Tax Transparency to Curb Illicit Financial Flows in Commodity Trading

As a global commodity-trading hub, Switzerland’s potential role in facilitating Illicit Financial Flows (IFFs) out of developing countries continues to be dissected in the policy and advocacy spheres. In their latest article, Dr. Elisabeth Bürgi Bonanomi and Dr. Irene Musselli discuss Switzerland’s legal framework and practices regarding Exchange of Information (EOI) between tax authorities and their potential utility in identifying and curbing commodity trade mispricing. Their analysis points out certain key procedural constraints in the EOI mechanisms that limit its utility. However, they also advance pragmatic solutions to deal with the constraints that could elevate EOIs as a tool in uncovering commodity trade mispricing.

Exchange of information (EOI) requests essentially refer to cross-country collaborations wherein a country’s tax authority requests information from another country on matters related to a taxpayer’s tax liability. While trade-mispricing practices require analysis of transaction-level data, EOI requests could provide tax authorities with tax, ownership and accounting information that aids their analysis. However, the mechanism in its current form appears riddled with procedural rules and principles that limit its utility vis a vis trade mispricing. These issues range from limits to the use and further transmission of the information exchanged and stringent taxpayer identification requirements to varying taxpayer rights across jurisdictions. Furthermore, rigid preconditions to the exchange in terms of legal and IT infrastructure limit the participation of developing countries, a crucial weakness since these countries remain almost disproportionately highly affected by mispricing in commodities. Particularly in regard to automatic exchange procedures, demanding administrative and IT requirements preclude developing countries from participating since they entail prohibitively high compliance hurdles and technical capacity capabilities. As a result, Switzerland’s EOI network is skewed towards high-income and upper middle-income countries.

However, we believe these obstacles can be mitigated through certain changes in the law and practice. To begin with, Switzerland should consider allowing a broad use of the information exchanged in the context of trade mispricing investigations, and proactively favour a more coordinated flow of information between tax and customs units in developing countries. In developing countries, this could dramatically improve the administration’s ability to cross-match tax-relevant information held offshore in Switzerland and domestic customs documents, in order to spot inconsistencies that point to customs fraud. Next, Switzerland could exempt low-income countries from the reciprocity requirement. These countries would receive but not send the information. They would be relieved from the necessity to put in place complex mechanisms to collect, process and send the information on their side. Considering the preponderance of customs fraud in developing countries with poor administrative capacity, extending cooperation to such jurisdictions could be a first step towards capacity building. To further strengthen capacity-building efforts in low-income countries, Switzerland could also volunteer as a partner in pilot projects that would focus on knowledge transfer by loaning out staff and experts to developing countries’ administrations. A domestic law provision, operationalized by Memoranda of Understanding (MoU), may set a legal basis to exchange information with low-income countries on a trial basis in the medium term, in the context of pilot technical assistance projects aimed at establishing the foundations for full-fledged treaty-based EOI procedures. Our analysis identifies a number of other policy options that could be legally and technically viable in the fight against IFFs. These include simplified transfer-pricing methods, hybrid public-private collaborations to improve customs’ oversight, blockchain implementation for contract transparency, and improving the playing field across jurisdictions when it comes to tax holidays and low tax rates. While these options deserve further attention in the domain, we believe the above modifications in the EOI framework could serve as low-hanging fruit with high potential rewards in tracking and curbing commodity-trade related mispricing.

Read full article here. Alternative link (CDE Version).

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