Confidentiality and International Initiatives (Continued)
iv. Automatic Exchange of Information
a. European Union Savings Tax Directive (STD)
The EU Savings Tax Directive (STD) came into effect on 1 July 2005. It applied to all 27 EU member states, together with their associated and dependent territories, and was also extended by agreement to key “third” countries. It applied only to bank interest, bond interest and income from bond funds, money-market funds, loans and mortgages. It also only applied to individual account holders and did not affect companies, discretionary trusts, foundations, stiftungs, anstalts or investment funds.
At the outset, 24 EU member states elected to share information automatically about interest payments to a resident of another EU state or any territory under the control of a EU member. Anguilla, Aruba, the Cayman Islands and Montserrat also agreed to automatic exchange of information.
To preserve their bank secrecy legislation, Austria, Belgium and Luxembourg instead chose to impose a withholding tax on interest income during a transitional period. The withholding tax rate was set at 15% until 2008, 20% until 2011 and 35% afterwards. The UK and Dutch territories of the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Netherlands Antilles, the Turks & Caicos Islands and Gibraltar also chose to apply the withholding tax and the EU subsequently agreed equivalent withholding tax arrangements with key third countries – Andorra, Liechtenstein, Monaco, San Marino and Switzerland.
Belgium decided to discontinue applying the transitional withholding tax as of 1 January 2010 and exchange information automatically. Guernsey, the Isle of Man and the British Virgin Islands also moved to automatic exchange of information.
In March 2012, the European Commission adopted a report on the performance of the STD, which stated that it must be amended to prevent the use of intermediary jurisdictions and “loophole” financial products. The implementation of “look-through” and “paying agent upon receipt” provisions for certain legal structures located in IFCs was justified and necessary.
In April 2013, five Member States – France, Germany, Italy, Spain and the UK – announced their intention to develop and pilot a multilateral agreement for information exchange. This will be based on the model Intergovernmental Agreement (IGA) for the implementation of the US Foreign Account Tax Compliance Act (FATCA) – see below.
The UK Treasury announced, on 2 May 2013, that its Overseas Territories – Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands – had followed the Cayman Islands and its Crown Dependencies – the Isle of Man, Guernsey and Jersey – by agreeing to share information automatically with the UK. Under the new agreements they will automatically provide names, addresses, dates of birth, account numbers, account balances and details of payments, not just in respect of UK taxpayers but in respect of its EU partners as well.
At a summit in Brussels in May 2013, European Union leaders agreed to the adoption of the revised Savings Tax Directive covering a wider range of taxable income by the end of 2013 after Austria and Luxembourg dropped their opposition to automatic exchange of bank data. They also agreed to negotiate with five non-EU nations – Switzerland, Liechtenstein, Monaco, Andorra and San Marino – for their participation.
b. Foreign Account Tax Compliance Act (FATCA)
On 18 March 2010, the US passed the Hire Act, which included the Foreign Account Tax Compliance Act (FATCA) provisions. These are due to come into effect on 1 July 2014. Under FATCA, US taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. FATCA will also require foreign financial institutions (FFIs) to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest.
On 8 February 2012, the five largest European countries – Germany, France, Spain, Italy and the UK – signed an IGA “regarding an intergovernmental approach to improving international tax compliance and implementing FATCA”. They undertook to collect client account information from banks within their borders and pass it on to the US tax authorities on the banks’ behalf. In return the US committed itself to collect information on US bank accounts operated by European residents and automatically pass it to the relevant national tax authority. This so-called “reciprocity” arrangement would be based on the countries’ existing bilateral tax treaties.
The US Treasury is in discussions with more than 80 countries – including all the major IFCs – to establish intergovernmental agreements (IGAs) in a bid to mitigate some of the more costly aspects of the new law. FATCA compliance may differ significantly depending on whether or not an FFI is in a country with an IGA. There will be further differences according to the type of IGA – Model 1 or Model 2 – and whether the IGA has provisions requiring US reciprocity in reporting US financial institution information.
At the G20 summit in St Petersburg on 6 September 2013, the leaders of the world’s 20 largest economies endorsed plans to exchange tax information automatically between themselves by the end of 2015 and called “on all other jurisdictions to join us by the earliest possible date”.
In the official declaration issued at the conclusion of the summit the G20 leaders formally abandoned the “on request” standard for exchanging confidential taxpayer information in favour of a new model of international tax co-operation based on automatic exchange of information in accordance with the OECD Convention on Mutual Administrative Assistance in Tax Matters.
