Richard J Hay discusses the high profile meeting of the G8 world leaders in June, where tax, trade and transparency were the key talking points.
The UK hosted the Group of Eight (G8) Heads of State Summit in Lough Erne Northern Ireland on 17 & 18 June.
‘Tax, trade and transparency’ were the key agenda items. Corporate taxation did not figure prominently, principally because the OECD ‘Base Erosion and Profit Shifting’ project did not report until July.
NGOs kept the media focus on the transparency work stream, calling on the UK in advance of the summit to “put its own house in order”. UK Prime Minister Cameron’s key objectives for the transparency program were:
collection of information on beneficial ownership for all companies,
central registers for data,
‘freely accessible’ to law enforcement; and
also accessible to the general public.
During the run up to the summit the UK deflected attention to the British offshore centres, prevailing on them to upgrade tax information exchange collection and exchange protocols. Under considerable media attention the Crown Dependencies and Overseas Territories (CD/OT) signalled willingness to engage in wide-ranging automatic information exchange. CD/OT commitments stimulated by the summit included the following:
FATCA-style information exchange with the UK;
participation in an EU pilot to engage in FATCA-style information exchange;
accession (through the UK) to the OECD Multilateral Tax Convention; and
scheduled reviews concerning transparency in respect of beneficial ownership.
The OECD Multilateral Tax Convention commits signatories to tax information exchange on request to all other signatories. The Convention also paves the way to automatic tax information exchange and to enforcement of the tax judgements of other signatories. The CD/OTs have not yet committed to automatic exchange through the Convention or to enforce the tax judgements of others, but there may now be pressure to do so.
The OECD tabled a report at the Summit entitled: ‘A Step Change in Tax Transparency’ with proposals for moving to automatic exchange of information, on a single standard. As many institutions are now adapting to accommodate US FATCA requirements, this appears likely to be the new standard.
UK Prime Minister Cameron withdrew plans to keep registers of beneficial ownership on the G8 agenda on 15 June, the same day that he met with the Chief Ministers and Premiers of the British offshore centres.
In the event, the UK received limited support at the Summit itself for other aspects of their transparency program, suggesting that while countries are keen to receive tax enforcement data they have less interest in reciprocating.
The next steps are Action Plans to press ahead with the vague G8 member commitments to enhance beneficial ownership collection. From the G8 only the UK, the US and France have tabled commitments to provide Action Plans at the time of writing.
The British offshore centres already collect beneficial ownership information for corporations and have done so for a dozen years, through licensed and regulated corporate service providers. The UK, by contrast, does not yet collect any beneficial ownership information.
The UK Action Plan for transparency provides for deposit of beneficial ownership in company registers. Prospects for success of UK plans do not look promising: overburdened corporate registrars have little ability to chase down those contributing data to confirm that beneficial ownership disclosure is adequate or accurate. Criminals, for example, would be unlikely to fear sanctions from Companies House for failing to properly report. It is likely that in due course the CD/OT model will be seen as far more effective. One might expect that in due course UK and other G8 countries will need to examine this model more carefully (also used in the Netherlands) as it becomes clear that the passive, archival process of corporate registries is unsuited to the law enforcement task intended for it. The Department for Business, Innovation and Skills is expected to run a public consultation on the new reporting requirements during the summer – including the question about whether to make the information available to the public.
Public Registers: What are the Risks?
A planned release of financial information poses risks well beyond occasional hacking or bribery of tax officials to access official records. Data aggregators would, for example, harvest the data out of public registers of beneficial ownership then organise and analyse the data for sale for commercial buyers. Such compiled records would be readily accessible to criminals.
Could governments effectively protect individuals in the public eye targeted after their data is stolen or released? Should celebrities owning their homes through companies in an effort to avoid paparazzi or other harassment have their personal data disclosed? What about the individual owners of companies running abortion clinics or engaged in nuclear research or life sciences activity which is lawful but offends fringe groups- eg, animal rights activists? Even if the G8 is comfortable, important questions remain regarding the real kidnapping and extortion risks in emerging countries with less stable or effective governments.
NGOs have noted that public registers would facilitate their work in support of tax investigation and enforcement. African countries with weak institutional capability are singled out for support. Thoughtful tax policy experts no doubt shudder at the prospect of ‘vigilante’ tax enforcement. As the recent condemnation of the US IRS for targeting Tea Party and similar activists shows, government agencies at least have the virtue of accountability for their derelictions.
