In April the Cayman Islands government committed to joining the G5 pilot programme of five European countries to automatically exchange tax information. The data that Cayman will pass on to the UK, Germany, France, Italy and Spain is expected to go much further than the already existing reporting of interest income on bank deposits by EU citizens with accounts in the Cayman Islands.
Things will change in terms of tax transparency. For some the latest proposals to enhance tax information exchange are just another hoop that offshore financial centres are forced to jump through.
The switch from bilateral tax information exchange on request to multilateral automatic exchange of information was just a logical step and had to be expected.
Yet those who in the past have continuously banged the drum in favour of a Conservative British government in the hope that the pressure on offshore financial centres would abate, have to be disappointed.
UK Prime Minister David Cameron has declared a clampdown not only on illegal tax evasion but also the legal but now considered unethical tax avoidance, as the main objectives for the UK’s presidency of the G8 this year.
In a letter to all Crown dependencies and overseas territories, including Cayman, Cameron wrote in May that in cooperation with them the UK is taking the lead on tax information exchange and beneficial ownership.
He welcomed the commitments made on automatic information exchange by some of the territories, which will help develop a global standard in tax transparency and he urged the territories to join the Multilateral Convention on Mutual Assistance in Tax Matters. But Cameron also stated that dealing with tax evasion is about more than simply exchanging information.
“It is also about improving the quality and accuracy of that information. Put simply, that means we need to know who really owns and controls each and every company. This goes right to the heart of the ambition of Britain’s G8 to knock down the walls of company secrecy,” the UK prime minister wrote.
This will require fully resourced and properly managed centralised registries that are freely available to law enforcement and tax collectors and contain full an accurate details on the true ownership and control of every company.
The agenda for the G8 summit in June is therefore set.
The motivation for the UK lies not only in recent public criticism by Austria of the UK territories as a haven for money laundering and tax evasion.
It also follows the perceived success of the US Foreign Account Tax Compliance Act, which seeks to flush out US tax evaders by introducing a withholding tax on foreign financial institutions and other entities with US taxpayer interests that do not exchange tax-relevant information with the IRS.
European governments were always subdued in their opposition to this unusual extraterritorial application of US law and the burden it creates for financial institutions worldwide, perhaps in the hope that they too, at a later stage, could impose a similar tax information exchange for their own countries.
This moment has now come with a new pilot programme for the automatic exchange of information between the European G5 countries – the UK, France, Germany, Italy and Spain – which will seek to emulate the strategy adopted by the United States with FATCA.
The British Overseas Territories, including the Cayman Islands, Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands have committed to join the pilot, but not after the UK applied considerable pressure. UK Chancellor George Osbourne said in early April that the UK overseas territories “are in no doubt about what we expect of them”.
The unequivocal commitment to expand tax information exchange however raises a number of questions. Not least if the measures will be truly effective or simply divert offshore companies and their service providers to jurisdictions that do not participate in information exchange and where beneficial owners can retain their anonymity whether for legal or illegal purposes.
Or as Prime Minister Cameron writes: “There is no point in dealing with tax evasion in one country if the problem is simply displaced to another. I hope others around the world will follow the lead we are setting together.”
The G5 plans are initially to broaden participation in the pilot in order to develop it into a global standard and to back the OECD in defining the standard in greater detail. UK chancellor Osborne said a widening of participation in the multilateral information exchange pilot “is clearly the fastest, most effective route available to us to get agreements in place, and capture hitherto ‘lost’ tax revenues – a priority for us all”.
No date has yet been set for the start of the pilot and the details are sketchy.
However, it is clear that it must go further than the already existing reporting of interest income on bank deposit under the EU Savings Tax Directive.
Under the EU Savings Tax Directive which Cayman is participating in since 2005, financial institutions in the Cayman Islands report the balance of interest income on bank deposits by EU citizens to the Tax Information Authority which then passes it on to the respective tax authorities in Europe.
In 2010 individual EU tax citizens gained a mere $6.96 million in interest income on deposits in 7,161 bank accounts in the Cayman Islands.
The new initiative will seek additional data and bank account information is expected to include names, addresses, date of birth, account numbers, account balances and details of payments made into the accounts.
More importantly, Britain will also press for the sharing of information on accounts held by entities such as companies and trusts and push for the ultimate beneficial ownership of companies and trusts to be ascertained.
Cayman’s financial industry reacted to the new initiatives by stating that it supports transparency.
Speaking at the Offshore Alert conference in Miami in May Gonzalo Jalles, CEO of Cayman Finance, said the private sector position in Cayman is straight-forward. “There is absolutely full support for transparency.” Cayman has followed international standards for a long time for example by signing tax information exchange agreements, he said.
In addition Cayman has committed to an intergovernmental agreement with the United States under FATCA and with the UK for a similar arrangement.
“We were first ones pushing to be part of this [G5] pilot of implementing the FATCA-like multilateral exchange of information,” he added.
But the private sector has concerns and will draw a line, he said. “We are not prepared to become collection agents, policemen or policymakers for other countries. And we have a concern when people mix the words avoidance and evasion.
“What we want to do is, we want to give the countries all the information and then they can set up all the regulations and they can enforce and we will help them enforce,” he said.
“But we can’t start guessing if a transaction is good or bad avoidance. We cannot become educated in tax codes of 80 countries around the world or whatever the number is. We will provide all the information and then it is up to each country to draw up the regulations and enforce it.”
A big driver for the transparency initiative is the need for European governments to find additional funds for cash strapped budgets. Some money has already been raised through various voluntary disclosure initiatives on both sides of the Atlantic, as well as bilateral settlements between the US and Switzerland or the UK and Liechtenstein for example.
The threat that information exchange will smoke out tax evaders led many to disclose their undeclared offshore earnings in order to avoid criminal prosecution.
As of December 2012, the Internal Revenue Service’s four offshore programmes in the US have resulted in more than 39,000 disclosures by taxpayers, according to a United States Government Accountability Office report on offshore tax evasion released in March.
About 10,000 cases have been closed, resulting in $5.5 billion in penalties and taxes. The average account balance was $528,000 and 6 per cent of the cases saw penalties of more than $1 million. More than half had a bank account in Switzerland.
At the same time the number of overseas accounts disclosed to the IRS doubled to 516,000 between 2007 and 2010.
In the UK 50,000 tax payers have come forward in all offshore disclosure facilities and raised more than than £1 billion in tax, penalties and interest.
Her Majesty’s Revenue and Customs expects to recover £3 billion by 2016 through the Liechtenstein Disclosure Facility, which already includes 4,000 disclosed cases.