The power politics of international tax co-operation: Luxembourg, Austria and the automatic exchange of information

Luxembourg and Austria resisted exchanging bank data on non-resident interest income with European Union (EU) partners for over a decade. In March 2014 they eventually gave in. Theories of tax competition analysts usually apply to intra-EU bargaining over taxation cannot explain their change of tack. Instead, I argue that American imposition of bilateral exchange of information on the two countries unlocked negotiations at EU level. Concessions made to the United States (US) by Luxembourg and Austria activated a most-favoured nation clause contained in an EU directive. Moreover, the US also forced third countries to exchange bank data, thus reducing the risk of capital flight from Luxembourg and Austria.