Global Financial Transparency: Where Will It Lead?

Ten years ago the notion of global cooperation to deliver comprehensive taxpayer net worth data across borders would have been dismissed as fantasy.  Ten years on, we are (nearly) there. 

Governments throughout the world were horrified by the costs and intrusions posed by the US Foreign Account Tax Compliance Act when it was initially unveiled in 2009/10.  Yet in a few short years the philosophy inherent in FATCA has come to predominate globally through its international equivalent, the OECD Common Reporting Standard.  FATCA and CRS are generally perceived as tools to better enforce existing taxes, yet the implications will reach far beyond that limited objective. 

In most countries tax reporting and exposures are confined to annual income and capital gains. Most systems require disclosure and taxation of taxpayer assets only once, at death.   FATCA and CRS require disclosure of financial net worth, annually updated. This means, remarkably, that countries will receive more information on the foreign liquid assets of their taxpayers than they collect at home.   Governments will use this information in ways not yet anticipated.

IFC Media’s 10-year anniversary provides a good opportunity to look back at how we got to this point, and consider where this ‘adventure’ might lead us.

How Did We Get Here?

Key milestones on the journey to global government monitoring of financial assets include the following.

OECD: 1998 Harmful Tax Competition Report

Until the end of the last millennium international law was clear:  no country was obliged to help another collect its taxes.  Government taxing ambitions were accordingly constrained by what they could reach without the assistance of others.  The OECD’s 1998 Report on Harmful Tax Competition transformed the prior consensus with an audacious announcement that all countries are now obliged to help others collect taxes.  There was no precedent or authority for OECD’s move. 

The so-called ‘tax havens’ objected to OECD’s attempt to force cooperation for the benefit of the narrow sovereign constituency represented within OECD membership.  OECD’s head of fiscal policy at the time responded that the ‘tax havens’ were free to do what they wanted, but there was a catch: OECD member countries were similarly free to set their own policies. 

Blacklisting was a powerful incentive to cooperate for small jurisdictions reliant on access to OECD member clients and markets for survival.  The stage was set for discussions on cross-border tax information exchange, including from those jurisdictions with little to gain from it. Tax information exchange (ie, provision) agreements - double tax agreements shorn of any benefits - were promoted for the smaller offshore centres. 

FATF: Tracking Beneficial Ownership

Data tracking for ownership interests in companies and trusts was promoted in parallel by the Financial Action Task Force.  FATF saw this as an essential tool in their mandate to curtail money laundering.  The 9/11 terrorist attack energised the FATF agenda, expanding it to include interdiction of terrorist financing.   

By 2002 all of the British offshore centres had established regulation and supervision for trust and company service providers.  Such ‘TCSPs’ were obliged to collect and maintain records of ultimate beneficial owners of structures, available to their local governments to respond to properly framed requests from foreign law enforcement authorities.  FATF rules now form the basis for several key concepts in the design of CRS.

Level Playing Field: Progress Stalls

The OECD proved unable to prod the US and other powerful members (who funded and controlled the agency) to assume the costs and competitive consequences of adopting the onerous data tracking systems forced on non-members.  Progress stopped after the small financial centres insisted that the larger countries within OECD membership fully participate as a condition of further progress. 

The OECD launched a program of country reviews by peers in 2004, yet some of their own members had limited interest in incurring the heavy domestic resource commitments imposed on non-members.  To its considerable credit, the OECD pressed on and largely succeeded in establishing a coherent global system for regulation.

Financial Crisis 2007/8 and FATCA

The financial crisis of 2007/8 lent renewed urgency to the OECD project on tax information exchange.  The shocks to the global economy imperiled public finances, stimulating a renewed commitment to boost tax collections.  Politicians needed scapegoats to sate a public thirst for vengeance; the banks and the global financial industry were obvious targets. 

The banks did not dare to complain in 2009/10 when FATCA was launched.  No matter that the former head of enforcement for the IRS testified that the tax deductible costs of implementing FATCA - for US banks alone - would exceed the revenue.  Something must be done.

