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The Hypocritical HegemonHow the United States Shapes Global Rules against Tax Evasion and Avoidance$

Lukas Hakelberg

Print publication date: 2020

Print ISBN-13: 9781501748011

Published to Cornell Scholarship Online: September 2020

DOI: 10.7591/cornell/9781501748011.001.0001

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Change and Stability in Global Tax Policy

Change and Stability in Global Tax Policy

Chapter:
(p.1) 1 Change and Stability in Global Tax Policy
Source:
(p.iii) The Hypocritical Hegemon
Author(s):

Lukas Hakelberg

Publisher:
Cornell University Press
DOI:10.7591/cornell/9781501748011.003.0001

Abstract and Keywords

This chapter takes a look at the ability of a great power like the United States to unilaterally effect fundamental change in international tax policy through coercion. It first shows that the structural constraints precluding a common interest in countermeasures to tax evasion were still in place when the US Congress passed the Foreign Account Tax Compliance Act (FATCA). Second, the chapter reveals that there was no need for normative change, because regulative norms have never consistently prevented the United States from interfering with the legal systems of tax havens. From there, the chapter considers when a great power like the United States can effect fundamental change in international tax policy and the domestic tax policies of less powerful countries through coercion. It argues that a government reaches great power status if it controls an internal market large enough to reduce its dependence on international trade and investment relative to the government's negotiating partners and uses its regulatory capacity to effectively restrict market access for foreign firms or investors.

Keywords:   tax evasion, taxation, international tax policy, coercion, regulative norms, tax havens, domestic tax policies, great power status, bank secrecy, information exchange

On October 29, 2014, fifty-one governments gathered in Berlin to abolish bank secrecy. At the seventh meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), they signed a multilateral agreement committing signatories to automatically inform one another of bank accounts held by their respective citizens and other local residents. Since then, an additional fifty governments have joined the agreement, including all jurisdictions that have traditionally figured on tax haven blacklists for refusing to grant administrative assistance to foreign tax authorities (see table 1.1). Since 2018, these governments have been bound by contract to implement a common reporting standard (CRS) developed by the Organisation for Economic Co-operation and Development (OECD). The CRS obliges governments to adopt rules requiring financial institutions to regularly report all capital income held by nonresident individuals and entities, as well as their account balances. In addition, domestic banks need to look through interposed trusts or shell companies when determining the beneficial owner of a new account, and also have to review ownership data for existing accounts containing more than $250,000. Global Forum members will monitor every signatory’s CRS implementation in regular peer reviews and publish corresponding country reports (OECD 2014e, 2014g).

For countries formally known for their financial secrecy, the adoption of the CRS was a fundamental regulatory change. In order to comply, they had to dismantle secrecy laws, which had previously prevented the automatic reporting of client information from banks to tax authorities. The affected countries had defended such legal provisions for decades, and some had even given these provisions (p.2) constitutional status. Switzerland, for instance, upgraded the breach of bank secrecy from civil to criminal offense when the French government raided the Paris offices of several Swiss banks in 1932 and refused any judicial cooperation on that basis (Guex 2000). Likewise, Austria added a provision to its constitution according to which parliament could change the bank secrecy law only with a two-thirds majority shortly before the country submitted its application for European Union (EU) membership in 1989. This should protect the secrecy provisions against requests for cooperation in tax matters (Bundesministerium für Finanzen 1988). Indeed, when the EU introduced the automatic exchange of information (AEI) on interest payments, Austria and Luxembourg were granted a temporary opt-out because of their bank secrecy laws. When the remaining member states attempted to end the opt-out, the two countries exploited the unanimity requirement for EU decisions on taxation to veto a corresponding directive six times in a row between 2009 and 2012 (Hakelberg 2015a).

Table 1.1 CRS Adoptions among Major Secrecy Jurisdictions as of January 15, 2018

Jurisdiction

OECD CRS Standard

Signed Multilateral Agreement

Passed Implementing Legislation

Austria

yes

yes

Bahamas

yes

yes

Bahrain

yes

yes

Belgium

yes

yes

Bermuda

yes

yes

Cayman Islands

yes

yes

Curaçao

yes

yes

Guernsey

yes

yes

Hong Kong

yes (China)

yes

Isle of Man

yes

yes

Jersey

yes

yes

Luxembourg

yes

yes

Macao

yes (China)

yes

Panama

yes

yes

Singapore

yes

yes

Switzerland

yes

yes

Note: Major secrecy jurisdictions include all countries identified as offshore financial centers by the Bank for International Settlements (BIS) for “dealing primarily with nonresidents and/or in foreign currency on a scale out of proportion to the size of the host economy” (BIS 2016a, 59) and those OECD members (Austria, Belgium, Luxembourg, Switzerland) that had refused to participate in the AEI on interest payments introduced by the EU in 2003 (Rixen and Schwarz 2012).

Sources: BIS (2016b); OECD (2017a, 2018b).

(p.3) Their governments’ success in defending bank secrecy at the international level enabled Austrian, Luxembourgian, and Swiss banks to boost their business with foreign clients. During the first decade of the twenty-first century, Swiss financial institutions managed almost half of the world’s households’ offshore financial wealth, amounting to $2 trillion or 9 percent of global gross domestic product (GDP) (Zucman 2013, 33). At the same time, Austrian and Luxembourgian banks were the largest recipients of cross-border deposits from households residing in other Eurozone countries. In 2010, Luxembourg reported €20 billion, Austria €9 billion, and Germany—the EU’s largest economy—merely €8 billion in bank deposits from the remaining member states of the currency union (Hakelberg 2015b, 411). This influx of foreign capital led to impressive growth rates in the financial sectors of the recipient countries but also made them highly dependent on investment from nonresidents. For instance, foreign financial wealth managed by Swiss banks equaled three times the amount of domestic wealth in 2007 (Zucman 2013, online appendix). Yet this influx was essentially driven by the promise of confidentiality, which foreign investors could exploit for tax evasion purposes among other things.1 The latest research suggests that 80 percent of the portfolios held by Scandinavian clients with the Swiss branch of HSBC had not been declared to tax authorities by their owners during the 2000s (Alstadsæter, Johannesen, and Zucman 2017b). Likewise, US Senate investigations revealed that 90 percent of the accounts held by US clients with Union Bank of Switzerland (UBS) and Credit Suisse over the same time period had not been declared to the Internal Revenue Service (IRS) (Levin and Coleman 2008; Levin and McCain 2014). Still, the Austrian, Luxembourgian, and Swiss governments ended up conceding their financial sectors’ key competitive advantage by adopting the CRS.

