The Beginning Of The End For Tax Havens

Over the last 10 years or so, we have reported on a number of new initiatives to clamp down on offshore tax evasion. The Savings Tax Directive in 2005 heralded a new era, but it was not the end. Spurred on by the financial crisis, governments became even more determined to attack offshore tax havens – and this is now escalating again.

Introduction

Hundreds of Tax Information Exchange Agreements (TIEAs) have been signed over recent years between countries like the UK, France, Spain and Portugal and offshore financial centres – or ‘tax havens’ as they are commonly called. Nonetheless, since the US government introduced its Foreign Account Tax Compliance Act (FATCA), Europe has followed suit in introducing agreements that are multilateral in nature.

There has been a surge in bilateral information exchange agreements. The UK introduced its Lichtenstein disclosure facility, followed by the UK-Swiss Agreement on tax disclosure. It then spread the net even wider by targeting its own offshore financial centres, which led to disclosure facilities with the Channel Islands and Isle of Man.

Now in a move from the more traditional bilateral agreements, there is a shift towards the kind of multilateral agreements that will see several countries all sharing information with each other. In due course, there is no reason to believe that this approach will not take place on a global basis.

Recent G5 multilateral pilot agreement

The British, French, Spanish, German and Italian governments have signed an automatic information exchange agreement, to operate on a multinational basis, in a bid to crack down on tax evasion.

Under the terms of the deal, a wide range of financial information will be automatically exchanged between the five countries. This provides a template for wider multilateral automatic tax information exchange.

The G5 pilot is based on the model agreements they negotiated with the US in order to comply with FACTA.

The US model agreement provides that the information to be obtained and exchanged is:

Name and address of the foreign national account holder.
Account number.
Name and identifying number of the reporting financial institution.
Account balance as of the end of the relevant calendar year or other appropriate reporting period, or immediately before closure.
In the case of portfolio accounts: (A) The total gross amount of interest, of dividends and of other income generated with respect to the assets held in the account, in each case paid or credited to the account (or with respect to the account) during the calendar year or other appropriate reporting period; and (B) the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period.
In the case of depository accounts, the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period.
In the case of any account not described in (5) or (6) above, the total gross amount paid or credited to the account.

Intention that the scheme is expanded to include more countries

In a letter to the EU Commissioner for Taxation, the G5 countries outlined their wish that other EU Member States also commit to joining the pilot exchange of information scheme, with a view to promoting a global system of automatic information exchange.

They urged for progress on the implementation of article 8 of the Administrative Cooperation and Mutual Assistance Directive of 2011 which provides that:

‘’Each Member State shall, by automatic exchange, communicate to the competent authority of any other Member State, information regarding taxable periods as from 1^st January 2014 on the following:

income from employment
director’s fees
life insurance products not covered by other Union legal instruments on exchange of information and other similar measures pensions
ownership of and income from immovable property.

As from 1st January 2017 the list above is to be expanded to include:

dividends
capital gains
royalties.”

As we can see, the reporting requirements under both these schemes will leave little room for tax evasion or concealed offshore funds going forward.

More countries join the G5 scheme

The Cayman Islands, Anguilla, Bermuda, British Virgin Islands, Montserrat and Turks and Caicos Islands have all agreed to join the pilot scheme, both bilaterally with the UK and also on a multilateral basis with the G5 countries.

It seems that tax havens the world over are voluntarily joining up to these type of schemes, presumably to avoid blacklisting by the Organisation for Economic Cooperation and Development (OECD).

The effect of OECD blacklisting could be severe as financial transactions can be crippled by close scrutiny by transacting banks and the need for those transferring funds to identify themselves and the nature of transactions at every turn. Getting funds in and out of a blacklisted country could end up proving to be an administrative nightmare resulting in huge disadvantages to carrying out business of any kind there.

As the Chief Executive of the Bahamas Financial Services Board, Aliya Allen, commented about information exchange agreements:

‘’We very much knew that was essentially the end game and it was just a matter of time before that arrived as the global standard. We saw the writing on the wall with FATCA, which was the prime opportunity for them to actively embrace that as the standard at OECD level, which they’re naturally going to take advantage of.’’

All this comes at a time when many countries are imposing higher taxes as part of austerity measures. There are legitimate tax planning arrangements available in countries like Spain, France, Portugal and Cyprus which can significantly lower your tax liabilities – there is actually no need to risk trying to hide assets offshore. Speak to Blevins Franks for personalised advice on how to structure your affairs to pay the least amount of tax possible.