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Banking transparency: Where everyone knows your account balance

The United States imposes an income tax on its citizens regardless of where they live. If you earn money abroad, the IRS wants to know about it -- and, of course, take its share. Similarly, if you earn money in the United States but process that income through a foreign bank, the IRS wants to know about it -- and, of course, take its share.

Enforcement is tricky, though, and a good portion of the trickiness comes from foreign banks not being forthcoming about their depositors. In some cases, rather than regularly sharing the information with governments, financial institutions would reply to specific requests if there was proof of wrongdoing. You want it? Show me why, then come and get it. The good old days of truly anonymous bank accounts had evolved into the pretty good days of limited information sharing.

Foreign governments have finally thrown in the towel. The finance ministers of the G20 have formally adopted the standard for the automatic exchange of tax information.

It is important to note that the information is not shared between financial institutions. Banks, brokers and investment houses will send their information to their governments. The governments will then exchange the information annually.

Of course, the financial institutions may not have all the information their governments have promised to exchange. That means they will turn to their customers to fill in the blanks. And the customers will have no choice but to hand the information over.

The information in question relates to individual and "entity" accounts. Entities are more than just business organizations; the category includes trusts and foundations, as well. The data points include balances and interest, but also every kind of investment income. For entities, sales proceeds will be added to the list.

There will be no anonymity in reporting. The objective, after all, is transparency. That means that the data will include the names of individuals that control reported entities.

The objective is transparency, but the goal is to uncover taxpayers that are trying to avoid their tax obligations. Financial institutions are not sharing depositor information with their governments just for the heck of it. The governments are not swapping data just as a way to convince taxpayers to come clean. The point is to make it easier for governments to find individuals and organizations that are not paying taxes their governments say they owe.

Sources:

OECD, "Standard for Automatic Exchange of Financial Account Information in Tax Matters," July 21, 2014

SwissInfo.ch, "Tax cheats will have nowhere to hide," Andreas Keiser, Sept. 19, 2014 

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