In addition to the economic costs, this decision also came with important political costs. For citizens in financially discreet countries, bank secrecy and its defense had often become part of their national identity. Many Austrians, for instance, believed in a narrative according to which bank secrecy had been introduced to restore trust in the country’s financial system and regularize black market activity after World War II. A high level of privacy, so the story goes, should motivate Austrians to entrust their savings to local banks instead of hiding money in their mattresses.2 As citizens became increasingly accustomed to the inability of the state to gather information on their accounts, bank secrecy attained the status of a “holy cow” in Austrian politics. No party dared to touch it for fear of the electoral consequences.3 Likewise, many Swiss were proud of their bank secrecy law, which they wrongly believed was introduced to protect the assets of German Jews persecuted by the Nazis.4 Policymakers exploited these narratives, despite their shaky empirical foundations, to raise popular support for bank secrecy. In (p.4) policymakers’ view, bank secrecy was a legitimate particularity rooted in historical circumstances that had nothing to do with the poaching of tax base from neighboring countries. In domestic politics, defending bank secrecy against outside pressure thus meant to preserve a national characteristic (Blocher 2006; Strache 2013). Nonetheless, the Austrian and Swiss governments expended considerable political capital to overcome domestic opposition to the CRS.

Given their previous defense of bank secrecy and the important economic and political costs linked to its abolition, why did tax havens eventually agree to automatically exchange account information with foreign governments? In this book, I argue that the end of bank secrecy in traditional secrecy jurisdictions is the result of coercion by the United States. On March 18, 2010, the US Congress passed the Obama administration’s second stimulus package after the financial crisis. Attached to this package was a little-noticed law that contained a credible threat of sanctions against secrecy jurisdictions: the Foreign Account Tax Compliance Act (FATCA). The act obliges foreign financial institutions to automatically report US clients and their capital income to the IRS. If a bank fails to comply, the agency is granted authority to withhold 30 percent of the payments this institution receives from US sources (Mollohan 2010). Since the United States controls the world’s largest financial market as well as central financial infrastructure like clearing houses and other interbank settlement systems, no foreign bank was willing to divest from the United States to circumvent the new reporting requirements. Instead, foreign banks began to lobby their home governments to abolish bank secrecy and other provisions preventing their compliance with FATCA (Emmenegger 2017; Grinberg 2012).

By dismantling the legal barriers to the dissemination of bank account information, however, secrecy jurisdictions also became vulnerable to information requests from third countries. Because of a most-favored-nation clause contained in an EU directive, Austria and Luxembourg were, for instance, legally obliged to exchange information with other EU member states after signing FATCA agreements with the US Treasury. Likewise, Switzerland could no longer fend off the EU’s request to participate in its AEI system after it had agreed to automatically report information on bank accounts held by US residents to the IRS. By making this concession, the Swiss government had ended its principled defense of bank secrecy. Hence, Switzerland’s traditional legal argument against the provision of administrative assistance to its European neighbors was no longer tenable. For financial institutions in Switzerland and other former secrecy jurisdictions, their governments’ decision to transmit account data to more than one foreign government created several challenges. If other secrecy jurisdictions did not accept the AEI, former secrecy jurisdictions could lose hidden capital to foreign competitors still providing secrecy benefits. If foreign governments requested different (p.5) types of information, former secrecy jurisdictions’ compliance burden would increase. Therefore, traditional secrecy jurisdictions joined major developed economies in calling for a level regulatory playing field: that is, governments around the world should apply a single global AEI standard based on FATCA. Against this background, the OECD developed the CRS and the multilateral agreement for its implementation (see chapter 5).

Yet a fundamental limitation remains. After imposing the AEI on the rest of the world, the Obama administration eventually refused to reciprocate the reporting of account information under its bilateral FATCA treaties and did not sign the multilateral agreement binding governments to the CRS (cf. OECD 2018b; US Treasury 2012a). Consequently, US banks currently have to follow much weaker transparency standards than banks in other countries. For instance, US banks are still under no obligation to look through trusts when determining account ownership (cf. FinCEN 2016). Unlike in countries respecting the CRS, in the United States foreign account holders can thus remain anonymous when they put their financial wealth in trust. Accordingly, the number of corresponding contractual relationships registered in secretive US states such as Nevada or South Dakota has rapidly increased since the multilateral adoption of the CRS (Scannell and Houlder 2016). Likewise, the value of foreign deposits in US banks has grown substantially, whereas the traditional secrecy jurisdictions listed in table 1.1 have incurred important losses (Hakelberg and Schaub 2018). In fact, Casi, Spengel, and Stage (2018) show that deposits from the EU and other OECD countries in the United States grew by 9 percent between 2014—when traditional secrecy jurisdictions adopted the CRS—and 2017. Concomitantly, such deposits diminished by 14 percent on average in the group of formerly secretive countries they study, including Guernsey, Hong Kong, the Isle of Man, Jersey and Macau.

Although the United States may thus replace Switzerland as the most important secrecy jurisdiction for European investors, the EU, which matches US market power when acting in unison (see chapter 2), has not yet managed to wrestle full reciprocity from the Obama and Trump administrations. The reason is that member states, which found consensus on AEI within the EU, still disagree on including the United States in their blacklist of tax havens facing collective sanctions (cf. Council of the European Union 2017; European Commission 2016e). Because of the unanimity requirement in tax matters discussed earlier, the veto of a single government is enough to prevent this decision, and several export-dependent member states, including Germany, fear an inclusion of the United States could provoke retaliatory measures in the trade arena.5 Since internal division has prevented the EU from checking their hypocrisy, successive US governments have thus been able to uphold a highly redistributive international AEI regime, inviting committed foreign tax evaders to shift their hidden financial (p.6) wealth from traditional secrecy jurisdictions into the United States. While Austrian tax advisers have, in response, deplored a loss of business to US competition,6 one of their American colleagues rebuffed European criticism of FATCA’s lack of reciprocity simply by stating that “fair is what you can get away with, and the United States has the power to defend this outcome.”7

Coercion Transcends Structural and Normative Constraints

The unexpected end of bank secrecy in traditional secrecy jurisdictions reflects the ability of a great power like the United States to unilaterally effect fundamental change in international tax policy through coercion. This interpretation stands in sharp contrast to the two established narratives to international tax policy: the contractualist and the constructivist perspective. From the contractualist perspective, an international agreement must be based on the common interest of the signatory states. Otherwise, disadvantaged governments will either refuse to cooperate or defect from the agreement (Dehejia and Genschel 1999; Rixen 2008). If this approach were still correct, tax havens would expect joint gains from the multilateral AEI and participate voluntarily. From the constructivist perspective, shared regulative norms, including the respect for national sovereignty, have traditionally prevented powerful governments from forcing tax havens to remove domestic legal hurdles to the dissemination of account information (Webb 2004; Sharman 2006b). If this reading continued to apply, the US sanctions threat contained in FATCA should have been preceded by normative change legitimizing the use of coercion against tax havens. To exclude the possibilities that tax havens’ participation in the multilateral AEI results from voluntary consent or normative change instead of coercion, I will thus show two things in this section. First, the structural constraints precluding a common interest in countermeasures to tax evasion were still in place when the US Congress passed FATCA. Second, there was no need for normative change, because regulative norms have never consistently prevented the US from interfering with the legal systems of tax havens.

