Tax transparency – the road ahead
In the last few years, particularly following the credit crunch, there has been a tangible focus on tax avoidance and clamping down on tax planning. Overnight, the rules of the game were changed and what was previously considered to be legitimate tax planning was condemned as being aggressive and morally incorrect.
Governments of developed nations, in particular, started to take measures to clamp down on tax avoidance schemes and as a consequence levels of cooperation between such states has increased significantly. The OECD has spearheaded these advances and we have been hearing a lot about exchange of information, disclosure of beneficial ownership of companies and beneficiaries of trusts, tax transparency, the Foreign Account Tax Compliance Act (FATCA) and other similar terms whose sole intention is to pretty much narrow the ever shrinking window of opportunity still available to tax avoiders.
As the world has become increasingly globalised it has become easier for taxpayers to hold capital and earn income outside their country of residence, which results in significant losses in terms of tax revenues for a number of jurisdictions. This, together with the economic crisis, has led to a number of countries to focus on obtaining information about their resident taxpayers in order to minimise these losses.
One of the measures that will be taken by the UK will be the introduction of a public registry of the individuals who have significant control of UK companies. This is expected to influence the customer due diligence undertaken, as UK companies will be required to identify those “persons with significant control” (PSCs). This registry is expected to be fully searchable and freely available online.
Information has been exchanged for a number of years. Article 26 of the OECD Model Tax Convention and also the Multilateral Convention on Mutual Administrative Assistance in Tax Matters have provided a basis for all forms of exchange.
However, the most radical step forward in exchange of information has been the US implementation of FATCA which is now being followed by the Automatic Exchange of Financial Account Information in Tax Matters, which will come into force in 2017.
Although 2017 seems far off, taxpayers need to be aware, now more than ever, of how this automatic exchange of information is going to work in order to ensure that their structures are durable.
Discussions about tax transparency, exchange of information and so on are closely linked with discussions about the fine line that exists between tax mitigation, avoidance and evasion
First of all, it is important to note that this automatic exchange of information is not applicable to only EU or OECD members, but goes well beyond that. Some countries, known as the ‘early adopters’, will be implementing this initiative by 2017, with a second wave implementing it during 2018. In total more than 100 countries shall adopt this procedure. Malta, like most other EU member states, will undertake its first exchanges by 2017.
In order to understand how this exchange will work, we need to understand the scope of the following:
• The financial information reported;
• The account holders subject to reporting;
• The financial institutions required to report.
The OECD has explained the scope of the above in its recent publication, Standard for Automatic Exchange of Financial Account Information in Tax Matters.
The scope of financial information reported covers different types of investment income, including interest, dividends, income from certain insurance products, sales proceeds from financial assets and similar types of income. The reporting requirements will not only be extended with respect to individual’s accounts, but shell companies, trusts and similar arrangements will be looked through by financial institutions.
This information is expected to be exchanged within nine months after the end of the calendar year to which the information relates. Furthermore, reporting financial institutions will not only include banks, but also brokers, certain collective investment vehicles and certain insurance companies.
In order to ensure the timely exchange of information and a reduction of administrative costs for governments, the process will be standardised through what is known as the ‘Common Reporting Standard’ which contains the reporting and due diligence standard that underpins the automatic exchange of information which each country must follow. The scope of the information that will be exchanged is wide and far reaching and it is important for clients to seek expert advice before implementing any new structures and also to ensure that their existing structures are durable in time.
Discussions about tax transparency, exchange of information and so on are closely linked with discussions about the fine line that exists between tax mitigation, avoidance and evasion.Following the Starbucks and similar cases, today we are speaking about ethical tax planning and not only of a distinction between what is legal and what is not.
