One of the key financial themes of 2013 has been automatic exchange of information, and the European and global fight against tax evasion. France has long taken a strong stance against tax evasion and banking secrecy.
One of the key financial themes of 2013 has been automatic exchange of information, and the European and global fight against tax evasion. Political leaders are insisting on more tax transparency from nations and offshore centres. After a surge of bilateral agreements, the move now is to multilateral agreements which will see several countries all sharing information with each other.
In due course, there is no reason to believe this approach will not take off on a global basis.
France has long taken a strong stance against tax evasion and banking secrecy. Both President Hollande and M. Sarkozy’s administrations rejected the idea of a tax deal with Switzerland where large withholding taxes are deducted if account owners do not authorise disclosure. The government believes this allows tax evaders to get away with their crime, and has been adamant that automatic exchange of information is the only way forward.
The latest international developments are exactly what France has been holding out for. Indeed it has been at the forefront of many of the moves.
France’s budget ministry estimates that the state loses as much as €80 billion of tax revenue a year because of hidden income. Increased multilateral automatic financial and tax reporting will provide the government with much more information on income and assets held overseas. This will significantly help it deter and trace tax evasion, and recoup unpaid tax and interest and penalties.
With France’s high taxes, hiding assets from the taxman may be tempting – but it is not necessary and not worth the risk. There are compliant arrangements available to French residents which lower tax on savings, investments and wealth, sometimes significantly, and you should take expert, personalised, advice.
Together with the other G5 countries of UK, Germany, Spain and Italy, France took the initiative to develop and pilot a new multilateral tax information exchange agreement.
They announced the scheme in April and called on other EU countries to sign up – by mid-June 12 had indicated they would. They urged the European Commission to take the lead in promoting a global system of automatic exchange of information to remove the hiding places for those seeking to evade taxes.
Once in effect, a wide range of financial information will be shared.
US Foreign Account Tax Compliance Act (FATCA)
The G5 pilot will be based on the model intergovernmental agreements they have signed with the US under FATCA. Under this, foreign financial institutions over the world have to enter into compliance agreements with the US Treasury to automatically report on American clients. If they refuse, they will suffer a withholding penalty of 30% of the payments made to them. Offshore centres were keen to sign up since the penalties could damage their finance industry.
It was only a matter of time before other countries began looking to set up similar arrangements. France in fact introduced a ‘mini FATCA’ last year, whereby trusts and trustees have to report to the French authorities where a trust has French assets, beneficiaries or settlors.
Information to be exchanged
The information to be automatically exchanged under the G5 and FATCA schemes includes: name and address of account holder; account number; bank details; account balance; gross interest for deposit accounts; gross interest, dividends and other income generated from the assets within a portfolio account and gross proceeds from the sale or redemption of assets within a portfolio account.
EU to share much more information
The amount of financial information shared between EU countries will significantly increase.
Two directives, the Savings Tax Directive and Administrative Cooperation Directive, provide for automatic exchange of information. Both are to be extended.
The Savings Tax Directive currently covers interest payments. In May the European Council agreed to adopt a revised version by the end of the year. The plan is to include payments from investment funds, pensions, innovative financial instruments, trusts and foundations, all to be shared automatically.
The EU is holding talks with Switzerland, Andorra, Liechtenstein, Monaco and San Marino about them moving to automatic exchange of information under the Directive.
The Administrative Cooperation Directive will apply automatic exchange of information to other forms of income from January 2015.
The original plan was for it to cover income from employment, director’s fees, life insurance, pensions and property. In June the European Commission announced its proposal to include dividends, capital gains and other financial income and account balances, from the same date.
Austria and Luxembourg’s decision to support plans for automatic exchange of information at EU level dramatically changed the situation for Switzerland.
On 14th June, a government panel released a report which suggested that Switzerland should be ready to share data on foreign depositors with the EU even before a global standard is established.
In a statement, the Swiss Bankers Association, said:
“The most recent international developments concerning automatic information exchange (AIE) indicate the pressure on Switzerland to adopt a (global) AIE regime is being kept up and even increasing.
“Swiss banks are keen to pro-actively negotiate with the EU on expanding the taxation of savings income and a type of information exchange acceptable to the EU.”
The EU believes that tax transparency is more important than data privacy. This is the way the world is going. Financial privacy is fast being consigned to history. You need to expect your tax authority to know where your wealth is and what income and gains it generates. There are no hiding places.
This does not mean that tax mitigation is no longer possible. You can still take advantage of tax compliant opportunities to protect your assets and investment income from the various French taxes. However it does make it more important than ever to take professional advice. Tax planning gets more complex when you have cross border financial interests, and you need to make sure you get it right, if possible from the outset.
19 June 2013