Structural Constraints to Cooperation from Tax Havens

The contractualist narrative of international tax policy identifies two structural constraints preventing governments from reaching agreement on countermeasures to tax evasion: an asymmetric prisoner’s dilemma and a weakest-link problem. The asymmetric prisoner’s dilemma results from the uneven distribution of (p.7) benefits from tax competition between small and large countries. Relative to their small domestic capital stock, small countries can attract a lot of foreign capital with a tax cut. Hence, they can compensate for tax revenue lost to a lower tax rate with tax revenue generated from a broader tax base. In contrast, large countries can—relative to their large domestic capital stock—only attract a small amount of foreign capital with a tax cut. As large countries find it more difficult to compensate for a lower tax rate with a broader tax base, they lose the tax competition for capital to small countries. Accordingly, large countries have an interest in international tax coordination, whereas small countries prefer tax competition (Genschel and Schwarz 2011; Wilson 1999). Since most governments assert a right to tax the worldwide income of individuals resident within the government’s territory, however, the crucial prerequisite for the competitiveness of small tax haven countries is secrecy. The low tax rates they offer apply only if the taxable capital income of a foreign account-holder remains hidden from the tax authorities in her country of residence.

Whereas the asymmetric prisoner’s dilemma results from interest heterogeneity between small and large countries, the weakest-link problem prevents large countries from changing the preferences of small countries through side payments. Since small countries gain less revenue from tax competition than large countries lose, because of the small countries’ lower rates, at first sight there seems to remain scope for a mutually beneficial agreement, in which large countries compensate small countries for refraining from tax competition. For the agreement to be effective, however, all of the world’s tax havens would have to participate. Otherwise, tax evaders seeking low rates and secrecy could simply transfer their financial wealth to the remaining uncooperative jurisdictions. If large countries offered a compensatory deal, tax havens would thus have an incentive to drag their feet. The longer they stay out of an expanding coalition of cooperating governments, the more they benefit from reduced competition in the tax haven market, and the more expensive their compensation becomes for large countries (Elsayyad and Konrad 2012). From the contractualist perspective, the expectation of an exponential rise in enforcement costs, sometimes created by cautionary tales of capital flight disseminated by the financial industry, causes otherwise powerful governments of large countries to shy away from initiatives against tax evasion (Dehejia and Genschel 1999; Rixen 2013).

If the asymmetric prisoner’s dilemma and weakest-link problem had somehow disappeared before the United States issued a credible threat of sanctions through FATCA, enabling secrecy jurisdictions to voluntarily agree to the AEI, we would thus have to observe at least one of three things: (1) a reduction in the benefit secrecy jurisdictions reap from abetting tax evasion reflected in an outflow of foreign financial wealth or a shrinking contribution of financial services (p.8)

Change and Stability in Global Tax Policy

Figure 1.1. ​ Foreign Financial Wealth in Secrecy Jurisdictions before FATCA (Percentage of Total)

Note: Cross-border deposits reflect deposit liabilities of banks in the respective reporting country to all foreign households and nonfinancial corporations. Foreign holdings of US securities include all forms of equity and all debt securities issued in the United States and held or managed by households, corporations, or financial institutions in a foreign country. Secrecy jurisdictions include all countries identified as offshore financial centers by the BIS for “dealing primarily with nonresidents and/or in foreign currency on a scale out of proportion to the size of the host economy” (BIS 2016a, 59), and those OECD members (Austria, Belgium, Luxembourg, Switzerland) that had refused to participate in the AEI on interest payments introduced by the EU in 2003 (also see table 1.1.).

Sources: BIS (2018); US Treasury (2017a).

to a tax haven’s overall economic performance; (2) a decrease in the importance foreign depositors in secrecy jurisdictions attach to financial secrecy, removing the link between information reporting and capital flight; or (3) an offer of side payments from large countries to secrecy jurisdictions despite the high expected cost of these payments.

To assess the first point, I draw on the two most widely used data sources in research on the relevance of secrecy jurisdictions in global financial relations: cross-border deposits from households and nonfinancial corporations reported by the Bank for International Settlements (BIS) and foreign holdings of US securities reported by the US Treasury (cf. Alstadsæter, Johannesen, and Zucman 2017b; Desai and Dharmapala 2010; Huizinga and Nicodème 2004; Johannesen and Zucman 2014). As figure 1.1 illustrates, the share of secrecy jurisdictions in the global total of both measures remained constant during the eight years preceding the adoption of FATCA. Whereas secrecy jurisdictions’ share of worldwide cross-border deposits fluctuated around 40 percent, secrecy jurisdictions accounted for a third of all foreign holdings of US securities during this time period. We can thus conclude that secrecy jurisdictions’ popularity among foreign (p.9)

Change and Stability in Global Tax Policy

Figure 1.2. ​The Share of Financial Services in OECD Secrecy Jurisdictions’ Gross Value Added

Note: Gross value added (GVA) is defined as an industry sector’s output minus intermediate consumption. The sum of GVA over all sectors plus taxes on products minus subsidies on products gives a country’s gross domestic product (GDP). The chart is limited to OECD secrecy jurisdictions because GVA data of comparable detail are not available for the remaining jurisdictions included in table 1.1. Previous research suggests, however, that the economic dependence of small island havens on the provision of financial services is much higher (Christensen, Shaxson, and Wigan 2016).

Source: Eurostat (2018).

depositors wishing to earn a lowly taxed return on US securities had not deteriorated before the adoption of FATCA. Likewise, data on countries’ main GDP aggregates reported by Eurostat, the EU’s statistics office, suggest that even in relatively large secrecy jurisdictions with rather diversified national economies, the provision of financial services continued to make an important contribution to national economic performance despite the financial crisis of 2008. In Luxembourg, the share of financial services in gross value added (GVA) increased from 16 percent in 2003 to 18 percent in 2010. In Austria and Switzerland, the corresponding shares declined only marginally, from 4 to 3 percent and from 7 to 6 percent, respectively, over the same time period (see figure 1.2). Accordingly, dependence on the financial sector had not declined significantly in any of these countries before FATCA.

To assess the second point, I draw on previous research on the relationship between the level of financial secrecy provided by a given country, and its stock of financial wealth. Huizinga and Nicodème (2004) find, for instance, that a country’s adoption of domestic information reporting from banks to tax authorities increases the value of resident households’ foreign deposits by 28 percent. That (p.10) is, many depositors prefer moving their savings abroad to disclosing their capital income to their local tax office. Likewise, Johannesen and Zucman (2014) show that a secrecy jurisdiction’s signature of a bilateral Tax Information Exchange Agreement (TIEA) reduces the value of cross-border deposits from the treaty partner’s households by 22 percent. This result is striking since TIEAs, which were promoted by the OECD just before the emergence of AEI as the new global standard, merely provide for information exchange upon request. To receive administrative assistance from the treaty partner, a tax authority needs to provide prior evidence of tax evasion by a clearly identified individual. Since this type of evidence is exactly what tax authorities are usually lacking, a secrecy jurisdiction’s consent to information exchange upon request does not increase the risk of detection for tax evaders (Eccleston and Woodward 2014; Genschel and Rixen 2015). Still, they showed a substantial reaction. Instead of withdrawing their deposits from the secrecy jurisdiction entering into a TIEA with their home country, however, most tax evaders merely shifted formal account ownership to a trust or shell company registered in a second secrecy jurisdiction. This behavior explains why overall foreign deposits in secrecy jurisdictions remained constant despite the observed reduction in deposits from countries with a bilateral TIEA relationship (Johannesen and Zucman 2014). We can thus conclude that tax evaders remained highly sensitive even to tiny changes in the level of financial secrecy when FATCA was adopted.

