Global fi­nan­cial in­dus­try forced to check on clients

US-led drive for global tax trans­parency will af­fect pri­vate and cor­po­rate in­ter­na­tional play­ers

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - AN­THONY MARKHAM

The For­eign Ac­count Tax Com­pli­ance Act has made waves in the up­per reaches of the funds in­dus­try and caused con­cern to banks, cus­to­di­ans, insurance com­pa­nies and trustees, but lit­tle news re­gard­ing its im­pact has yet spread to the wider world. Few ul­ti­mate clients of the in­ter­na­tional fi­nance in­dus­try have yet heard of it.

This sit­u­a­tion will change dra­mat­i­cally over the com­ing months and years.

All US cit­i­zens and green card hold­ers are US tax­pay­ers, whether or not they re­side in the US, and all US tax­pay­ers have ex­ten­sive re­port­ing, fil­ing and tax­pay­ing obli­ga­tions with sig­nif­i­cant penal­ties for fail­ure to file. The aim of the com­pli­ance act is to oblige the in­ter­na­tional fi­nance in­dus­try to re­port to the US In­ter­nal Rev­enue Ser­vice (IRS) on the in­ter­na­tional fi­nan­cial ac­counts of US tax­pay­ers, on trusts in which they have in­ter­ests and on com­pa­nies and part­ner­ships con­trolled, or deemed con­trolled by US tax­pay­ers.

In 2009 the IRS de­cided it needed an­nual re­ports from the world­wide fi­nan­cial in­dus­try de­tail­ing, in re­spect of each and ev­ery ac­count, the tax­payer’s name, tax iden­ti­fi­ca­tion num­ber, and the as­so­ci­ated ac­count de­tails in­clud­ing ac­count num­bers, bal­ances and move­ments. The IRS jus­ti­fies this de­mand on the ba­sis that it will sig­nif­i­cantly en­hance com­pli­ance by US tax­pay­ers, both vol­un­tar­ily and through in­formed en­force­ment.

Fol­low­ing the IRS de­ci­sion, the US hit on the happy idea of com­pelling the world’s fi­nan­cial in­dus­try to fall into line by us­ing a big stick: the threat of with­hold­ing 30% on all pay­ments de­rived from US in­vest­ments. This is not the same as the with­hold­ing of 30% of in­ter­est and div­i­dends which has been in place for years. The new with­hold­ing ap­plies to all pay­ments, in­clud­ing the pay­ment of cap­i­tal re­turned on dis­in­vest­ment. The US is the largest re­cip­i­ent of in­ward in­vest­ment in the world. It is very dif­fi­cult for any in­ter­na­tional fi­nan­cial in­sti­tu­tion to op­er­ate with­out in­vest­ing, di­rectly or in­di­rectly, in the US, or deal­ing with fi­nan­cial in­sti­tu­tions that in­vest in the US.

And so it be­came clear that the world fi­nance in­dus­try would have to fall into line.

The US soon found there were snags. Sep­a­rate com­pli­ance by world­wide in­sti­tu­tions with the US com­pli­ance act is cum­ber­some. Many coun­tries have rules about data pro­tec­tion, in some ju­ris­dic­tions el­e­vated to “bank­ing se­crecy”, which pro­hibits com­pli­ance. The threat of with­hold­ing for non-com­pli­ance was per­ceived as threat­en­ing the con­tin­ued op­er­a­tion of non-US fi­nan­cial cen­tres, in­clud­ing the very largest cen­tres, like Lon­don and Frank­furt.

As a re­sult, the gov­ern­ments of coun­tries with in­ter­na­tional fi­nan­cial in­dus­tries have in­ter­vened and have con­cluded, or are con­clud­ing, “in­ter­gov­ern­men­tal agree­ments” with the US, which makes For­eign Ac­count Tax Com­pli­ance Act com­pli­ance legally pos­si­ble and in­deed com­pul­sory, in such coun­tries. In ex­change the gov­ern­ments con­cerned re­quired some con­ces­sions from the US. Each agree­ment achieves free­dom from com­pli­ance act with­hold­ing re­quire­ments for the lo­cal fi­nance in­dus­try. The agree­ments also pur­port to ob­tain re­cip­ro­cal dis­clo­sure of in­for­ma­tion re­gard­ing ac­counts in the US of tax­pay­ers in the rel­e­vant agree­ment ju­ris­dic­tion, but de­liv­er­ing on this par­tic­u­lar as­pect seems to have run into con­sti­tu­tional dif­fi­cul­ties in the US.

To com­ply with the com­pli­ance act, the banks, in­sur­ers and cus­to­dian trustees of the world will have to check all their ac­counts as at 30 June 2014, when the com­pli­ance act is sched­uled to go live, to see if they have US tax­pay­ers. This is a sub­stan­tial task, which will take years and fi­nan­cial in­sti­tu­tions will re­quire many cus­tomers to fill in ex­tra forms to make sure their cat­e­gori­sa­tion is right. De­spite con­tin­u­ing pres­sure on the US to al­low more time, so far there has been no in­di­ca­tion of fur­ther de­lay. Cus­tomers with US con­nec­tions, who are the tar­get of the in­ves­ti­ga­tion, will be most af­fected, but oth­ers will also be in­volved, even if a par­tic­u­lar cus­tomer has no US con­nec­tions. The fi­nance in­dus­try will need to seek ad­di­tional dec­la­ra­tions from new cus­tomers to en­sure that they are cat­e­gorised prop­erly.

