Exchange of information: Automatically selective

Swiss bank accounts of Nigeria's moneyed elite remain excluded from Automatic Exchange of Information. Lagos is Africa's largest and fastest growing metropolis and home to the richest Africans, yet the city is also a world leader when it comes to inequality. Photo: Ikeja City Mall, Lagos.
Article as analysis
The Swiss Government wants to extend automatic exchange of financial account information on potential tax dodgers selectively to some advanced developing countries. And to G20 members China and Russia. Stormy parliamentary debates lie ahead.

Switzerland officially introduced the AEOI, the Automatic Exchange of Information for tax purposes in January. It will be put into practice for the first time next year and bank account data will be transmitted to the tax authorities of various countries regarding their citizens. This is a huge step for a country which only a short time ago was viewed worldwide as a tax haven par excellence.

Naturally, Switzerland is not the only country introducing the AEOI. The new system of tax transparency has now become the world standard. Over 100 countries have already signed the Multilateral Competent Authority Agreement (MCAA). They are now all in the process of implementing the AEOI reciprocally through bilateral agreements. Over half of them will begin sharing information as early as this year, in many cases with 40 or more partner countries. Switzerland is lagging these pioneers in two ways simultaneously: not only is it implementing the AEOI one year later, but is also limiting it to 38 partners for the time being. These are in fact the 28 EU Member Countries and a few hand-picked non-EU industrialized countries.

By 2019 – extension to selected emerging countries…

So far there are no developing and emerging countries on the list of countries with which Switzerland is certain to implement the AEOI. But this is now about to change. In two almost simultaneous public consultation procedures, the Federal Council has proposed the extension of the AEOI to several more countries by 2019. The new candidates include emerging countries and advanced developing countries in Latin America (Argentina, Brazil, Chile, Costa Rica, Colombia, Mexico and Uruguay) and Asia (India, Indonesia and Malaysia), Mauritius, the Seychelles and South Africa.

From a development standpoint, the inclusion of these new partners in the AEOI system is highly commendable, even though they are all countries with a relatively high income. These countries would otherwise continue to lose revenue through tax flight abroad – revenue that not only is theirs, but would also enable them to further their development. Alliance Sud will be striving to ensure that the Federal Council's proposed extension finds a majority in Parliament.

…and a few States not guided by the rule of law

We already know that there will be heated parliamentary debates. Under the same package the Federal Council also plans to extend the AEOI to influential G20 members China, Russia and Saudi Arabia. These are countries with major shortcomings as regards the rule of law. The human rights organization Freedom House has classified all three as "not free" in matters of political and civil rights. Nor are they particularly meticulous when it comes to data protection. National-conservative Councillors in Federal Berne have already promised to raise a hue and cry during the parliamentary discussions on information exchange with such undemocratic States.

It should be noted however that opposition from many parliamentarians is often very low-key when it comes to free trade agreements or arms trading with partner countries where the rule of law leaves much to be desired. In such cases, moral considerations take second place. The arguments being wielded in national-conservative circles against the extension of the AEOI are an unpleasant reminder of a long-outdated ideology of justification whereby the sole purpose of Swiss banking secrecy was to protect upright people abroad from abuses by extortionate governments.

The fact is that those who welcome the lack of information exchange are mostly tax dodgers who are removing from their countries substantial amounts of money that should go towards education, healthcare or transportation infrastructure – and who still nonetheless profit from these public goods. These are generally members of the economic elite, whose wealth is obvious even in the absence of any information about a Swiss bank account. The AEOI is hardly relevant when it comes to government abuses.

Who is affected by the AEOI?

Parliamentarians from the political left are less concerned about the rights of possible tax dodgers when it comes to the AEOI with countries like China and Russia. Their concern is much more with foreign nationals who not simply stash away their untaxed fortunes in Switzerland, but rather live here. They fear that in the case of these persons, the exchange of sensitive bank data may not least of all prove harmful to family members who remain behind in their home countries.

Yet this fear is unfounded. The AEOI only concerns information regarding account holders who, under the laws of partner countries, are resident in those countries for tax purposes. Generally (and more specifically in the cases of Russia and China), this presumes that one spends at least half the year in the country concerned. Hence, people who reside permanently in Switzerland almost invariably remain unaffected by the AEOI.

In addition, the OECD Global Forum on Tax Transparency regularly monitors the data protection provisions of all countries that have signed the Multilateral Competent Authority Agreement. The idea is to ensure that transmitted information remains with the tax authorities and serves exclusively for tax collection purposes. The Federal Council reserves the right, in the practical implementation of the AEOI, to transmit data only when the partner country concerned performs satisfactorily in this test. Should there still be provable abuses despite this, the AEOI may be suspended. The Multilateral Competent Authority Agreement also provides for this.

Cherry picking

The real problem with the Federal Council's concept for extending the AEOI is really a different one: the selective choice of partner countries. The Federal Council's list of candidates by no means includes the names of all countries that have signed the multilateral framework agreement on the AEOI. Missing from the list for example is Ghana, a country being supported by the State Secretariat for the Economy (Seco) with funds from the development budget, in its efforts to increase its tax revenues. Why this is so is not clear from the consultation documentation.

Last but not least, the Swiss AEOI list still does not contain the poorest developing countries. This means that their elites can continue to squirrel away untaxed funds to Swiss bank accounts undisturbed. Admittedly, none of these countries has so far signed the multilateral framework agreement either. In many cases the reason may be the lack of the requisite infrastructure for collecting data on possible foreign account holders and automatically transmitting it to their tax authorities. The costly technical preparedness for reciprocal information exchange is nevertheless a prerequisite for joining the multilateral system. Some progressive industrialized countries have therefore voluntarily entered into bilateral AEOI pilot projects with poorer developing countries, under which they provisionally waive the reciprocity requirement. From a development standpoint, Switzerland would do well to emulate these countries.