Regulation and legislation of financial institutions, including Corporate Service Providers, has increased in an unprecedented manner since the 9/11 terrorist attacks and the financial crisis of 2008. Under the impulse from intergovernmental bodies such as the G20 and the G8, the OECD and the Financial Action Task Force (FATF) have put together a framework for increased transparency for tax matters and beneficial ownership information. Along with the FATCA initiative out of the US this has led to a raft of proposed national and multi-lateral legislation, some of which has already been adopted, or is proposed for the near future.
Other initiatives such as the Directive of the European Parliament and of the Council on Alternative Investment Fund Managers (AIFM) are also being finalised. A further piece of the puzzle will be put in place when the Financial Stability Board finalises its program for “A Global Legal Entity Identifier for Financial Markets”.
The original rules were intended to catch terrorists and drug-barons, but the focus has now changed so that their principal targets are serious tax crime, corruption and financial stability.
The need to protect the tax bases of high-tax jurisdictions with debt-burdens and welfare state programs to maintain is understood. However to put this into perspective it must be realised that the tools for complying with this legislation are not yet ready, and the full extent of the burden of implementation has yet to be established. The extent to which a fair “level playing field” for all countries will be put in place, with full reciprocity from the major G20 nations, will show whether or not these initiatives have also been motivated out of a wish to stifle competition for financial services from non-G20 nations, or through a real desire for fairness.
These moves are considered by some to be necessary now to reign in the perceived negative side-effects of financial globalisation, free movement of capital and tax competition.
The positive effects of these movements on the world economy should not be forgotten. Low tax jurisdictions have contributed significantly to the increased fluidity of international trade, and the mobility of human and other resources. International stakeholders still seek to use legitimate tax neutral vehicles to structure transnational trade and investment. Increased regulatory burdens will raise the costs and time needed to complete transactions, without an obvious net benefit to the world as a whole.
At the same time that individual high tax countries who are the members of these supra-national groupings offer special tax incentives to attract High Net Worth Individuals and businesses to create wealth within their shores, and the OECD employees are exempt from taxation in most Member countries of the Organisation, one of the latest reports from the IMF discusses a super tax of 10% on savings in the Eurozone as a theoretical way to solve the debt problem and bring back the debt ratio to the “acceptable” levels of before 2008.
We should also keep at back of our mind the harmful potential of new technologies and data trawling techniques for the misuse of public data of a personal nature, and also the risks from the lack of protection of private and confidential data highlighted recently by documents leaked by Edward Snowden.
In the media there is often a flurry of news articles each time a new law is announced, or draft texts are published, before they are even adopted, or enacted. We try below to put these into perspective, by looking at the history and current status of some of the important initiatives in this area at an international level, as well as giving specific national examples. This overview is intended to help you to consider how this might affect you and your business, to try to put into perspective the global movement towards greater transparency on tax and other matters.
The G-20 was set up to respond to the financial turmoil of 1997-99 through the development of policies that "promote international financial stability". The G-20 comprises countries considered to be systemically important, but omits over 170 governments (192 governments are members of the United Nations). Previously, major global economic, social and environmental issues were debated in the small, increasingly unrepresentative and often times ineffectual circle of G8 leaders.
The OECD published at that time a list of countries assessed by the Global Forum against the international standard for exchange of tax information.
The Centre for Tax Policy and Administration (CTPA) is now the focal point for OECD work on taxation. The Centre provides technical expertise and support to the Committee on Fiscal Affairs and examines all aspects of taxation other than macro-fiscal policy, which is dealt with by the Economic Policy Committee. Its work covers international and domestic tax issues, direct and indirect taxes, tax policy and tax administration.
The Global Forum on Transparency and Exchange of Information for Tax Purposes, which was originally established in 2000, was restructured and strengthened in 2009.
The standard of transparency and exchange of information developed by the OECD gained significant support. All 91 countries participating in the OECD run Global Forum on Transparency and Exchange of Information for Tax Purposes in 2009 committed to implement it. In October 2008, the UN also introduced the standard in the UN Model Tax Convention. The standard provides for exchange of information on request, in civil and criminal tax matters when the information is foreseeably relevant to the administration or enforcement of the taxes of the requesting party. All types of information, including bank and fiduciary information, must be exchanged. However, fishing expeditions are not allowed.
The G20 and the OECD stress the importance for developing countries to benefit from the sea change in transparency and exchange of information. Some emerging economies have entered into negotiations of tax information exchange instruments, in particular Argentina, China, India, and South Africa. Global Forum membership is open to developing countries.
