The financial upheaval of the last few years, a growing national debt, and the recent crackdown on Americans using offshore accounts to evade taxes, have all brought more and more scrutiny to the issue of international banking secrecy of late. But while this has naturally resulted in growing frustration over the stubbornness of tax havens like Switzerland, Luxembourg, and Bermuda, one important question remains: Are we hypocrites?
Could the United States be withholding information about bank accounts held by foreign nationals from their own governments – the exact thing we rail against other nations for doing? Are we therefore party to tax evasion in nations around the world?
The answer: Not really (anymore).
On April 17, 2012 new IRS regulations went into effect, requiring banks and other financial institutions to report annual interest payments in excess of $10 to the governments of certain Non-Resident Alien (NRA) accountholders beginning in 2013. The rule applies to the 78 countries with which the US has treaties or tax information sharing agreements, and is meant to facilitate the exchange of information from other countries and thereby strike a major blow against anyone looking to avoid income taxes at home by stashing money abroad.
“The United States has constructed an expansive network of international agreements, including income tax or other conventions and bilateral agreements relating to the exchange of tax information,” the new rule’s published objective reads. “These information exchange relationships are based on cooperation and reciprocity. A jurisdiction’s willingness to share information with the IRS to combat offshore tax evasion by U.S. taxpayers depends, in large part, on the ability of the IRS to exchange information that will assist that jurisdiction in combating offshore tax evasion by its own residents.”
Some of the surprising nations with which the United States will share tax information, given their historical lack of banking transparency are Austria, the British Virgin Islands, Monaco, Lichtenstein, Luxembourg, Switzerland, and Venezuela. Unfortunately, other popular tax havens like the Cayman Islands and the United Arab Emirates are not included.
The new IRS rule replaces a system under which the US was only required to share information about bank accounts held by Canadian nationals with their home government. However, it does not go as far as previously proposed regulations that called for the US to share NRA bank account information with any and all governments.
In other words, the banking lobby proved too strong to achieve full international banking transparency, but a treat-thy-neighbor rationale was enough to take a major step in that direction.
The fact of the matter, however, is that criminals can still stash their cash in some of the most popular and notorious financial hideaways in the world. They can still evade taxes, thereby placing an undue burden on their homeland’s economy, as well as launder money in order to support terrorism and the sale of drugs and arms.
The next step in curtailing such practices should be for the US, the European Union, and any of the remaining 78 countries in the current tax sharing coalition to team up and seek to ostracize holdout nations from the world banking system. Something clearly needs to be done, and while many of the world’s biggest economic players are obviously taking steps in the right direction, the job is not yet finished.