UK Prime Minister David Cameron stated that the G8 summit in June 2013 could go down in history as ‘the turning point in the battle against tax evasion and avoidance’. The G8 Presidency planned to focus on the ‘three ts’ of trade, tax and transparency, and set out bold ambitions to ‘rewrite the rules on tax’.
There were announcements on transparency of company beneficial ownership, and more specifics were released on the UK’s Foreign Account Tax Compliance Act-style intergovernmental agreement (IGA) on automatic information exchange with the Crown Dependencies and British Overseas Territories. Questions remain over the detail. There were many broad statements of intent, but how will the proposals work in practice? Will they assist HMRC in its fight against offshore tax evasion? And what do trusts and estate practitioners need to know?
What does ‘automatic information exchange’ mean?
Put simply, automatic exchange of information means member states collect bulk data on various categories of income (e.g. dividends, interest, royalties, salaries and pensions) earned in their country. The tax authority of a taxpayer’s country of residence can then check its tax records to verify that taxpayers have accurately reported their worldwide sources of income. This information is also used to evaluate an individual’s net worth, as many tax authorities now aim their resources and risk reviews at high-net-worth individuals. The information is then sent to authorities in individuals’ home countries so it can be taxed correctly, with the exchange taking place through secure IT networks. In Europe, all EU data protection rules must be fully observed. Identifying the taxpayer and matching the information with domestic records is usually done by running the data through sophisticated IT matching systems.
Automatic information exchange is a new standard compared to the tax information exchange agreements (TIEAs) of the past, which are bilateral agreements under which territories agree to cooperate in tax matters through exchange of information. They allow governments to enforce domestic tax laws by exchanging, on request, information relevant to a tax matter covered by the arrangements. The volume of data transmitted under old-style TIEAs was limited and often required the taxpayer to be easily identifiable or already under tax investigation.
A 2012 OECD report, Automatic Exchange of Information: What It Is, How It Works, Benefits, What Remains To Be Done,1 summarises the features of an effective model for automatic exchange. It highlights the main success factors as:
- a common agreement on the scope of reporting and exchange and related due diligence procedures;
- a legal basis for the domestic reporting and international exchange of information; and
- common technical solutions.
The G8 asked the OECD to produce a new report; this was released on the final day of the G8. The report outlines four steps to implement a global, secure and cost-effective model of automatic exchange of information. The report, A step change in tax transparency,2 follows the G20 Finance Ministers’ April 2013 endorsement of automatic exchange of information for tax purposes as the expected new standard. It focuses on ensuring effectiveness on recognising that tax evasion is a global issue that needs a worldwide reach to avoid merely shifting the problem elsewhere.
The four steps outlined in the report are:
- enacting broad-framework legislation to facilitate the expansion of a country’s network of partner jurisdictions;
- selecting the legal basis for the exchange of information;
- adapting the scope of reporting and due diligence requirements and coordinating guidance; and
- developing common or compatible IT standards.
Standardisation is key to the success of tax information exchange. A fragmentation of standards would mean diluting the impact as well as higher stakeholder costs. The OECD is working with G20 countries to develop a multilateral standard and to report progress at the next G20 meeting. The steps outlined in the report are ambitious targets, and although the timing for implementation is not mapped out, their functionality will soon become clear as they are put in place.
Does automatic exchange work?
Automatic exchange has several benefits when it is used to counter offshore tax evasion. It saves time and can help detect non-compliance, even where tax administrations have had no previous indications of problems. It also acts as a strong deterrent for account holders, encouraging them to report all relevant information and comply voluntarily. It remains to be seen what penalties or pressures are applied on countries that fail to implement the G8 measures fully. Will countries use the information for tax amnesties or will they take a more aggressive stance and seek criminal prosecutions? Another hot topic is the focus not only on tax evasion but on the use of new information exchange to tackle tax-avoidance schemes and possibly tax-planning arrangements.
