By M.V. | NEW YORK From The Economist

“A NEW single global standard on the automatic exchange of information” is unlikely to set too many pulses racing outside the world of tax diplomacy. But the standard in question, unveiled on February 13th, is an important step forward for those who want to make offshore tax-dodging harder to get away with and believe the answer lies in multilateral action.

“Globalisation of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence,” declared Angel Gurria, the secretary-general of the OECD, the (mostly) rich-country think-tank that has drawn up the standard and is the closest thing the international tax system has to a referee. “This new standard,” he said, “will ramp up international tax co-operation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”

Despite an American-led crackdown since 2008, vast amounts of undeclared money remains stashed in foreign bank accounts and investments—some of it in America itself (think Miami, see picture). The current, “on request” standard for information-swapping is flawed. It works only when tax authorities know who is hiding money from them, and even then relies on the help of the jurisdiction that holds the cash. That help isn’t always forthcoming, even in countries that offer co-operation in principle.

Tax-transparency activists want to see information exchanged automatically on a regular basis. The world has started to move in that direction as “tax fairness” has gripped the public imagination in the wake of the global financial meltdown. By far the biggest catalyst has been the Foreign Account Tax Compliance Act, or FATCA, an American law passed in 2010 and due to kick in on July 1st. This will require all foreign financial institutions to report data on American clients or face stiff penalties. Britain has forced a similar arrangement on its offshore dependencies, such as the Cayman Islands and Bermuda.

As a result, automatic exchange looks to many like the global standard-in-waiting, especially given the backing it has received from the G8 and G20. The OECD plan stems from a request from the G20 to chew over how this could be made to work in practice.

The draft standard provides for financial institutions to report information to their respective governments, which would in turn share the data with other jurisdictions once a year. The information to be reported includes not only all kinds of investment income (including interest, dividends and income from certain insurance contracts) but also account balances and proceeds from sales of financial assets. Brokers, certain investment vehicles and insurance companies would have to report, as well as banks and custodians. (This is important because some tax dodgers have moved their money from bank accounts to insurance products to keep out of the taxman’s reach.)

Just as importantly, reportable accounts include not only those held by individuals but also those in the name of trusts, foundations and other entities. The standard includes a requirement to look through passive entities to report on the individuals that ultimately control them.

However, as the Tax Justice Network, an NGO, pointed out after the draft was released: “The effectiveness of this broader scope still relies on comprehensive beneficial ownership information in registries of trusts and shell companies.” The G8 and G20 are pushing for wider adoption of ownership registries, but opinions differ on whether these should be public or open only to tax authorities and law enforcement.

Another concern is that poor countries will end up being excluded from the OECD standard. They will be expected to provide reciprocal information exchange, even though almost all tax havens are in rich countries (Angolans stuff money in Swiss banks, not the other way round) and many poor countries lack the resources to collect and check the data. One way round this would be to let some countries join on a non-reciprocal basis, but with a timetable to begin exchanging information on their non-resident savers.

Another worry, as with previous OECD initiatives, is the lack of sanctions for recalcitrant jurisdictions. The new standard is not intended to replace the on-request model but to complement it—though if it is widely adopted, countries that fail to embrace it could find themselves on black lists. Switzerland, the mother of offshore financial centres, has indicated that it will consider exchanging information automatically when it becomes the global norm. Some suspect this to be a long-term delaying tactic, since the playing field might never be completely level.

Some offshore practitioners complain that legitimate financial privacy is being trampled in the stampede to tackle dubious financial secrecy. They argue that information passed to tax authorities in some of the less cleanly governed developing countries could easily fall into the wrong hands (for instance kidnappers), endangering the safety of holders of legitimate wealth.

Mr Gurria touts the new standard as a “game changer”. In truth, the real game changer was FATCA, an extraordinary piece of extraterritorialism that sounded the death knell for the old, murky system. But the OECD still has an important role to play in forging consensus and speeding adoption of new approaches. So far 42 countries have indicated they will use the new transparency standard, including Britain, France and Italy.

For more on this story go to:

http://www.economist.com/blogs/schumpeter/2014/02/tackling-tax-evasion