Finally, the historical record shows that secrecy jurisdictions have not been compensated for participating in the AEI either before or after the US Congress passed FATCA (cf. Eccleston and Gray 2014; Eggenberger and Emmenegger 2015; Palan and Wigan 2014). The first reason is that compensating secrecy jurisdictions is a “hard political sell for democratically elected governments” (Genschel and Schwarz 2011, 354). After all, large-country governments would spend the money of honest taxpayers to compensate secrecy jurisdictions for ceasing to serve the dishonest. Accordingly, compensation has never been seriously debated in negotiations over tax cooperation at the OECD (Sharman 2006b, 153–54). The second reason is that compensatory arguments rely on the implicit assumption that governments compete for tax revenue, which could be replaced by handouts from large countries. It seems more realistic, however, to assume that governments compete for tax base, because incoming foreign capital not only increases tax revenue in secrecy jurisdictions but also raises economic activity, wages, and employment—which, in turn, cause increased revenue from the taxation of labor and reduced spending on unemployment benefits (Genschel and Seelkopf 2015). These positive spillover effects are most likely more important than the increased revenue from capital taxation itself, meaning that handouts represent a poor alternative. (p.11) While large countries are thus highly unlikely to offer compensation, secrecy jurisdictions are just as unlikely to accept it.

In sum, a substantial part of secrecy jurisdiction’s economic output continued to depend on the exploitation of large stocks of foreign financial wealth during the first decade of the twenty-first century. The size of these stocks was a function of the level of financial secrecy offered to foreign depositors, and large countries did not offer secrecy jurisdictions compensation for becoming more transparent. Accordingly, their governments expected significant economic losses from replacing bank secrecy with the routine reporting of foreign account-holders to the tax authorities of their home countries. For instance, the Luxembourgian statistics office predicted a decline of 5 to 10 percent in the financial sector’s contribution to GVA, leading to a 0.5 percent decline in overall employment, before Xavier Bettel, the country’s prime minister, signed the multilateral AEI agreement (Adam 2014). Likewise, the Swiss Federal Council, the country’s executive organ, expected economic losses from the AEI’s “relatively high implementation costs for financial institutions,” and a “certain outflow of assets managed in Switzerland on behalf of foreign private clients” that may not be compensated by new inflows (Schweizerischer Bundesrat 2015, 52). Hence, we can conclude that secrecy jurisdictions did not accept the AEI to benefit from joint gains but rather did so despite expecting significant costs. Since cooperation leaves them worse off than the status quo ante, cooperation cannot result from voluntary consent.

Normative Constraints to Bullying Tax Havens

Against this background, coercion suggests itself as a plausible alternative. According to the constructivist narrative of international tax policy, however, an alliance of tax havens and libertarian lobbyists has in the past mobilized the regulative norm of nonintervention to prevent the OECD and United States from enforcing tax cooperation. This argument is based on the analysis of the OECD campaign against “harmful tax competition” (HTC) launched in 1998 to prevent tax havens from poaching foreign tax base through the provision of financial secrecy and preferential tax regimes. To pressure tax havens into compliance with the OECD demands, including the exchange of account information upon request, OECD members threatened tax havens with collective sanctions. In response, the governments of several tax-competitive island states argued that using coercive means against fragile developing countries was inappropriate and inconsistent with the OECD’s central missions of promoting cooperation and sustainable growth. In parallel, right-wing American think tanks persuaded the incoming Bush administration that the OECD campaign infringed upon fiscal (p.12) sovereignty and replaced efficiency-enhancing international competition with a global tax cartel. From the constructivist perspective, these arguments drew their force from the apparent mismatch between the OECD’s identity as an impartial provider of expertise and the use of coercive power, and the positive connotation of competition among the Bush administration’s senior officials. Hence, the United States and the OECD were persuaded to delay and eventually rule out the use of sanctions against tax havens in 2003 (Sharman 2006b; Webb 2004).

Only six years later, however, the Obama administration developed FATCA, which did exactly what the regulative norm of nonintervention was supposed to rule out: on pain of significant penalties, the act obliges all foreign banks, including those from tax havens, to report US account-holders to the IRS, thereby imposing legal amendments on foreign countries and undermining their competitiveness in the attraction of hidden wealth. From the constructivist perspective, the adoption of FATCA must thus have been preceded by normative change legitimizing the use of economic sanctions against tax havens. Yet as I will further elaborate in chapters 3 and 4, the historical record shows that the norm of nonintervention never consistently prevented the US government from interfering with the legal systems of tax havens, including during the time period from which constructivist scholars draw the bulk of their empirical evidence. In fact, the persuasiveness of the normative arguments emphasized by the constructivist narrative varied considerably with the US administration’s political orientation and the legality of the tax minimization strategies targeted by economic sanctions. Instead of normative change, a change in government paired with a strong focus on criminal tax evasion were decisive for the adoption of FATCA.

As mentioned above, the constructivist narrative recognizes the importance of the US administration’s political orientation. According to Webb (2004, 813), the Republican administration of George W. Bush was “ideologically predisposed to accept the critiques of the right-wing coalition that had formed in the US to oppose the [OECD campaign against harmful tax competition.]” In fact, tax competition was an important justification for the Bush administration’s domestic tax policy agenda. From its perspective, taxes on corporate profits and capital income had to be cut to preserve US competitiveness in the attraction of investment. Hence, senior officials perceived support for an OECD project framed by libertarian lobbyists as a socialist plot against international competition as incompatible with the Bush administration’s general approach to tax reform (see chapter 4). When the administration’s party ideology did not resonate with the normative arguments deployed in favor of tax havens, however, the US also did not shy away from interfering with their legal systems. In contrast to the Bush administration, the Clinton administration had defended the progressivity of the income tax during its tenure. In the Clinton administration’s view, tax evasion (p.13) undermined the tax system’s perceived fairness, thereby reducing the readiness of ordinary citizens to voluntarily comply with the tax code. Since preventing secrecy jurisdictions from abetting tax evasion by US citizens was perfectly compatible with this tax policy agenda, arguments mobilizing the norm of nonintervention in defense of tax havens gained little traction with Democratic officials. Accordingly, the Clinton administration did use coercive pressure against non-cooperative jurisdictions (see chapter 3).