On the ba­sis of the cat­e­gori­sa­tion of old cus­tomers and the ad­di­tional in­for­ma­tion ob­tained on new cus­tomers, the fi­nance in­dus­try will need to pre­pare re­ports, des­tined for the IRS. All this is an ad­di­tional cost to the in­ter­na­tional fi­nance in­dus­try. That cost will no doubt be passed on to some de­gree, and be ab­sorbed by the fi­nance in­dus­try to some de­gree. This task may not seem too se­ri­ous. In­for­ma­tion tech­nol­ogy so­lu­tions will be de­vel­oped to au­to­mate data col­lec­tion and re­port­ing. Per­haps there will be in­dus­try con­sol­i­da­tion in

De­spite con­tin­u­ing pres­sure on the US to al­low more time (for com­pli­ance), so far there has been no in­di­ca­tion of fur­ther de­lay

the process of ab­sorb­ing th­ese costs and de­vel­op­ing the so­lu­tions.

All the con­se­quences men­tioned above are essen­tially ad­min­is­tra­tive and will be re­garded as rel­a­tively mi­nor by the cus­tomers. But the real ques­tions are: The For­eign Ac­count Tax Com­pli­ance Act is al­ready ex­tended to UK tax­pay­ers; will it ex­tend to other tax­pay­ers and if so, how quickly? and

What will be the con­se­quences for all tax­pay­ers of the “min­ing” of the data col­lected?

Tax au­thor­i­ties world­wide have seen that, once the ma­chin­ery is in place, it is rel­a­tively easy for other ju­ris­dic­tions to tag along. The UK and the US are con­spir­ing with the rest of the world to ex­tend the reach of this leg­is­la­tion world­wide. Al­ready many Euro­pean coun­tries, in­clud­ing France, Ger­many, Spain and Italy, and a good num­ber of other coun­tries, such as Nor­way, Den­mark and SA, have an­nounced that they will sign up. Lev­els of non-com­pli­ance in dif­fer­ent coun­tries will vary, as will the level of so­phis­ti­ca­tion of lo­cal tax au­thor­i­ties, but how long will it be be­fore fur­ther coun­tries join in? Will the pro­gramme not be at­trac­tive to the rest of Europe, South Amer­ica, Africa, Canada, the Mid­dle and Far East, and oth­ers? The G20 has asked the OECD to spear­head a pro­gramme to en­sure that tax trans­parency be­tween ju­ris­dic­tions is the new norm. A con­fer­ence of the OECD Global Fo­rum on Trans­parency and Ex­change of In­for­ma­tion for Tax Pur­poses, which brings to­gether 122 coun­tries, was held in Jakarta, In­done­sia, last Novem­ber. The con­fer­ence es­tab­lished a new group to mon­i­tor and re­view “au­to­matic ex­change of in­for­ma­tion” con­sis­tent with the G20 call.

Tax­pay­ers with his­tor­i­cal, ag­gres­sive or non-com­pli­ant struc­tures will no longer be able to rely upon lack of scru­tiny.

Sup­pose you have an off­shore trust with a le­git­i­mate his­tory, your safety net, which you have never needed to touch or re­port? Your lo­cal tax au­thor­i­ties will have a new win­dow on your in­ter­na­tional af­fairs and an op­por­tu­nity to dis­cuss with you whether your his­tor­i­cal plan­ning re­ally did work as well as you think.

Sup­pose you are an “ac­ci­den­tal” US cit­i­zen who has never lived in the US, and you for­got to file with the IRS your an­nual “For­eign Ac­count Bal­ance Re­port” on your UK bank ac­count. The IRS will know. The penalty can be a per­cent­age of the ac­count bal­ance.

Per­haps you are a UK res­i­dent who has a bank ac­count in the Cay­mans; or a trust you es­tab­lished in the Turks and Caicos Is­lands and a com­pany in the Bri­tish Vir­gin Is­lands which you are re­luc­tant to dis­close. HMRC will have it on file.

If you are a res­i­dent of one of the coun­tries which have ex­pressed an in­ter­est, but which have not yet rolled out their own “tax trans­parency” pro­gram, per­haps you have a lit­tle more time. But the au­to­matic ex­change of in­for­ma­tion ini­tia­tive seems un­likely to fal­ter. The world fi­nance in­dus­try will re­luc­tantly but un­avoid­ably be­come a po­lice­man for tax au­thor­i­ties, re­port­ing au­to­mat­i­cally back to the au­thor­i­ties in a tax-col­lec­tor friendly man­ner. It is likely that ev­ery in­sti­tu­tion will ask for your place of tax res­i­dence and tax num­ber; and as coun­tries join the pro­gram, so re­ports will start to be filed car­ry­ing your num­ber which will be re­turned to your coun­try of tax res­i­dence, and no doubt the re­port will be linked with your tax re­turn.

As a re­sult a large amount of ad­di­tional data about the in­ter­na­tional af­fairs of tax­pay­ers will be avail­able to fis­cal au­thor­i­ties ev­ery­where. Op­por­tu­ni­ties for data min­ing are man­i­fest.

Is pri­vacy still a sig­nif­i­cant “unique sell­ing point” of the off­shore world? And if so, from whom? Th­ese ju­ris­dic­tions claim to be prop­erly reg­u­lated, flex­i­ble, tax-neu­tral off­shore plat­forms. But to what ex­tent do they still shel­ter ag­gres­sive plan­ning which has sur­vived solely or partly be­cause of lack of scru­tiny? Per­haps a tide of shady in­ter­na­tional fund­ing will go out and we will see who is wear­ing the bathing suit.


CLIENT AU­DIT HEADACHE Banks, in­sur­ers and cus­to­dian trustees of the world will have to check all their ac­counts as at 30 June 2014 to see if they have US tax­pay­ers

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