Automatic exchange of information is a data sharing practice that prevents corporations and individuals from abusing bank accounts they hold abroad to hide the true value of their wealth and pay less tax than they should at home. Under automatic exchange of information, a country takes the information it has on the financial activity of individuals and businesses who are operating within its borders but are resident in, aka permanently living in or headquartered in, another country and shares that information with that country. The allows countries to know the true value of their residents’ wealth and make sure they pay the right amount of tax.
For example, if Ana is a resident of Brazil (ie she has a home in Brazil and lives there for most of the year) and has a bank account in Luxembourg, then under automatic exchange of information, Luxembourg will automatically share information about Ana’s bank account with Brazil, helping Brazil’s tax authorities check whether Ana is abusing her bank account in Luxembourg to hide the true value of her wealth and pay less tax than she owes in Brazil.
They key element here is that the information is shared automatically, not upon request or in return for a fee or diplomatic favour. By sharing information automatically, countries can be alerted right away to a resident abusing a foreign bank account to shortchange on their tax responsibilities at home – rather than having to first investigate whether the resident is abusing tax, which may be impossible to do without the information on their foreign bank account, then track down the country where they suspect the foreign bank account is located and then obtain the information through a potentially slow, cumbersome and costly request process. If the resident has foreign bank accounts in more than one country, the country will have to repeat the process until it has a full picture of the resident’s financial affairs. In that time, the resident could have moved their money and assets to another country and can continue to do so in an endless game of cat and mouse. Automatic exchange of information nips the chase in the bud, giving countries the information they need to track down and clamp down on tax abusers without delay.
The Tax Justice Network first called for automatic exchange of information to become a standard global policy in 2005, at which point virtually no countries were exchanging information automatically and our proposal was considered to be too complicated, expensive and idealistic to implement. Some even believed the amount of money held offshore was too small to be worth collecting information on.
Today, after years of campaigning, nearly 100 countries are automatically exchanging information with each other. The information shared covers over 84 million accounts containing a total of $11 trillion.
By making financial transparency a default setting in our tax systems instead of an optional feature, automatic exchange of information has allowed governments today to bring $11 trillion under the rule of law.
But there is still plenty of room to improve. Much like a chain, our economies are all linked together and the robustness of our financial transparency is only as strong as the weakest link. As long as a handful of secretive jurisdictions continue to not share information, tax abusers and criminals can continue to find places to hide their illicit financial affairs.