To begin with, the Clinton Treasury Department backed the OECD’s sanctions threat in public statements and through the inclusion of agreed-on defensive measures among the revenue proposals attached to its last budget (Associated Press 2000b; US Treasury 2000). While US support lasted, several major tax havens, including Bermuda and the Cayman Islands, committed to applying the OECD standard for information exchange upon request (Government of Bermuda 2000; Governor of the Cayman Islands 2000). More important, however, the Clinton administration introduced the qualified intermediary (QI) program for foreign financial institutions wishing to exempt their clients from withholding taxes on the return to US securities. In order to become a QI and benefit from the exemption, banks had to report US clients and their income from US sources to the IRS and withhold US taxes on payments to foreigners (IRS 2000). Although the program contained a gaping loophole—the absence of a requirement to look through legal entities when identifying account owners allowed foreign banks to hide their US clients behind shell companies (Levin and Coleman 2006)—the QI program still forced several governments to create exemptions from their secrecy provisions. For instance, the Swiss finance ministry issued a regulation freeing compliance officers responsible for the implementation of the QI program from their obligations under the country’s bank secrecy law, an act of administrative overreach later criticized by the federal council (Schweizerischer Bundesrat 2012).

Yet the salience of arguments mobilizing the norm of nonintervention varied not just with the US government’s political orientation. Much to the chagrin of right-wing American think tanks, even the Bush administration did not respond to all of their normative appeals. In fact, the libertarian lobbying coalition argued against international countermeasures to both harmful tax practices identified by the OECD: the provision of PTRs for foreign firms and financial secrecy. In the view of the lobbying coalition, forcing tax havens to remove PTRs came down to the creeping harmonization of tax rates, infringed on fiscal sovereignty, and would eventually “hamstring America’s competitive advantage in the world economy” (Mitchell 2001c, 24). Likewise, the coalition framed the attempt to lift financial secrecy as an attack on the right to privacy, inviting high-tax European nations to use the OECD to impose additional reporting requirements also on the United (p.14) States, which was itself allowing foreigners to invest confidentially (Task Force on Information Exchange and Financial Privacy 2002). Paul O’Neill, the Bush administration’s secretary of the Treasury, embraced the first argument. After several meetings with libertarian lobbyists, he explained to his OECD colleagues that the United States was in favor of tax competition, as it forced governments to become more efficient. Therefore, obliging tax havens to remove tax regimes designed to encourage foreign investment ran counter to the Bush administration’s tax policy priorities (O’Neill 2001c). In contrast, O’Neill discarded libertarian concerns over restrictions to privacy, and welcomed “the priority placed on transparency and cooperation to facilitate effective tax information exchange” (O’Neill 2001a, 82).

In accordance with O’Neill’s stance, the Bush administration linked its further participation in the OECD initiative to the removal of all recommendations interfering with national tax codes, thereby forcing the remaining member states to adopt the US position. At the same time, the Bush administration did not oppose the blacklisting of countries based on transparency and exchange of information criteria, and maintained the Clinton administration’s QI program, which the Treasury could have repealed by regulation. As I will further elaborate in chapter 4, this ambivalent response to normative arguments from libertarian lobbyists had two main reasons. First, information exchange did not interfere with national tax codes, and therefore did not oblige tax havens to remove regimes enabling multinationals to avoid taxes elsewhere. From the perspective of Secretary O’Neill this meant that information exchange did not interfere with international tax competition, which he and the libertarian opponents to tax harmonization interpreted as a desirable constraint on government profligacy. Second, tax evasion, the activity to be tackled by information exchange, was a criminal offense. Providing law enforcement agencies with additional information to prosecute such offenses matched the law-and-order instincts of many Republicans.8 Hence, O’Neill underlined, he had taken an oath obliging him to execute US tax laws as written, which implied going after those “who illegally evade taxes by hiding income in offshore accounts” (O’Neill 2001a, 82).

Against this background, we can conclude that the importance of normative constraints to the use of coercion against tax havens has been highly contingent on the US government’s political orientation and the legality of the tax minimization strategy targeted by regulation. Instead of normative change, the change of power from the Bush to the Obama administration and a strong focus on criminal tax evasion were decisive for the adoption of FATCA in 2010. As I will argue later, a Democratic government and legal constraints on the discursive power of otherwise influential interest groups are, indeed, the main preconditions for the (p.15) use of coercion against tax havens by the US government. In their absence, multinationals and wealthy individuals prevent effective action.

When Does a Great Power Enforce Change?

Secrecy jurisdictions have not voluntarily agreed to participate in the AEI, nor have norms consistently prevented the US government from interfering with these jurisdictions’ legal systems. The main lesson from the unexpected end of bank secrecy is thus that a great power like the United States can effect fundamental change in international tax policy and the domestic tax policies of less powerful countries, if necessary, through coercion. A government reaches great power status if it controls an internal market large enough to reduce its dependence on international trade and investment relative to the government’s negotiating partners and uses its regulatory capacity to effectively restrict market access for foreign firms or investors (Simmons 2001; Bach and Newman 2010). When both elements are in place, a great power can issue credible sanction threats, linking noncompliance with its tax policy demands to exclusion from its domestic market. Small countries have to play along, since their firms earn a substantial share of their profits in the great power’s market and therefore depend on access (Drezner 2008; Krasner 1976). The foreign portfolio investment placed through financial institutions in major secrecy jurisdictions is, for instance, highly concentrated in a few major markets, particularly the United States (see chapter 2). If private banks in secrecy jurisdictions lost access, their business model would be at risk. After all, they mainly serve as conduits through which a foreign investor can relieve the return she earns on an investment in a third country of its tax burden. Without access to major financial markets, her investment opportunities decrease, her return shrinks, and the advantages of her offshore arrangement disappear. Accordingly, private banks in secrecy jurisdictions depend even more on access to major markets than they depend on their promise of confidentiality.

If the United States can unilaterally effect fundamental change in international tax policy, however, a second puzzle emerges. Whereas FATCA significantly increases financial transparency in countries other than the United States and thereby goes a long way toward curbing tax evasion by US households, a series of data leaks, investigative reports, and academic studies show that tax avoidance by US multinationals has continued unabatedly over the past decade (Day 2015; Gamperl, Obermaier, and Obermayer 2017; Levin and McCain 2013). According to the latest estimates, the US fisc loses at least twice as much annual tax revenue (p.16) to corporate profit-shifting as to tax evasion by households with offshore accounts (Clausing 2016; Zucman 2014; Tørsløv, Wier, and Zucman 2018).9 This situation persists, even though the Obama administration, which initiated FATCA in response to the UBS scandal of 2008, was equally committed to curbing corporate tax avoidance at the outset of the administration’s term. In fact, President Obama and Secretary of the Treasury Timothy Geithner announced a two-pronged strategy for “leveling the playing field” for US taxpayers when presenting their first budget and revenue proposals in May 2009. In addition to a “[crackdown] on the abuse of tax havens by individuals,” which eventually evolved into FATCA, this strategy included countermeasures to the indefinite deferral of tax payments on foreign profits and the circumvention of controlled foreign company (CFC) rules by US multinationals (Office of the Press Secretary 2009).

