The push for global tax transparency – the UK’s son of FATCA

December 04, 2012

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If press rumours are to be believed, the Autumn Statement may see the introduction of legislation under which UK Crown Dependency and Overseas Territories tax havens hand over data to HM Revenue & Customs (HMRC). Countries likely to be affected, and where we expect to see a high level of new tax disclosures emerging, include Jersey, Guernsey, Isle of Man, the Cayman Islands, Gibraltar, Bermuda and the British Virgin Islands. But what’s brought about the need for such a focused crackdown on the use of tax havens? And what is the impact of this legislation likely to be?

Understanding the need for greater tax transparency

In April 2009, the Office for Economic Cooperation and Development (OECD) and the G20 called for significant progress to be made towards financial transparency, principally in countries identified as ‘tax havens.’ They identified 38 countries which had committed to, but hadn’t yet substantially implemented, the internationally agreed tax standard (dubbed the ‘grey list’), and four countries that hadn’t demonstrated any commitment to the tax standard (the ‘black list’). By signing 12 double tax agreements countries were able to get themselves off the grey list. By 2012, no countries remained on the black list and only three remained on the grey list.  On the face of it substantial progress to create global tax transparency had been achieved. 

In reality however, the OECD was criticised for removing countries from the grey list which still significantly obstruct progress towards fiscal transparency, due to the leniency of the requirements for the ‘white list’. Put bluntly, tax havens simply tried to avoid tax agreements with developed countries.

Making use of the Liechtenstein Disclosure Facility

Progress towards tax transparency came instead from an unexpected source. In recent years the increased importance of whistleblowers has been a major factor in the development of banking transparency.  Several banks have seen data handed over to tax authorities in relation to Swiss, Jersey and Liechtenstein bank accounts. As a direct consequence, Liechtenstein announced a programme to make sure all UK resident business would be tax compliant by 2015 and negotiated the Liechtenstein Disclosure Facility (LDF) with the UK. This allows anyone with undeclared offshore assets in late 2009 to make a voluntary disclosure to HMRC on preferential terms. The LDF has proved to be very successful for the UK Government, which extended it to March 2016 and announced that it expected to collect £5bn through this mechanism.

Adopting tax transparency policies

Many banks, suffering a loss of reputation and at risk of legal action from governments such as the United States (US), are adopting tax transparency policies and are systematically getting rid of non-tax compliant customers. Nowhere is this transition more obvious than in Switzerland where the new UK/Swiss Tax Agreement (due to come into force on 1 January 2013) has accelerated this change and led to a significant number of UK residents making tax disclosures.

The Foreign Account Tax Compliance Act (FATCA)

In a game-changing move, the US announced the Foreign Account Tax Compliance Act (FATCA) in 2010. This onerous legislation requires banks to report details of US citizens holding accounts with them. One thing is clear, the US may stand behind many tax havens, but it won’t tolerate its own citizens using them.

As part of the mechanism for the operation of FATCA, countries such as the UK have recently signed up to collect data for the US. The UK’s Crown Dependency and Overseas Territories are in the process of negotiating a similar agreement with the US which is expected to by signed by the end of the year. There’s been debte suggesting that the UK is putting pressure on the US not to sign this agreement unless the Crown Dependencies agree to our information exchange with the UK.

This is an important development and one which allows the UK to insist that its own tax havens hand over UK resident’s bank information, as well as information on trusts and funds. Like the US, the UK is content to allow the existence of its tax haven dependencies but it won’t tolerate their use by its own residents.

The impact of a UK FATCA

If the Chancellor does announce a FATCA-style piece of legislation, this will have a significant impact for anyone holding bank accounts in territories such as  Jersey, Guernsey and the Isle of Man etc. We’ll be listening with interest when George Osbourne delivers his Autumn Statement on 5 December 2012 to see if the details of this legislation will be made clearer.

Introducing a further investment in new resource to counteract tax evasion, a Ministerial Statement dated 3 December 2012 announced that “A groundbreaking agreement with the US – the UK-US Agreement to Improve International Tax Compliance and to implement FATCA – will significantly increase the amount of information automatically exchanged between the two countries. The agreement sets a new standard in international tax transparency and will further enhance HMRC’s ability to tackle offshore evasion. The Government will look to conclude similar agreements with other jurisdictions.”

This suggests the speculation was right. We’ll find out tomorrow and will let you know our thoughts on the potential impact. Our tax disclosure team is led by Stephen Camm ([email protected]) and includes a specialist team, led by Rob Bridson ([email protected]), which helps institutions understand and implement programmes such as FATCA.