The world’s new tax haven

Financial Mirror (Cyprus) - - FRONT PAGE - By Udith Sikand

In the af­ter­math of the 2008 fi­nan­cial cri­sis, there was a sense that the sys­temic fail­ures it re­vealed would spark a rad­i­cal over­haul of the global fi­nan­cial ar­chi­tec­ture. Eight years on, that has not hap­pened: an ex­cep­tion is per­haps off­shore fi­nance. The US led the way with its For­eign Ac­count Tax Com­pli­ance Act (FATCA), which tar­gets US cit­i­zens with foot­loose money. A more am­bi­tious ini­tia­tive was launched in 2009 by the G20; it aimed for full dis­clo­sure of fi­nan­cial trans­ac­tions un­der­taken by res­i­dents of one sig­na­tory coun­try liv­ing in another. To­day, the Com­mon Re­port­ing Stan­dard (CRS) has 101 sig­na­tory na­tions, and from next year in­for­ma­tion will start to cas­cade be­tween na­tional tax au­thor­i­ties. The process is set to trans­form the way that global cap­i­tal is man­aged and taxed. Iron­i­cally, a big win­ner may be the US dol­lar.

It is ironic be­cause the US, which started the war on off­shore fi­nan­cial cen­ters, is not part of this mul­ti­lat­eral frame­work, and as a re­sult is emerg­ing as the pre­ferred lo­ca­tion for wealthy (non-US) in­di­vid­u­als cap­i­tal be­yond the pry­ing eyes na­tional tax in­spec­tors.

The CRS prom­ises to change be­hav­ior as it com­pels fi­nan­cial in­sti­tu­tions to re­port in­for­ma­tion on both per­sonal and cor­po­rate ac­counts held by non-res­i­dents. Tax havens such as the Bri­tish Vir­gin Is­lands, the Isle of Man and Sin­ga­pore must ex­change in­for­ma­tion on ac­count hold­ers, with the main re­spon­si­bil­ity for iden­ti­fy­ing ben­e­fi­cial own­er­ship rest­ing with banks. Ahead of these mech­a­nisms go­ing live from next year, the likes of Aus­tralia, the UK and In­dia have made it a crim­i­nal of­fence not to dis­close off­shore in­come. As a sop, some coun­tries are of­fer­ing tax amnesty schemes. The hope is that money gets pulled away from tax havens, which con­tain wealth es­ti­mated at be­tween US$7trn and US$32trn. On the face of it, such mea­sures should bol­ster sav­ing in lo­cal cur­rency and di­min­ish the root­less off­shore market in US dol­lars.

Gov­ern­ments have sought to sweeten the pill by of­fer­ing im­mu­nity to in­di­vid­u­als who fess up to hav­ing il­licit off­shore wealth. In­done­sia’s amnesty scheme, which runs un­til March 2017 and of­fers penalty rates in to of stash their the sin­gle dig­its, has seen dec­la­ra­tions of about US$280bn, or 90% of the govern­ment’s tar­get. The prob­lem is that 70% of the dec­la­ra­tions made so far have in­volved on­shore as­sets, while only US$10bn was repa­tri­ated. Sim­i­larly, In­dia which re­cently ran amnesty schemes for over­seas and do­mes­tic in­come, with penalty rates av­er­ag­ing 45%, saw just US$1bn of off­shore as­sets de­clared, com­pared to US$10bn do­mes­ti­cally. Res­i­dents of In­done­sia and In­dia are es­ti­mated to have a com­bined US$1trn of wealth squired in Sin­ga­pore and Mau­ri­tius, yet both of these off­shore cen­ters are signed up to CRS, mean­ing that they will soon be pass­ing along ac­count hold­ers de­tails to tax au­thor­i­ties in Jakarta and New Delhi. Hence, the pre­sump­tion must be that much of this money is in the process of mov­ing to other ju­ris­dic­tions not cov­ered by CRS dis­clo­sure.

Ex­hibit A is the US, as it in ef­fect op­er­ates as a tax man­age­ment is­land with its own FATCA mech­a­nism fo­cused purely on chas­ing down the fi­nan­cial hold­ings of US cit­i­zens. While en­force­ment re­lies on bi­lat­eral agree­ments with “part­ner” gov­ern­ments, the irony is that the US does not re­cip­ro­cate by of­fer­ing sim­i­lar dis­clo­sure as it re­lates to the fi­nan­cial hold­ings of for­eign cit­i­zens within the US.

To be sure, it can be ar­gued that high US tax rates would more than off­set the lure of con­fi­den­tial­ity that US “se­crecy” of­fers. In ad­di­tion, the US govern­ment has told FATCA part­ner coun­tries that it ul­ti­mately plans to adopt leg­isla­tive changes which will al­low re­cip­ro­cal in­for­ma­tion shar­ing. Per­haps, but the com­plex US tax code of­fers plenty of scope for min­i­miz­ing tax—just ask Don­ald Trump—while there is lit­tle ev­i­dence that a more na­tivist-in­clined US Congress will any­time soon sign the US up to a mul­ti­lat­eral frame­work that har­mo­nizes tax treat­ment, to the po­ten­tial detri­ment of US fi­nan­cial in­sti­tu­tions.

For this rea­son, the shift in CRS re­port­ing is likely to force a flow of US dol­lars away from off­shore fi­nan­cial cen­ters and into the main­land US. Such a trend should guar­an­tee a con­sis­tent bid for the US dol­lar, even while it threat­ens the out­look for those cen­ters which for decades thrived by manag­ing off­shore dol­lars, largely for the pur­pose of tax eva­sion.

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