This article discusses the impact of incomplete tax transparency on tax evasion. While FATCA and CRS address some forms of tax evasion, tax evaders may still use other tax evasion opportunities. Anti-tax evasion measures might not be effective or cost-efficient if tax evaders can continue evading taxes through alternative tax evasion channels. Automatic exchange of information (AEOI) might also exacerbate the social harm from tax evasion if tax evaders take costly actions to avoid reporting. This article explores policy responses that could better address the problems created by incomplete tax transparency.
FATCA and CRS have a major flaw that enables tax evaders to avoid reporting of their offshore financial assets. This noncompliance opportunity stems from the fact that many private entities are classified under FATCA and CRS as “financial institutions” (“FIs”), and as such these entities are required to report their beneficial owners. Where a tax evader holds financial assets through a private entity that he or she owns and manages, it is unlikely that this entity will report its owner to the tax authorities. At the same time, banks and other FIs that maintain the financial accounts of such entities are not required to report these entities’beneficial owners. Therefore, to avoid reporting, tax evaders can simply hold financial assets through private entities that are classified as FIs.This noncompliance opportunity is a result of a wrong choice of who to regulate. The drafters of FATCA and CRS decided to impose obligations on many private entities to report their beneficial owners, instead of imposing these obligations on banks and other FIs that maintain the financial assets of such entities. This policy also results in higher compliance costs for compliant taxpayers, and larger distortions and deadweight loss. Thus, it benefits tax evaders and harms compliant taxpayers. This Article proposes solutions that the U.S. Treasury and the OECD should consider.Building on this analysis, this Article explores a general question of regulatory design: how to choose which group of agents should be required to satisfy a regulatory obligation where that obligation can be imposed on one of two or more alternative groups of agents. When making this decision, the designers of the regulation should consider the cost-effectiveness of compliance, the potential distortions, and the likelihood of noncompliance for each of the alternative groups.
Countries may soon adopt domestic minimum taxes in response to the global minimum tax under the Global Anti-Base Erosion (GloBE) regime. These taxes, which will have priority over the global minimum tax under GloBE, could become the primary measure of ensuring that multinational enterprises (MNEs) pay a minimum level of tax. Despite their expected importance, the GloBE Model Rules and Commentary provide little guidance on several important design and policy issues concerning domestic minimum taxes. This article analyses the relevant rules in the Model Rules and the guidance in the Commentary. It also explores several questions that the OECD and the GloBE Implementation Framework should consider regarding the design of domestic minimum taxes and related issues such as collateral benefits. Domestic Minimum Tax, Global Minimum Tax, GloBE, Pillar Two, QDMTT
The United States' one-sided approach to tax transparency might lead to an unprecedented clash with the European Union (EU) in the near future. In light of the EU's deadline for the United States, the U.S. Treasury and Congress should urgently engage in a discussion on whether the United States should adopt the Common Reporting Standard (CRS) for automatic exchange of financial account information. A recent report from the U.S. Government Accountability Office considered this issue and did not recommend adopting CRS. This Essay discusses the contents of the report, as well as important considerations that were left out of the report.
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