In August 2013, China became the 56th signatory to the Convention and the final G20 member country to fulfil the commitment made at the 2011 G20 Summit in Cannes to move to automatic exchange of information as the new global standard.
In September 2013, the G20 mandated the OECD to create a single global standard for the automatic exchange of information. The aim is for the OECD to unveil the new standard, together with a Model Competent Authority Agreement, in February 2014 and to finalise technical procedures for effective automatic exchange of information by mid-2014.
It cannot be over emphasized that all confidentiality has now disappeared. Any “high tax” nation can currently request the information it requires from any IFC via TIEAs and tax treaties. Those procedures will now be radically enhanced by automatic exchange of information. This does not mean that offshore structures can no longer provide tax advantages or efficiencies. They can. But it does mean that the days of simply failing to declare income or capital gains are over. Legitimate planning that utilizes compliant structures has always been and remains effective. Expert advice guidance is essential and it may be necessary to obtain specialist advice not just to get the planning right but also to demonstrate that you have taken care to achieve tax compliance.
d. Base erosion and profit shifting (BEPS)
The G20 leaders also agreed, at the St Petersburg summit on 6 September 2013, to adopt an OECD Action Plan for the prevention of base erosion and profit shifting (BEPS). The move is intended to close the gaps between national tax systems by re-examining existing international tax rules on tax treaties, permanent establishment and transfer pricing.
G20 leaders called on members to examine how their own tax systems contribute to BEPS asserting “profits should be taxed where economic activities deriving the profits are performed and value is created” and “international and our own tax rules [should] not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions.”
The need to address BEPS was raised at the G20’s 2012 Summit and the OECD was asked to report on what action could be taken. All non-OECD G20 countries have now signed up to a BEPS project, through which they will develop proposals and recommendations for tackling the issues identified by the OECD.
In a “Tax Annex” to the leaders’ declaration, the G20 reiterated the general and specific action steps set forth in the OECD plan required to address BEPS:
- identify the “main difficulties that the digital economy poses for the application of existing international rules and develop detailed options to address these difficulties”;
- develop treaty provisions and recommendations for neutralising the effect of hybrid instruments and entities;
- strengthen existing controlled foreign corporation (CFC) rules;
- limit base erosion via interest deductions and other financial payments;
- counter harmful tax practices more effectively, taking into account transparency and substance;
- prevent treaty abuse;
- prevent the artificial avoidance of permanent establishment (PE) status;
- ensure that transfer pricing outcomes are in line with value creation in respect of intangibles, risks and capital, and other high-risk transactions;
- establish methodologies to collect and analyse data on BEPS and the actions to address it;
- require taxpayers to disclose their aggressive tax planning arrangements;
- re-examine transfer pricing documentation;
- improve dispute resolution mechanisms;
- develop a multilateral instrument to assist in implementing measures developed in the course of the work on BEPS.
The timeline for BEPS is ambitious, aiming for completion by December 2015, and will integrate a number of related on-going OECD projects on fundamental tax issues, among them the definition of permanent establishment and the transfer pricing of intangibles. Multinational groups should assess their existing and planned structures, considering the increased focus on “substance” and the potential for more public transparency in respect of their tax return information and allocation of profits.
e. Beneficial Ownership
At the G8 summit in June 2013, participants made further commitments to develop new measures to ensure that information about the beneficial ownership of companies and trusts would be made accessible to the relevant authorities.
The UK has already published its own Action Plan aimed at counteracting misuse of companies, trusts and other legal arrangements and designed to enhance transparency. This incorporates the following principles:
- to ensure that companies hold accurate information on their beneficial ownership and, by amendment to the Companies Act 2006, to make sure the information is available to the authorities through a central registry at Companies House; there is to be a consultation on whether this information should be publicly available;
- to review corporate transparency including issues relating to bearer shares and nominee directors;
- to ensure that trustees of express trusts are obliged to hold accurate information on beneficial ownership of the trust, that the relevant authorities have access to this and that mechanisms are in place to share it with other jurisdictions;
- to support the Crown Dependencies and the Overseas Territories in publishing their own Action Plans on Transparency.
These Action Plans, when implemented, will see “anonymity” disappear completely. There are still many taxpayers whose offshore arrangements would not bear scrutiny by their home tax authorities but hiding money offshore or in the major banking centres is no longer a feasible option. Fortunately there are still many compliant structures and arrangements that can be highly effective in protecting assets and saving tax. Anyone with concerns over their existing arrangements would be well advised to contact their nearest Sovereign office for an expert review.