There is of course no guarantee or even reason for confidence that all those with access to published financial data would use it responsibly in the regulated and impartial manner expected from governments. Could clear lines be drawn between vigilante tax enforcement by well-intentioned NGOs and (self-help) action by criminals to effect a more direct ‘redistribution’ of newly visible wealth? Ironically, such risks are likely to be highest in the countries with weak institutions- the very same which NGOs seek to help.
Does a Level Playing Field Matter?
A level playing field - ie, universal or at least broad-based application of standards - is essential to avoid simple displacement of business to less expensive or less transparent locations. However, the notion of a more than 100 countries progressing in one wave seems an impractical process. Some countries will have to lead and take the competitive consequences.
As the UK now conducts approximately 25 per cent of the cross-border financial intermediation in the world, a program which hobbles them and does not include Asia and the US may be ineffective and pointless. Worse, the UK could lose any leverage over progress on global standards if it moves ahead of other big players who are happy to exploit the regulatory arbitrage opened by UK action. Even if China and the US ultimately join the program, the last man standing (and other late movers) will still be big winners where they have corralled all of the business before the level playing field is locked down.
China’s cooperation in US FATCA is uncertain; it is not a G8 member and was not asked to join the consensus. Even if China were asked to join in, we know the answer. China already blocked similar action by the UK when it chaired G20 under PM Gordon Brown in 2009. Few MNCs or wealthy individuals are likely to shift their affairs to China if they hang back, but what about Hong Kong if it shelters under China’s umbrella?
What about the US? US LLCs are generally tax-free when owned by non-US persons, provided their activity is confined to holding operations or investments outside the US.
The US establishes more than a million LLCs a year, most of which are used for routine (reported and taxed) US business. To their credit, US federal government agencies also candidly acknowledge widespread abuse of US LLCs by international criminals, given that US data collection obligations lag well behind current international standards. In many states no information at all on corporate owners is collected, giving complete anonymity to owners.
There is no risk of BVI-style theft of US data discs – such discs do not exist in the US system. Many US states do not even track shareholders of record at the moment, so US domestic standards have a long way to catch up. With over 18 million active corporations US self-exemption from the rules is a not a small hole in the global system. What are the prospects for a globally effective process for tax information collection and exchange while the US is not on the program?
G8 proposals represent an ambitious program in the global drive for transparency. Costs will be vast. Competitive implications, cyber-criminal access to data registers and level playing field issues all bear careful thought.
IFCs play an important role providing the utility ‘wiring’, which supports cross-border investment and trade. Globalisation has fuelled a doubling of world GDP in a generation, unprecedented in world history. Poverty has declined dramatically across emerging economies, particularly those like China which have skilfully used and supported the symbiotic financial hubs which surround them. Trade, not aid, has been the emerging country ticket to success.
Ill-considered damage to the facilities which support global business could be perilous. Asian and other emerging financial hubs in the Middle East – as well as the US - will eagerly snap up existing financial services capacity which is impaired by uncompetitive and poorly designed UK/G8 policy. G20 will now take over the transparency work stream in a Heads of State meeting in St Petersburg scheduled for 4 September 2013 under a Russian presidency.
It feels like 2002, when small IFC regulatory compliance leapfrogged that of the OECD countries, forcing a slowdown in the pace until the larger countries caught up. In the meantime British IFCs would be well advised to contribute actively to the public conversation on regulation to ensure that the world recognises their leading regulatory standards and their constructive contribution to the economies of the metropolitan countries they service.
About the Author:
Richard Hay is a tax partner and head of the financial regulation practice in the London office of Stikeman Elliott, Canadian and international lawyers. He is counsel to the IFC Forum, a group which represents the major professional firms in the leading IFCs.
 “Company Formations Minimal Ownership Information Is Collected and Available”, Report to the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, US Senate, United States Government Accountability Office, April 2006. Also see: US Money Laundering Threat Assessment, US, December 2005.
 “The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It”, World Bank, November 2011.
Richard Hay is a Stikeman Elliott London partner specializing in international tax law, and head of the London office's International Private Banking and Financial Regulation Group. Mr. Hay advises financial institutions and private clients on tax, regulatory and political risk aspects of cross-border estate planning structures for high net worth families, including those in Canada, Latin America, Asia and Europe. Mr. Hay also advises IFC Forum (www.ifcforum.org), banks and private clients on financial regulation and the information exchange initiatives conducted by the G-20, the OECD, the EU, FATF and the IMF. Mr. Hay is also Co-chairman of the London based International Committee of the Society of Trust and Estate Practitioners, a member of the International Bar Association and the International Tax Planning Association.