International Data Exchange and the fight against illicit financial flows

Tax evasion is the illegal evasion of taxes by individuals, corporations and/or trusts. These illicit financial flows result in countries missing out on tax revenues. Through international data exchange like FATCA and CRS, countries are sharing financial data and taking the first step into fighting these illicit financial flows.

On October 2nd in Rome, Italy the World Bank held a one day workshop titled “Automatic Exchange of Information (AEOI), access to sources of information to improve compliance and prevent tax fraud”. The workshop focused on topics such as the design of tax regimes, exchange of information between tax authorities, gathering and using information from open sources as well as early warning mechanisms to prevent tax fraud.

Identifying illicit tax revenue

International Data Exchange between countries is important for better identifying of illicit tax revenue flows and for any country to improve its domestic tax mobilization. For developing countries, estimates of illicit flows vary from US$500 billion to US$1 trillion annually. A December 2014 report from Global Financial Integrity titled “Illicit Financial Flows from the Developing World: 2003-2012,” finds that developing and emerging economies lost a combined US$6.6 trillion in illicit financial flows from 2003 through 2012. Illicit outflows increased at a staggering average rate of 9.4 percent per year—roughly twice as fast as global GDP.

For many years there have been ongoing discussions on the importance of data exchange and how to better share financial data between countries. As per 2015 the USA’s FATCA (Foreign Account Tax Compliance Act) regulation is in effect for US taxpayers, and OECD countries will follow with the CRS (Common Reporting Standard) regulation as per 2017.

Impact on tax authority

Turning on the switch for international data exchange is not done easily and it is already clear that the new FATCA regulations have a great impact on tax authorities and governments. Tax authorities that have signed the IGA (Inter-Governmental Agreement) with the USA have to collect the information regarding US taxpayers from all Financial Institutions in their respective countries. They then have to filter and combine all data and distribute it to the IRS, all to be handled secure and highly encrypted as it contains classified information of account holders. The IRS in turn will send back FATCA alerts (discrepancy notifications) as well as confidential account information on citizens of the respective country that it is sharing information with.

Buy a proven solution

Mutual data exchange is essential information to fight the illicit revenue streams and get a better handle of lost tax revenues. But as you can see it can easily become a big hassle for a tax authority. Tax authorities need a streamlined process and automated technical system that meets international requirements. Building this non-core process in-house can result in unfavorable results, high cost of maintenance, big cost overruns and increased risk of non-compliance. Underestimating the task at hand can have a big impact on a tax authority. Buying a proven solution that meets all international standards, is the much safer route to choose.

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