the 21st century, multilateral solutions are needed. Both MAATM and BEPS are such solutions but they are hampered by the focus on residence jurisdictions for passive income and source jurisdictions for active income. There are too many residence jurisdictions in the first case, since every country has rich people, and too many source jurisdictions in the second, since multinationals operate globally. Thus, in our opinion it is time to re-evaluate the benefits principle. Most of the current issues can be solved if we taxed passive income primarily at source and active income primarily at residence.

CFR Comment:

Prof. Avi-Yonah is one  of the leading tax scholars and a good barometer of what is likely to come next as high-tax jurisdictions try to limit tax competition. This is a must read for those wondering what comes after BEPS.

Voluntary Disclosure Schemes for Offshore Tax Evasion: An Analysis
Matthew Gould and Matthew D. Rablen
CESifo Working Paper Series No. 5750 (Feb. 11, 2016) available at


In recent years, tax authorities worldwide have implemented voluntary disclosure schemes to recover tax on offshore investments. Such schemes are characterized by the acquisition of non-audit information on offshore holdings, and a subsequent opportunity for affected taxpayers to make a voluntary disclosure. Accepted disclosures are subject to a discounted rate, but verified under-disclosure attracts a higher penalty. We characterize the optimal scheme and show that an optimal scheme can generate a Pareto-improvement over the optimal auditing equilibrium without a scheme, and can stimulate legitimate offshore investment activity. We show when a tax authority optimally gives incentives for truthful disclosure, and when it does not. The analysis yields practical design insights for policymakers.

CFR Comment:

A theoretical approach to an important compliance problem, this paper should add to the evidence supporting onshore tax authorities’ use of voluntary disclosure schemes.


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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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