Over the last 15 years we have reported on a number of new initiatives to clamp down on offshore tax evasion, each one whittling away at financial privacy as we knew it. We will now soon see the introduction of a global automatic exchange of financial information, covering a wide range of income.
Over the last 15 years we have reported on a number of new initiatives to clamp down on offshore tax evasion, each one whittling away at financial privacy as we knew it. The Savings Tax Directive in 2005, with its automatic exchange of information on savings income, was revolutionary at the time, but not the end of the story. Far from it, in fact. We will now soon see the introduction of a global automatic exchange of financial information, covering a wide range of income.
The 2008 financial crisis prompted governments, desperate to increase tax revenue, to renew the campaign against offshore tax evasion. Offshore centres, keen to protect their reputations, fell into line. Within four years 119 countries had committed to the Organisation for Cooperation and Development (OECD) standard for tax transparency and exchange of information, and around 1,100 new tax information exchange agreements were signed.
These are bilateral agreements, between two jurisdictions, and generally provide for information being provided on request. Last year saw a pivotal commitment to multilateral agreements, where several countries share vital information. Fundamentally, this will happen automatically each year, regardless of whether someone is suspected of tax evasion or not.
This new approach dates back to 2010, when the US enacted its Foreign Account Tax Compliance Act (FATCA). It will require foreign financial institutions around the world to report account details of their American customers to the US tax administration. Working together with the G5 (UK, France, Spain, Germany and Italy), the US developed a model for the “intergovernmental agreement” (IGA) to be used to implement FATCA.
In April 2013, the G5 announced their intention to exchange FATCA-type information amongst themselves. Their aim was for all other EU Member States to join and to promote it as the global system of automatic information exchange. By January 2014 over 40 jurisdictions had joined the pilot group, including Portugal, Cyprus, Malta and the Channel Islands, Isle of Man, Gibraltar and UK offshore territories.
In September 2013, G20 leaders announced plans to introduce automatic exchange of information as the global standard. The OECD began working with the G20 and EU, and in February 2014 released its Common Reporting Standard covering the reporting and due diligence rules to be imposed on financial institutions around the world.
A G20 Finance Ministers communique issued later in February said they expected to begin to exchange information automatically on tax matters among G20 members by the end of 2015.
They also called on all other jurisdictions to adopt the OECD protocol, threatening “tougher incentives” for those who fail their OECD tax transparency evaluations. This implies financial sanctions may be imposed.
To prevent taxpayers circumventing it, the Common Reporting Standard is specifically designed with a broad scope across three dimensions:
- The financial information to be reported includes all types of investment income, as well as account balances and sales proceeds from financial assets.
- As well as banks, custodians, brokers, certain collective investment vehicles and certain insurance companies need to report.
- Reportable accounts cover both those held by individuals and entities such as trusts.
Financial institutions in participating countries will determine the residence of each client and collect data on their assets and income. This will be forwarded to the tax authorities in the clients’ country of residence.
The OECD lists the main benefits of automatic exchange as:
- Provides timely information on non-compliance where tax has been evaded on the investment income or underlying capital sum.
- Helps detect cases of non-compliance even where the tax authorities have no previous indications of non-compliance.
- Deters tax evasion, encouraging taxpayers to report all relevant information
- May help educate taxpayers in their reporting obligations, thus increasing tax revenues and ensuring taxpayers pay their fair share of tax in the right place at the right time.
Meanwhile, there are also developments here in the EU. The Savings Tax Directive is being revised to cover investment funds, pensions and innovative financial instruments, and capture payments made through trusts and foundations.
The revised Administrative Cooperation Directive, to apply from January 2015, introduces automatic exchange on employment income, director’s fees, life insurance products, pensions and ownership and income from immovable property.
The EU is also closer to reaching agreements with Switzerland, Liechtenstein, Andorra, Monaco and San Marino on their revision of their savings agreements. They are said to be ready to work towards alignment with the EU when it comes to tax transparency, in keeping with the global standard.
How could the loss of financial privacy affect you? Are you sure your tax planning is fully compliant? Are your assets as tax efficient as possible or are you paying more tax than necessary? What happens when your beneficiaries inherit your assets? International tax planning is very complex these days. To ensure that you save tax wherever possible, and in a fully legitimate manner, it is essential to seek specialist advice.
17 March 2014