Taxman V Taxpayer – Taxes Rise, Financial Privacy Falls


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The battle between the taxman and taxpayer is one of the longest-running sagas of the ongoing development of human society. It has intensified over recent years and governments are developing new

The battle between the taxman and taxpayer is one of the longest-running sagas of the ongoing development of human society. It has intensified over recent years and governments are developing new weapons to reduce financial privacy in their bid to prevent tax evasion and increase tax revenue. Never mind that financial privacy is not necessarily about hiding from the taxman. Never mind that there is a clear difference between tax evasion (illegal) and tax avoidance (legal) ? governments are quite happy these days to blur the two in their rhetoric.

In the aftermath of the financial crisis many governments are having to increase taxation one way or another. Not only did they rack up huge debts bailing out banks and supporting the economy, but falling corporate profits, reduced consumer spending and low bank interest rates resulted in less tax revenue for the government.

While this should eventually improve, there is a second threat for governments which will only get worse ? longevity. Birth rates have fallen and people are living longer, resulting in increasingly large social welfare bills for the governments just as the working population (who pay much needed income taxes) is shrinking.

It is hard to imagine how governments can tackle this issue without sharing the burden with the taxpayer ? i.e. by making us pay more tax. In the UK for example, the National Institute of Economic and Social Research (NIESR) calculated that if public finances are to remain sustainable, taxes have to rise by 6% of gross domestic product – ?82 billion – each year to pay for pension and healthcare commitments.

This is hardly unique to the UK. The Organisation for Economic Co-Operation and Development?s (OECD) latest Tax Policy and Fiscal Consolidation Brief also warned that ?tax revenues will need to be increased? and that it would be hard to do so without raising income tax and social security contributions.

Obviously at the same time governments need to ensure that all due taxes are paid which involves being able to trace tax evasion.

Besides supporting high taxes, the OECD also supports policies hindering capital movements from high to low tax countries. It has been at the forefront of the war against tax evasion for decades. In 1998 it began to focus on so called ?tax havens? as part of a broader initiative to ?counter harmful tax practices that deny governments and their citizens their rightful income from taxation?. This involves promoting transparency and effective exchange of information between offshore centres and tax officials. In 2009 a major revision of its Model Tax Convention made it clear that bank secrecy cannot be a barrier to effective exchange of information.

The financial crisis thrust offshore centres into the spotlight as governments looked to apportion blame beyond their doors. The G20 London summit April 2009 was a decisive moment in the global fight against offshore tax evasion and more progress was made towards full and effective exchange of information following it than in the entire previous decade.

In its Global Forum on Transparency and Exchange of Information for Tax Purposes information brief published in April 2011, the OECD said:

?Better transparency and information exchange for tax purposes are key to ensuring that taxpayers have no place to hide their income and assets and that they pay the right amount of tax in the right place.?

Under the OECD list for essential elements of transparency and exchange of information for tax purposes, each country must ensure that ownership and identity information for all relevant entities and arrangements is available; reliable account records are kept and banking information is available for all account holders.

Authorities should have the power to both obtain and provide information as requested under an exchange of information agreement. Personal rights and safeguards are to be restricted to permit greater exchange of information.

The European Commission has also been proactive when it comes to preventing offshore tax evasion, launching its Savings Tax Directive in 2005 with its groundbreaking automatic exchange of information policies and making non-EU countries such as Switzerland sign up, albeit under the withholding tax option.

In December 2010 the EU?s Economic and Financial Affairs Council agreed that Member States have to respond to requests from other Member States regardless of their own banking secrecy laws. The protection for taxpayers has been weakened – a tax authority only need give the individual?s name and reason for the request ? it does not need to name the bank involved so the request will be passed on to all the financial institutions in the country.

The EU is also seeking to expand on automatic exchange of information. In February the European parliament put forward a draft Council Directive on the Administrative Cooperation in the Field of Taxation designed to extend the current exchange of information on request to a mandatory automatic exchange of information between EU states.

Under the proposals, from January 2014 there will be automatic exchange of information on employment income; directors? fees; life insurance; pensions and ownership and income from immoveable property. From 2017 dividends, royalties and capital gains could be included on the list.

Financial privacy? What financial privacy? Any tax plan must be capable of standing up to full scrutiny. The days of relying on privacy laws are well and truly finished.

Professional guidance from a tax and wealth management firm like Blevins Franks is more important than ever before when it comes to navigating the minefield that is now international tax planning whilst keeping a fully legal plan which can withstand any investigation.

By David Franks, Chief Executive, Blevins Franks

19th April 2011

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.