24 April 2013

Deutsche Bank: FATCA paving the way - Exchange of tax information continues to make international headway

Seldom has there been such feverish activity: both the speed and the number of international initiatives to improve the taxation of cross-border investment income as well as the broad media interest in the topic have swelled to dimensions rarely seen before.

The US has paved the way for a faster and more comprehensive introduction of an automatic exchange of information and given new impetus to negotiations at the EU and OECD levels. The dire fiscal situation in many states is the knockout argument for many states to give up their opposition to greater cooperation on tax issues. Two weeks ago a joint declaration by the finance ministers of Germany, France, the UK, Italy and Spain seizes on the FATCA agreement in order to speed up the implementation of an expanded automatic exchange of information for tax purposes at the EU level. It also threatens the strict banking secrecy of a number of EU states which have now indicated that they will relinquish or reassess it...

The initiatives... present financial authorities and payment institutions such as banks (since investments are mainly processed via the latter) with major administrative challenges – above all if these measures remain uncoordinated.  A system that is as standardised and coordinated as possible to achieve a cost-efficient taxation of investments therefore makes sense. To the extent that an expanded exchange of information results in the aversion of serious competitive disadvantages for investors and companies, this helps to prevent taxation from having distorting effects on capital allocation. A harmonisation and simplification of international procedures on as broad a basis as possible is necessary – however, there are ultimately limits to this. This is a result of the differences between countries' taxation systems, i.e the application of national tax laws which diverge considerably – even in the EU. Furthermore, it has to be taken into account that not only the principles of international taxation but also of many national taxation systems have their origins in the first half of the 20th century. This makes it virtually impossible to appropriately capture today's highly integrated value chains and the new business models and technologies (in which the location of economic activity is different from the location where profits are taxed). This often results not only in double taxation but also to taxes not being levied and thus to competitive distortions. These issues cannot be solved via a more comprehensive exchange of information alone – this requires further and more extensive changes to and coordination of the tax systems.

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