Increased Tax Transparency-An Ever-Shrinking World

In a personal tax context, one only needs to read the 2013 offshore evasion strategy published by HMRC on 20 March 2013 to understand just how tough a stance the Government is taking on offshore evasion.

In April 2009, the G20 leaders declared that the era of banking secrecy was over. OECD Member States perceive increased tax transparency for individuals as going hand in hand with the ability to combat tax evasion. An example of the importance the OECD places on increased tax transparency and combating tax evasion is the mandate it has given to the Global Forum on Transparency and Exchange of Information for Tax Purposes to conduct peer reviews of the 120 Member States of the Global Forum against the internationally agreed standard for transparency and exchange of information. The international standard is based on OECD and UN Model Tax Conventions and is focused around three elements, namely:

1. the availability of information;
2. the access to information; and
3. the exchange of information with safeguards to protect confidentiality.

G20 finance ministers highlighted at their April 2013 summit that they considered the international standard to be the automatic exchange of information, although it is understood that not all countries have adequate infrastructure in place to automatically exchange information. Accordingly, all jurisdictions are encouraged to sign or express interest in signing the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, building on existing frameworks like the EU savings directive.

The drive by OECD Member States in targeting overseas tax evasion is evidenced by the introduction of the US’s FATCA regime which squarely seeks to impose US compliance requirements beyond their own borders. With many leading tax administrations, likely to follow suit this is surely a sign of things to come.

At the UK level, HMRC entered into an agreement with the Principality of Liechtenstein in 2009 following a number of well publicized data thefts. This resulted in the introduction of a Taxpayer Assistance and Compliance Programme, a Tax Information Exchange Agreement and a tax disclosure facility in the UK, the Liechtenstein Disclosure Facility. In October 2011, the UK and Swiss Governments signed a similar agreement to cooperate on tax matters; however, this sought to protect anonymity. Following in this theme, the UK government made Budget announcements earlier this year to introduce similar bilateral agreements with Guernsey, Jersey and the Isle of Man.

On 25 April 2013, the Cayman Islands communicated to the UK Government that it was committed to joining the G5 pilot recently announced by the UK, France, Germany, Italy and Spain, on multilateral automatic exchange of tax information. On 2 May 2013, it was also announced that Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks & Caicos Islands had signed up to the same G5 pilot, such that each territory would automatically exchange information bilaterally with the UK and multilaterally with France, Germany, Italy and Spain. In recent weeks, it was reported that David Cameron wrote to 10 territories and Crown dependencies, encouraging them to increase the level of tax transparency in the global fight against tax evasion.

In short, increasing pressure is being placed on jurisdictions with perceived shortfalls regarding tax transparency to combat overseas tax evasion. The personal risks associated with individuals holding untaxed assets can be particularly significant. HMRC is mounting many serious tax investigations under Code of Practice 9 and, in the most extreme cases, conducting criminal investigations.

The Finance Act 2010 introduced new offshore penalties of between 30% and 200% of the additional tax, dependent on the relevant jurisdiction. Bearing in mind the risks associated with holding untaxed assets, individuals in such a position are strongly advised to speak to a tax adviser in order to identify personal tax issues, determine which facility would be the most appropriate and seek assistance with the disclosure process in order to build a compliant platform for the future.

These tax information exchange agreements are also particularly relevant in the context of alternative investment funds. For AIFMD purposes, one prerequisite under the Third Country Passport regime (due to come into effect at the earliest in Q3 2015), is that tax information exchange agreements exist between the EEA Member States in which the fund is intended to be distributed and both 1) the jurisdiction in which the fund is established, and 2) the jurisdiction in which the manager is established. This AIFMD driven requirement is forcing non EEA jurisdictions with significant financial centers to sign up to increased tax transparency, or run the risk of being sidelined in the distribution of alternative fund products into EEA Member States.

Global fiscal policy is moving towards ever more tax transparency. Taxpayers with unresolved tax issues are advised to take action to bring such matters into check at the earliest possible opportunity. The message from Governments around the globe is that uncovering noncompliance is simply no longer a question of if, but when.