To pressure legislators and business into the adoption of these measures, the Obama administration initially supported a British-German initiative for an OECD project against corporate tax base erosion and profit-shifting (BEPS) in the G20. The original intent behind the BEPS project was “to ensure that profits are taxed where economic activities occur and value is created” (G20 Leaders 2013, 4). The emphasis on a realignment of taxation and real economic activity was a response to a series of investigative reports showing that US multinationals such as Amazon, Apple, Google, and Starbucks did not pay taxes on their foreign profits either in the European source countries where they made a large share of their turnover or at their place of residence in the United States where they developed most of their intellectual property. Instead, they manipulated royalty and interest payments between their foreign subsidiaries so as to divert taxable income to corporate tax havens such as Bermuda, Ireland, or the Netherlands where no or only limited economic activity took place (Bergin 2012; Griffiths 2012; Levin and McCain 2013; Murphy 2009). As countermeasures, the draft reports on BEPS released by the OECD’s committee on fiscal affairs (CFA) proposed three crucial changes. First, the transfer pricing guidelines should be revised so as to give tax examiners greater leeway in the reassessment of transactions between related firms (OECD 2014b). Second, the definition of permanent establishment (PE) in the OECD’s model tax treaty should be expanded to prevent firms from artificially avoiding a taxable presence in a source country (OECD 2014f). Third, multinationals should be obliged to deliver annual reports, breaking down their profits, sales, payroll, and internal payments on a country-by-country basis, thus facilitating the detection of mismatches (OECD 2014c).

In the context of the BEPS project, however, the Obama administration did not foster change through the enforcement of a regulatory template, as it did with FATCA in parallel negotiations over multilateral AEI. Instead, the administration ended up defending the regulatory status quo, thereby perpetuating an orthodox (p.17) interpretation of the fundamental principles of international tax law, which allow multinationals to geographically separate taxable income from underlying economic activity. First, US negotiators made sure that tax examiners can only adjust the price of a transaction between related firms under exceptional circumstances: the transaction has to have taken place less than five years ago and involve an intangible asset, whose ex post value does not match the firms’ ex ante projections for clearly foreseeable reasons (Finley 2016; OECD 2015a). That is, multinationals merely have to adjust their projections to their profit-shifting objectives to avoid any risk of reassessment. Second, the CFA made proposed changes to the PE definition optional after the US representative threatened to reserve against their inclusion in the model tax treaty (Martin 2015; OECD 2015e). Accordingly, both parties to an existing bilateral tax treaty have to endorse the new definition to make it effective. Third, the United States—along with other governments—greatly reduced the transparency created through country-by-country reports by insisting on their confidentiality and removing royalty, interest, and service fee payments from the list of reportable items (Stewart 2014; OECD 2015d).

Why did the Obama administration use US power to curb tax evasion by US households but not to limit tax avoidance by US multinationals? In this book, I argue that a Democratic administration is, indeed, a necessary condition for the enforcement of countermeasures to tax evasion and avoidance by the United States. Democratic party ideology—mainly defined by affluent egalitarians—has traditionally endorsed progressive tax reform in accordance with the ability-to-pay principle: that is, the tax rate should rise with the taxpayer’s income to ensure that the strongest shoulders carry the largest fiscal burden (Bartels 2009). For a progressive tax system to work, however, the most potent taxpayers—wealthy individuals and profitable corporations—also have to be taxed on their global income. Otherwise, their effective tax rate falls and the revenue necessary to relieve the middle and lower classes disappears. Therefore, Democratic tax reform depends on the deterrence of both: tax evasion by wealthy individuals with offshore accounts and tax avoidance by multinationals with large foreign profits. In contrast, Republican party ideology—mainly defined by affluent libertarians—has traditionally favored flat taxes on capital income and corporate profits. From this perspective, saving and investment by wealthy individuals is decisive for economic growth. Hence, the tax system should encourage corresponding decisions. Otherwise—so the Laffer curve suggests—capital flight is the likely result (Bartels 2009). Instead of posing a challenge, tax evasion and avoidance thus provide an important justification for Republican tax reform. Here, the objective is to outplay rather than subdue competition from tax havens.

Yet a Democratic administration is insufficient for the enforcement of countermeasures to tax evasion and avoidance by the United States. Affected (p.18) domestic interest groups may wield enough power in the political process to block proposals increasing the tax burden on their foreign income. This power depends on their ability to access policymakers, credibly threaten them with divestment, and convince them of the legitimacy of the affected groups’ tax minimization strategies (Fairfield 2010; Fuchs and Lederer 2008). A multinational corporation could, for instance, threaten to cut jobs in a policymaker’s electoral district if she supports higher taxes on its foreign income. Alternatively, the corporation could stress the legality of its tax planning strategy, shifting the blame for tax avoidance toward legislators writing incoherent tax codes. In contrast, wealthy individuals who evade taxes by underreporting their foreign income break the law. Despite their access to policymakers, they will thus find it difficult to openly state their case, since the public rarely considers crime legitimate and policymakers usually avoid lenience when debates over law enforcement become politically salient (Kirchler, Maciejovsky, and Schneider 2003; Stuntz 2001). Tax-evading individuals thus wield less power in the political process than tax-avoiding multinationals. Accordingly, only the combination of a Democratic administration and an illegal tax minimization strategy awaiting regulation is sufficient for the United States to enforce countermeasures.

When we look at international tax policy from this perspective, we understand why FATCA creates new reporting requirements for foreign banks but none for US financial institutions. The Obama administration wanted to curb tax evasion by US households with offshore accounts. Simultaneously keeping US wealth managers from abetting tax evasion by foreign taxpayers, however, would have provoked resistance from the financial sector, endangering the survival of the entire legislative project. Hence, the US forced all other governments to deliver data but spared domestic banks from a meaningful increase in financial transparency (see chapter 5). Likewise, we understand better why the Obama administration eventually defended the international tax system’s status quo in negotiations over the BEPS project’s final recommendations. Because of business opposition, Democratic attempts at ending the deferral of tax payments on foreign profits had failed, depriving the administration of a domestic regulatory model. Reforms proposed by European governments could have attributed a larger share of US multinationals’ foreign profits to their own coffers. Hence, the Obama administration decided that minimizing the foreign tax burden of US multinationals was still better than having European governments increase their tax take at the expense of the US (see chapter 6). As a result, US multinationals started to pay taxes on their foreign profits only once the Trump administration provided tax haven conditions itself, reducing the tax rate on repatriated income from 35 to 10.5 percent (Drucker 2018).

(p.19) My emphasis on the interaction between party ideology and business power in American politics runs counter to two alternative explanations for the emergence and different outcomes of bargaining over multilateral AEI and the BEPS project. According to the first explanation, the financial crisis provided exceptionally permissive conditions for multilateral initiatives against tax evasion and avoidance by creating the need for bank bailouts and stimulus packages, which exacerbated the budget constraints of many governments (Eccleston 2012); by weakening the lobbying position of finance both in secrecy jurisdictions and the United States (Emmenegger 2017; Eccleston and Gray 2014); and by imposing fiscal austerity on voters, thus increasing the political salience of revelations showing that corporations and wealthy individuals were not paying their fair share of tax (Seabrooke and Wigan 2016). While these mechanisms certainly influenced the timing and speed of negotiations, none of them has proved decisive for the proposal and eventual (non-)adoption of countermeasures to tax evasion and avoidance at the international level.

