A new world of tax in­for­ma­tion

Au­to­matic ex­change of data may not be in clients’ best in­ter­ests

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - JO­HANNE HAGUE

IN BER­LIN in late Oc­to­ber last year, rep­re­sen­ta­tives from 51 ju­ris­dic­tions got to­gether to sign the sym­bolic mul­ti­lat­eral com­pe­tent author­ity agree­ment (CAA) for the au­to­matic ex­change of in­for­ma­tion. This event was in­tended to be a “step change” in the way in which ju­ris­dic­tions share tax in­for­ma­tion to com­bat tax eva­sion, by cre­at­ing a frame­work for the sys­tem­atic and pe­ri­odic trans­mis­sion of bulk tax­payer in­for­ma­tion by the source coun­try to the coun­try of res­i­dence of the tax­payer.

Mau­ri­tius was one of the two coun­tries from the African con­ti­nent to sign the CAA (the other be­ing SA). Our lead­ers pat­ted them­selves on the back for thrust­ing Mau­ri­tius to the fore­front of such ground-break­ing global ac­tion.

For­give me if I don’t join in the cel­e­bra­tions just yet.

Putting aside the un­set­tling Or­wellian re­al­ity of this topic, to my mind, re­joic­ing in the ad­her­ence to the CAA would be naive and (if I may say) some­what ig­no­rant about the prac­ti­cal, fi­nan­cial and eco­nomic chal­lenges it en­tails.

Mau­ri­tius has worked hard to es­tab­lish it­self as a trans­par­ent, ef­fi­cient and re­li­able in­ter­na­tional fi­nan­cial cen­tre. Tough anti-money laun­der­ing rules are in place, we are rated “largely com­pli­ant” by the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment (OECD), our fi­nan­cial ser­vices mar­ket is well reg­u­lated and sta­ble. But there is a just bal­ance to be struck be­tween trans­parency and pro­tect­ing our clients’ rights.

Au­to­mat­i­cally equat­ing bank­ing se­crecy with anti-money laun­der­ing and tax eva­sion is a danger­ous gen­er­al­i­sa­tion. We need to be care­ful that our zeal to be seen as be­ing in line with the first world does not drive our clients away.

I still re­mem­ber the days when US For­eign Ac­count Tax Com­pli­ance Act (Fatca) was first heard of. Most peo­ple I came across com­mented on what an abom­inable and in­com­pre­hen­si­ble piece of leg­is­la­tion it was. Many thought it would never come into fruition. Few imag­ined glob­al­i­sa­tion of this Fatca-in­spired leg­is­la­tion only a hand­ful of years later. The CAA pur­ports to draw on the in­ter­gov­ern­men­tal ap­proach adopted un­der Fatca. How­ever, the CAA is broader in scope than Fatca and con­tains fewer ex­emp­tions.

It is ironic that the OECD has the com­pelling head­line that the aim of this ini­tia­tive is to tax the su­per­rich who hide their money off­shore and yet, the CAA does not con­tain the min­i­mal fi­nan­cial thresh­olds for in­di­vid­u­als which ex­ist un­der Fatca. Sim­i­larly, purely lo­cal fi­nan­cial in­sti­tu­tions are ex­empt un­der Fatca by rea­son of their client base. This is not the case un­der the CAA. The ex­pres­sion “fish­ing ex­pe­di­tion” comes to mind.

One of the cru­cial points high­lighted in the CAA and all com­ple­men­tary lit­er­a­ture pub­lished by the OECD is that pro­tect­ing tax­pay­ers’ con­fi­den­tial­ity is cru­cial. Ro­bust and fail-proof IT and ad­min­is­tra­tive sys­tems need to be built in or­der to col­lect and trans­mit in­for­ma­tion safely. The tech­ni­cal guid­ance dis­cusses pro­posed trans­mis­sion meth­ods and en­cryp­tion stan­dards but it is clear that there is no sin­gle so­lu­tion (or per­haps, no so­lu­tion at all).

But let’s face it. We live in a dig­i­tal world where even the most se­cure sys­tems ap­pear to be hacked into ef­fort­lessly. The lat­est round of cy­ber­at­tacks on Sony is but one ex­am­ple.

The sec­ond re­lated is­sue is the costs in­volved in putting such a sys­tem in place.

Does Mau­ri­tius have the re­sources (fi­nan­cial and hu­man) to do it? And who will bear the ul­ti­mate cost? The tax­payer, of course.

Mau­ri­tius forms part of the so­called “early adopters group”, be­ing a group of na­tions which have com­mit­ted to im­ple­ment the CAA by Septem­ber 2017. In prac­tice this means that fi­nan­cial in­sti­tu­tions in the rel­e­vant coun­tries will need to have their sys­tems fully com­pli­ant with the leg­is­la­tion by 1 Jan­uary 2016. The group la­bels this dead­line as an “am­bi­tious but re­al­is­tic timetable”.

Am­bi­tious? Ab­so­lutely. Re­al­is­tic? I’m afraid that the jury is still out on this one.

The first step to be taken is for there to be a proper legal ba­sis in the rel­e­vant ju­ris­dic­tion for the CAA and ac­com­pa­ny­ing guid­ance to be ef­fec­tive. Do­mes­tic leg­is­la­tion needs to be en­acted. Fi­nan­cial in­sti­tu­tions need time to di­gest this leg­is­la­tion and im­ple­ment it. For those lo­cal in­sti­tu­tions in Mau­ri­tius who have taken great care to avoid tak­ing on US clients so as not to be bur­dened by Fatca, the tremen­dous ex­pense and bur­den they face with this new leg­is­la­tion is now an un­avoid­able re­al­ity.

While its ob­jec­tive in it­self is laud­able (ie to catch tax-evad­ing crooks), this ini­tia­tive comes fraught with many chal­lenges and ob­sta­cles which should not be un­der­es­ti­mated nor over­looked.

And as a fi­nal thought, I leave you with this ques­tion: is it a sur­prise that, af­ter lit­er­ally forc­ing Fatca onto the rest of the world, the US has not signed up to this?

Au­to­mat­i­cally equat­ing bank­ing se­crecy with anti-money laun­der­ing and tax eva­sion is a danger­ous gen­er­al­i­sa­tion



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