HMRC is already preparing to receive an unprecedented amount of information as a result of the US-led FATCA, which was enacted in 2010.
After a consultation, on 31 May 2013 HMRC published the regulations and guidance on the implementation of the US-UK FATCA IGA. These extra information-sharing provisions represent a fundamental shift in the UK’s ability to track down tax evaders, and the world will be a much smaller place as a result. The new provisions laid out at the G8 go beyond the current requirement that only ‘available’ information should be exchanged automatically; exchange would also be mandatory, as member states will make that information available to the US under FATCA.
While it will be several years before we see the complete information flows from FATCA, there is much detail to be ironed out for private client advisors. It will be interesting to see what this means for non-UK-domiciled individuals living in the UK. Many of these individuals will now be paying GBP50,000 a year for their non-UK-domiciled tax status. In the past this has meant that such individuals do not disclose details of offshore assets that have no relevance to their UK tax affairs. However, we are yet to see whether special rules will be adopted to limit information exchange for non-UK-domiciled individuals. For deceased estates with assets in multiple jurisdictions, information exchange may bring new questions about the payment and reporting of estate taxes. Structures created for non-tax reasons may also come under increased scrutiny, as asset protection and commercial arrangements may be investigated by tax authorities with new data.
Tax transparency: is it becoming reality?
The commitments made at the G8 show that the tide is turning in the fight against tax evasion and demonstrate a major breakthrough for the UK. In the past few years there have been various offshore disclosure agreements, partial amnesties and now automatic information exchange agreements; this would have been unheard of five years ago.
The Crown Dependencies and the British Overseas Territories have all agreed automatic information exchange agreements. On 9 April 2013 the UK, alongside France, Germany, Italy and Spain, announced an agreement to develop and pilot multilateral tax information exchange based on the Model IGA to Improve International Tax Compliance and to Implement FATCA. Since then, the European Commission has said that 12 other member states wish to join the agreement. The EU-wide proposal has been put forward to avoid a multitude of different bilateral agreements, with the aim of preventing loopholes and limiting further administrative costs.
The UK has new agreements with Guernsey, Jersey and the Isle of Man to allow information on UK taxpayers with accounts in these jurisdictions to be reported to HMRC automatically each year. All three Crown Dependencies can use disclosure facilities with HMRC from 6 April 2013 until September 2016, but HMRC will begin investigating accounts immediately if it has information it believes warrants such action.
There are also EU laws that permit the automatic exchange of certain information between member states. The 2005 EU Savings Tax Directive ensures that member states collect data on the savings of non-resident individuals and automatically provide this to the tax authorities in their country of residence. While the directive already provides for the automatic exchange of information on employment, directors’ fees, life insurance, pensions and property, the EU Commission has proposed expansion of the Administrative Cooperation Directive to include more information from 1 January 2015.
Following the G8, the European Commission told five EU countries that they must enforce new EU laws aimed at tackling tax evasion in the next two months or else face court action. The EU’s executive warning to Italy, Poland, Belgium, Greece and Finland’s self-governing Aland Islands comes as the new laws require states to share information regarding possible tax evaders and set deadlines for how quickly information must be provided. Since the legislation is already in force, the five countries must respond to the Commission or face possible referral to the EU Court of Justice.
The string of initiatives introduced in recent months to assist the fight against offshore tax evasion and aggressive tax avoidance are a step in the right direction. However, caution is needed, as many of these announcements are political headlines and targets that throw up questions for tax practitioners. It remains to be seen what automatic information exchange looks like in practice and how each country will use the new information.
Practical safeguards may also follow, including secure IT systems for transmission of data and checks to ensure accuracy and prevent unnecessary enquiries for compliant taxpayers. Many businesses and private individuals will also have concerns over the apparent disregard for privacy and the non-tax consequences that can follow. One measure of success will be that money is not driven to non-compliant countries as a result of the new standard for automatic information exchange. Instead the countries that hide funds with no or limited tax transparency will become obscure and unattractive.
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