In fact, Barack Obama (2007), motivated by the redistributive goal of restoring tax fairness for the middle class, had already turned the enforcement of new information exchange standards and the strengthening of CFC rules into important campaign pledges in September 2007—that is, half a year before the failure of Bear Stearns, the first crisis-related collapse of a major bank, in March 2008, and more than a year before the adoption of the Troubled Assets Relief Program (TARP), the US government’s first bailout package, in October 2008. Accordingly, the Obama administration’s proposal of FATCA in 2009 corresponded to tax policy priorities defined before the budgetary fallout from the financial crisis became clear. These priorities rather resulted from revelations orchestrated by Carl Levin, the Democratic chairman of the Senate Permanent Subcommittee on Investigations (PSI). Under his leadership, the body’s reports and hearings exposed that Liechtenstein Global Trust (LGT) and UBS had conspired to circumvent the reporting of US clients to the IRS, a legal obligation flowing from their participation in the US Treasury’s QI program (Levin and Coleman 2006, 2008). This program, in turn, had been introduced by the Clinton administration in 2000 when the federal budget was balanced. Still, one of its main purposes was to increase compliance from US taxpayers with foreign accounts (see chapter 3).

Moreover, the US financial industry did not have to be on the defensive to let the QI program and FATCA pass. The industry simply was not negatively affected by the programs, which created new reporting requirements for foreign banks but none for US financial institutions. Instead, the QI program reduced the regulatory burden related to US banks’ role as withholding agents by shifting responsibility for the correct identification of foreign recipients of US-source income to (p.20) foreign banks. By obliging foreign banks to disclose the identities of US account holders to their US withholding agents, the program moreover provided US banks with an opportunity to lure away their foreign competitors’ wealthy clients (see chapter 3). Likewise, FATCA only obliges foreign banks to report their US clients’ capital income to the IRS. The US government’s bilateral FATCA agreements with foreign countries do not grant reciprocity, and the United States does not participate in the multilateral AEI agreement (see chapter 5). According to a former US Treasury official, the Obama administration spared US banks from new reporting requirements because their regulatory burden had already increased in the aftermath of the financial crisis.10 Hence, if the US financial industry was weakened, this weakness created lenience rather than severity among tax officials in the Obama administration.

Finally, the crisis certainly increased the political salience of scandals revealing that wealthy individuals and corporations shirked their fiscal obligations at a time of budgetary stress. The PSI’s 2006 report on the circumvention of the QI program, for instance, received much less media coverage than the 2008 follow-up although the first report essentially contained the same information.11 Also the British and German governments would not have proposed the BEPS project without the steady stream of investigative reports between 2009 and 2012, exposing tax avoidance by US multinationals (see chapter 6). Yet the Clinton administration’s adoption of the QI program demonstrates that Democrats also introduced new reporting requirements for foreign banks in the absence of a tax scandal breaking in the aftermath of a financial crisis (see chapter 3). Likewise, unprecedented public awareness of the shortcomings of the international tax system after the crisis was not enough to break business opposition to meaningful changes. The key request of civil society organizations, for instance—the publication of country-by-country reports—was included in the BEPS project’s final recommendations, but the US and other governments severely reduced the reports’ effectiveness by insisting on their confidentiality and removing information on intrafirm transactions from the list of reportable items (see chapter 6). As one of the main advocates for country-by-country reporting concluded, “the greatest multinational corporate transparency measure to be agreed by international policymakers in recent decades, has been strangled at birth” (Cobham 2015b).12

According to the second alternative explanation, different balances of power in international bargaining over countermeasures to tax evasion and tax avoidance were decisive for the Obama administration’s success in enforcing multilateral AEI and its parallel failure to focus the BEPS project on the adoption of CFC rules. From this perspective, the global dominance of the US capital market, indeed, provides the US government with unmatched power in bargaining over the regulation of financial institutions, including their tax-related reporting obligations. (p.21) In contrast, the foreign tax credit—a provision in US tax law reducing US corporate tax by the amount of foreign taxes paid—makes the US government’s tax revenue contingent on the foreign tax burden of US multinationals, over which the US government allegedly has no control. Hence, foreign governments can check US power in bargaining over countermeasures to tax avoidance by threatening to increase taxes on US multinationals at source, thereby effectively reducing the tax revenue of the United States (Grinberg 2015; Lips 2019).

This explanation departs from the erroneous assumption that the resistance of foreign governments prevented the Obama administration from pushing for the adoption of stronger CFC rules during the BEPS project. Instead, the administration had already failed to implement corresponding measures domestically because of opposition from US multinationals. Therefore, the US government lacked a domestic regulatory template during negotiations over the BEPS project, initially opening agenda space for governments seeking to expand the taxation of multinationals at source. Between the publication of the project’s draft reports and the adoption of final recommendations, however, the Obama administration defended the international tax system’s status quo against all attempts at a significant expansion of source countries’ right to tax (see chapter 6). Thereby, the administration acted in accordance with the traditional international tax policy of US governments, which have since the adoption of the foreign tax credit in 1918 forged an international tax regime that reduces source country taxation to an absolute minimum (Avi-Yonah 2007; Picciotto 1992).13 Rather than being vulnerable to tax increases at source, the United States has for a century used its market power to enforce international standards and bilateral tax treaties that prevent source countries from such increases.

How the Argument Unfolds

Whether international rules against tax evasion and avoidance are tightened or not, essentially depends on the domestically defined preferences of the United States. The US government enforces tighter rules when a Democratic administration is in power and proposed regulation targets a clearly illegal tax minimization strategy like tax evasion by individuals with offshore accounts. The status quo prevails under a Republican administration or when proposed changes affect legal tax avoidance strategies by powerful interest groups such as US multinationals. To show that this dynamic applied not only in the aftermath of the financial crisis of 2008 but shaped all OECD attempts at curbing tax evasion and avoidance since the abolition of capital controls in the 1980s, this book’s empirical part extends beyond the emergence of multilateral AEI and the BEPS project. (p.22) In addition, the book also provides historical narratives on the Clinton and Bush administration’s different approaches toward tax evasion and avoidance. Hence, the book covers the following historical episodes: (1) the OECD’s HTC project launched by the G7 in 1996, (2) the development of a largely ineffective OECD standard for TIEAs between 2002 and 2008, (3) the emergence of AEI as a global standard for administrative assistance in tax matters since 2009, and (4) the OECD’s most recent project on countermeasures to corporate BEPS launched in 2012. Each narrative provides a thick description of the respective US government’s tax policy preferences, linking the US position to the OECD initiative’s eventual success or failure in reaching its regulatory objectives. The narratives draw on forty-two interviews I conducted with decision makers and tax policy experts in six countries, as well as on official documents, legal commentaries, and coverage in the specialized press.