The G20 representatives issued a statement of their commitment to the automatic exchange of information as the new global standard. The G20 countries will develop the details of the plan throughout 2014 with the goal of beginning to exchange information automatically on tax matters among G20 members by the end of 2015.
By that time 120 countries had committed to the G20’s standards of tax transparency, including FATF’s (Financial Action Task Force) recommendations on the disclosure of beneficial ownership of entities (see below).
The G20 Finance Ministers and Central Bank Governors fully endorsed the OECD proposal for global multilateral and bilateral automatic exchange of information for tax purposes in July 2013.
The Financial Action Task Force (FATF) is an inter-governmental body created in 1989 under the aegis of the EU G8 group. The FATF currently comprises 34 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe. Its 40+9 Recommendations had previously been the standard for anti-money laundering and terrorist financing since 2001.
In 2012 the FATF Recommendations were revised to integrate counter-terrorist financing measures with anti-money laundering controls, introduce new measures to counter the financing of the proliferation of weapons of mass destruction, and to address the laundering of the proceeds of corruption and tax crimes.
The FATF is conducting a fourth round of mutual evaluations for its members based on these new Recommendations, and states will be expected to put in place local legislation to meet these new principles.
Expanding the scope of money laundering predicate offences by including tax crimes.
… Countries should apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences. Predicate offences may be described by reference to all offences; or to a threshold linked either to a category of serious offences; or to the penalty of imprisonment applicable to the predicate offence (threshold approach); or to a list of predicate offences; or a combination of these approaches.
Predicate offences for money laundering should extend to conduct that occurred in another country, which constitutes an offence in that country, and which would have constituted a predicate offence had it occurred domestically. Countries may provide that the only prerequisite is that the conduct would have constituted a predicate offence, had it occurred domestically.
In Recommendation 24. and 25. on Transparency and beneficial Ownership of Legal Persons and Arrangements countries are asked to ensure that information on the beneficial ownership and control of legal persons can be obtained or accessed in a timely fashion by competent authorities. In particular, countries should ensure that information is also available on express trusts, including information on the settlor, trustee and beneficiaries.
The relevant Interpretive Note requests measures to prevent the misuse of nominee shares and nominee directors, for example by applying one or more of the following mechanisms: (a) requiring nominee shareholders and directors to disclose the identity of their nominator to the company and to any relevant registry, and for this information to be included in the relevant register; or (b) requiring nominee shareholders and directors to be licensed, for their nominee status to be recorded in company registries, and for them to maintain information identifying their nominator, and make this information available to the competent authorities upon request.
These recommendations have led to jurisdictions revising their anti-money laundering directives (see more on the EU Fourth Money Laundering Directive below), and a move towards disclosure of beneficial ownership of companies (see more on the UK and David Cameron’s position on disclosure of beneficial ownership and the BVI and Cayman Islands consultation on Beneficial Ownership Information below).
There were further developments in this area at the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes meeting in Jakarta in November 2013.
The Global Forum now brings together 121 countries and jurisdictions for wide-ranging discussions on transparency and exchange of information. The Jakarta meeting was attended by delegates from 86 member jurisdictions and 11 international organisations. During the Jakarta meeting, six new countries became members: Azerbaijan, Dominican Republic, Lesotho, Romania, Senegal and Ukraine.
The meeting published new compliance ratings for 50 countries and jurisdictions on practical implementation of the Global Forum’s information exchange standard.
Eighteen jurisdictions are rated Compliant [i], 26 jurisdictions are rated Largely Compliant [ii], two jurisdictions are rated Partially Compliant [iii] and four jurisdictions are rated Non-Compliant [iv]. Fourteen additional jurisdictions [v] were not given compliance ratings, pending further improvements to their legal and regulatory frameworks for exchange of information in tax matters.
Four jurisdictions - Luxembourg, Cyprus, the British Virgin Islands and the Seychelles - are rated as non-compliant with international tax transparency standards in the latest report from the OECD's Global Forum. Switzerland was told it must further relax its banking secrecy laws before it can be rated at all.
In response to these ratings the Seychelles, and Cyprus defend their positions below.
See more on Luxembourg’s commitment to a global standard on automatic exchange of information below.
The British Virgin Islands has started a consultation on access to information on beneficial ownership records. See below.
Monaco was assessed as “largely compliant” (see more on this below).
It should be noted that many countries in the world have not been subject to these peer review.