The Rise of the NGOs 

From 2009, NGOs, including the Tax Justice Network and various charities, took an active interest in tax system design and curbing perceived tax abuse.  In Europe they were unrestrained by the need to steer clear of political lobbying. The Charity Commission in the UK and their equivalents in Europe accepted that lobbying by tax exempt organisations to challenge the tax practices of multi-national corporations and wealthy individuals fell within their remit of poverty relief in Africa.  

NGOs found that their tax justice agenda resonated with contributors, feeding (and funding) their interest in the subject.  Governments found NGO support for their tax raising efforts convenient.

Current Pressures

The UK Drive for Public Registers 

A generational shift from those who grew up in the shadow of World War II to those who live on Facebook has prompted a change in perceptions of the legitimate ambit of personal privacy.  NGOs lobbied the then UK Prime Minister David Cameron to promote public registers of beneficial ownership of company shares.  The cabinet Office embraced the plan and the UK has now adopted rules to require all private companies to disclose ultimate beneficial ownership to the corporate registrar with public access.  

The new UK regime relies on self-reporting. No doubt the compliant will properly report, but prospects for ensnaring tax evaders and criminals seem doubtful.  Will criminals self-report the establishment of companies for fraudulent purposes?  Despite evident gaps, the UK is pressing hard to broaden the adoption and exchange of central registers, including through the recent G5 initiative proposing establishment and exchange of such registers. 

Significantly private property is typically held in corporate form. Accordingly, the project will effectively create a public register of private property ownership.  Plans to extend the disclosure to foreign companies holding UK real estate and those bidding for government contracts will extend reporting.  The information will be useful to tax and law enforcement.  Those intent on redistribution will no doubt also find such registers of ultimate individual ownership of private assets useful. 

The EU and AMLD4 

The Fourth EU Anti-Money Laundering Directive now requires EU countries to establish central ultimate beneficial owners (UBO) registers for both companies and trusts, effective June 2017. 

Post Panama Papers the EU Parliament proposes to revise the Directive to allow unrestricted public access to both the share ownership and trust beneficiary registers.  If implemented, ultimate asset ownership will be available throughout Europe.

Where will Information Exchange Lead?

CRS and FATCA were introduced as a means of ensuring better enforcement of existing taxes.  However their effect is likely to be far reaching as governments consider the implications of the tsunami of financial data now becoming available.  Government analytical capabilities will limit data utility in the short term, but that will change.  The UK’s ‘Aspire’ project to analyse information in the hands of HMRC is the largest IT project in the country.

Some points to watch:

•      more information and enforcement capability will broaden national taxing ambitions; 

•      competition and conflict between nation states over taxing rights will become more common;

•      ‘not resident anywhere’ will become an increasingly unsustainable status for private clients as governments scramble for unoccupied ground;

•      governments will explore wealth taxes as they gather information on their taxpayers’ assets;

•      US will profit in the short term from regulatory arbitrage while it does not participate in CRS, and in the long term due to its more embedded respect for private property ;

•      governments will be overwhelmed with information in the short term.  Digital data does not disappear, so expect governments to mine past reports as analytical capabilities improve; and

•      Darwinian survival for elected politicians may force a continued agenda of taking from a narrow group of wealthy persons for distribution to a wider voter group.

The US now stands aloof from CRS, despite having vigorously promoted a similar system (FATCA) for others. Can the OECD vision for CRS succeed while there is a hole in the system which vents into the largest financial services market in the world? 

Brexit: Opportunity Knocks

Seen in an historical perspective, future observers of today’s world will see a peculiar disequilibrium.  Business and personal investment have globalized but governments have not. 

IFCs facilitate trade, investment and economic growth.  Globalisation has contributed to a doubling of world gross domestic product over the past two decades. Much of the benefit has accrued to developing countries, where dramatic declines in poverty have resulted from connecting local workforces to world consumers.

The offshore industry has struggled to explain the social and economic utility in their work.  Brexit provides a compelling opportunity to refresh the relationship between the Crown Dependencies, the Overseas Territories and the United Kingdom, such that the wider British family can be seen as part of the solution to that new challenge.

Industry must devote more effort to effectively articulating how their activity benefits ordinary voters through their essential contribution to cross border trade, jobs, pension returns and facilitation of international investment.  Is industry up to the challenge?  The future of the offshore industry may well depend on it. 

Richard Hay
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.