I fully develop and test my argument as follows: in chapter 2, I devise a theory of power in international tax politics. This theory rejects the contractualist idea according to which joint gains for all parties are a necessary precondition for international agreements. Instead, I argue that great powers can impose their preferred international tax policy on less powerful countries even if this policy leaves them worse off relative to the status quo ante. To this effect, the great power issues a credible threat of sanctions, linking compliance with its tax policy demands to market access for foreign firms. Since small countries are more dependent on access to the great power’s market than the great power is on access to their markets, they are highly responsive to a corresponding threat. Yet the great power uses coercion in international tax matters only under restrictive conditions. Domestic politics need to prevent the government from passing regressive tax reform, and legal constraints need to keep the discursive power of affected interest groups in check. Finally, I determine which jurisdictions attain great power status in international tax politics. Although the EU’s market power matches that of the United States, internal divisions and European law create a level of regulatory dispersion that prevents the bloc from finding and enforcing a common position. As a result, the United States is currently the only great power in international tax politics.

In chapters 3 and 4, I apply this theory to bargaining episodes before the 2008 financial crisis. Chapter 3 discusses the Clinton administration’s tax policy preferences and its resulting stance vis-à-vis the anti–tax evasion and anti–tax avoidance elements of the HTC project. Like the Obama administration a decade later, the Clinton administration unilaterally introduced new reporting requirements for foreign banks through the QI program and backed the adoption of tighter information exchange standards at the OECD level. Because of business opposition, however, the administration failed to close loopholes in US CFC rules enabling US multinationals to indefinitely defer tax payments on foreign income (p.23) and helped to dilute the HTC project’s proposed countermeasures to corporate tax avoidance. Chapter 4 then discusses the Bush administration’s regressive tax policy agenda, which led to the withdrawal of US support from the HTC project in 2001. At the request of the Bush administration, the OECD first had to abandon all recommendations interfering with international competition for corporate investment. Second, the OECD had to postpone collective sanctions against secrecy jurisdictions until secretive member states like Luxembourg and Switzerland also complied with OECD standards. Yet the Bush administration did nothing to increase pressure on the respective governments. From a theoretical perspective, chapters 3 and 4 moreover reveal that the US Treasury’s responsiveness to normative claims advanced by libertarian lobbyists against international tax cooperation has been contingent on the respective administration’s tax policy agenda.

Chapters 5 and 6 then discuss the OECD’s post-crisis initiatives against tax evasion and avoidance. Chapter 5 explains how the Obama administration’s preference for a progressive income tax system and new information on the circumvention of the Clinton administration’s QI program led to the adoption of FATCA. By breaking the principled opposition of secrecy jurisdictions to the automatic reporting of account information to foreign governments, the act enabled the emergence of a multilateral AEI regime modeled on US policy. However, the Obama administration eventually refused to fully cooperate itself, because of financial sector opposition to new reporting requirements allegedly undermining business with foreign clients. As a result of this hypocrisy, US banks currently enjoy a competitive advantage over foreign banks in the attraction of hidden wealth. Subsequently, chapter 6 shows how the Obama administration’s tax policy agenda also led to the proposal of countermeasures to corporate tax avoidance. Because of business opposition, however, the Obama administration was unable to implement its preferred countermeasure to corporate profit-shifting—more stringent CFC rules—domestically. The administration therefore lacked a template for international regulation in bargaining over the BEPS project’s final recommendations. As a result, and to limit the foreign tax burden of US multinationals, the US government defended the international tax system’s status quo against unorthodox reform proposals by other governments, aiming at the expansion of taxation at source.

In chapter 7, I discuss the most recent developments in international tax policy, focusing on the question whether EU member states can overcome their internal division and centralize some regulatory authority over taxation at the supranational level. The European Commission has made several proposals in this regard, including a consolidated tax haven blacklist, a digital services tax, and a common consolidated corporate tax base (CCCTB). Yet their adoption is far from (p.24) certain, as member state preferences continue to diverge. Interestingly, however, progress is not always blocked by small capital-importing EU countries. Eager to protect its export industry from retaliation, Germany has recently prevented the EU from blacklisting the United States for its hypocritical implementation of the AEI and from introducing a 3 percent tax on revenue from the provision of digital services. The chapter’s final section summarizes the key findings of the historical narratives and explains their relevance for political science debates on US hegemony, international norms, party ideology, and business power.

Notes:

(1.) Investors may use secrecy jurisdictions for purposes other than tax evasion. Instead of hiding assets from the tax office, investors may hide assets from spouses to frustrate requests for alimony in case of divorce, or from creditors to avoid the repayment of debt. Whatever the main motive, however, it is likely to concur with tax evasion, since declaring assets to the tax office is most likely to also bring them within the reach of spouses and creditors.

(2.) Interview with former Austrian minister of finance, July 10, 2014.

(3.) Interviews with member of the Austrian Parliament, July 8, 2014; tax policy adviser to the Austrian Greens, July 9, 2014; tax policy adviser to the Austrian chancellor, July 16, 2014; Austrian OECD diplomat, March 7, 2014.

(4.) Bank secrecy had existed in Switzerland long before Adolf Hitler was elected Reich chancellor in 1933. The Swiss Bankers Association spun this narrative only once the Allies began to investigate its financing activities for the Axis powers toward the end of World War II (Guex 2000).

(5.) Interviews with European Commission official on June 13, 2018 and with two academic experts on EU tax policy on August 23, 2018.

(6.) Interview with partner and manager in Austrian tax law firm on July 7, 2014.

(7.) Interview with partner in US tax law firm on April 17, 2015.

(8.) Interviews with former US Treasury officials on April 13 and 15, 2015.

(9.) According to Clausing (2016) the US fisc lost $77–$111 billion to corporate tax avoidance in 2012. Tørsløv, Wier, and Zucman (2017) estimate that US multinationals diverted 63 percent of their foreign profits to tax havens in 2016, causing a tax revenue loss for the United States of $70 billion. At the same time, Zucman (2014) estimates that the revenue cost of tax evasion by US households with offshore accounts amounts to $36 billion annually.

(10.) Interview on April 13, 2015.

(11.) A Nexis search for “Qualified Intermediary Program” in all English-language news retrieved six articles between August 2006, when the first PSI report was released, and December 2007. A Nexis search for “Qualified Intermediary Program” in all English-language news retrieved forty-one articles between July 2008, when the second PSI report was released, and December 2008, but only three articles between January and June of the same year.

(12.) Alex Cobham is the current director of the Tax Justice Network, a nongovernmental organization (NGO) advocating for tougher international rules against tax evasion and avoidance.

(13.) According to the benefits principle, a source country is entitled to tax the active business income of a permanent establishment under its jurisdiction. The royalties, dividends, and interest this permanent establishment pays to its parent company, however, are in principle taxable in the latter’s country of residence. According to the OECD’s model tax treaty, source countries retain the right to levy limited withholding taxes on dividend and interest payments but not on royalty payments (OECD 2014d, Art. 10, 11, & 12). Moreover, the United States strikes bilateral tax treaties with foreign countries that reduce withholding taxes on interest paid to US firms to zero (US Treasury 2016, Art. 11).