The Forum also established a new Automatic Exchange of Information (AEOI) Group, open to all interested countries and jurisdictions, to prepare the move towards AEOI implementation. Italy was elected chair of this group. This is a new voluntary AEOI Group comprising members who wish to come together to work towards a common goal of engaging in AEOI. The main responsibilities of the AEOI Group will be to propose terms of reference and a methodology for monitoring AEOI on a going-forward basis, building on the expertise developed at the OECD level, - establishing a set of criteria to determine when it would be appropriate for jurisdictions to implement AEOI having regard, in particular to capacity constraints, resource limitations and the need to ensure confidentiality and the proper use of information exchanged, and helping developing countries identify their needs for technical assistance and capacity building before engaging in AEOI. The group will work in close co-operation with the OECD, the World Bank Group and the G20 Development Working Group.
They also agreed for further work aimed at strengthening the definition of beneficial ownership and the availability of this type of information.
It was also noted that in the margins of the Jakarta meeting, 2 of its member jurisdictions signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters. At present, 63 countries have signed the Convention, four have signed letters of intention to sign and 13 jurisdictions are now covered by way of territorial extension and 36 countries have now deposited their instruments of ratification (for more information see http://www.oecd.org/tax/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm).
At the latest Global Forum Seychelles received a rating overall as non-compliant.
In relation to this rating, Seychelles contested its review findings and has already requested a supplementary report to address the updates in its governance framework that have been made.
The Seychelles has emphasised its commitment to good practices and transparency in relation to tax information exchange while also championing the concerns of smaller jurisdictions in the review process and expressing its regret at some of the findings of the review undertaken on Seychelles' jurisdiction.
Seychelles’ Phase 2 report, which covered the three-year period under review between 1 July 2009 and 30 June 2012, was on the agenda for adoption along with those of 49 other countries. Although the conclusion of the report is that Seychelles met the standard for 8 essential elements out of 10, there are two elements where Seychelles has been rated non-compliant.
The two areas of concern relate to the issue of bearer shares and availability of record keeping of IBCs and their agents, and in response to these issues, Seychelles has illustrated that it has cooperated fully with the OECD and has also taken action to address these concerns.
However, these actions can only be formally recognised through a supplementary review and thus the Global Forum will maintain the overall rating of non-compliant relating to Seychelles until re-assessment can take place.
Seychelles is already well-positioned to address all the recommendations in the report. The amendments to the International Business Companies (IBCs) Act to eliminate bearer shares and to strengthen the framework for the keeping of records and strengthening the sanctions for non-compliance, have been gazetted on 15th November and will be presented to the National Assembly on 26th November.
A number of delegations similarly raised concerns, particularly of smaller states, with regards to the manner in which the process of review is undertaken, where the framework for interaction is based on experience in sharing information which is not equal among states.
The Organization for Economic Co-operation and Development's Global Forum on Tax Transparency and Exchange of Information recently released compliance ratings for 50 jurisdictions at a meeting in Jakarta, based on an assessment of legal and regulatory frameworks in the jurisdictions and how these are implemented.
Cyprus, along with Luxembourg, British Virgin Islands and the Seychelles have been rated "non-compliant" with international tax transparency norms.
The OECD raised concerns on Cyprus failure to respond to tax information requests. Another concern the OECD has is that less than 25% of Cyprus-based corporations filed income tax returns with the government between 2008 and 2012. The low number of filings may have accounted for a lack of government oversight and resulted in Cyprus not exchanging up-to-date tax information with other jurisdictions, the report said.
The Ministry of Finance defended the Island's tax regime, saying the government has implemented a number of progressive reforms that were not accounted for.
They note that the rating does not take account of changes in the law that were implemented in 2012. The law now requires that information on trusts should be made available, and that provisions have been removed that allowed for the issue of bearer share warrants in public companies, and for companies that are Cyprus-incorporated but not tax resident, to avoid filing tax returns.
Regarding the information requests, Finance Ministry notes that the country has in the last year “significantly enhanced” its ability to respond to requests for information from other jurisdictions.
The Ministry argues that Cyprus ought to have been assigned a higher rating. With coordinated efforts now being made by the Ministry of Finance, the tax authorities, the accounting and legal profession, the Cyprus Securities and Exchange Commission and the Companies Registrar and having in mind also the aforementioned reforms, they believes that the Cyprus rating will improve during the OECD's next review stage in 2014.
In November Luxembourg, alongside 36 of its partners, signed a declaration strongly supporting the development in the OECD of a single global standard for automatic exchange of information between tax authorities. “This declaration is fully in line with recent decisions taken by the Luxembourg Government such as the decision of 10 April 2013 to introduce, on 1 January 2015 and within the scope of the 2003 EU Savings Directive the automatic exchange of information and the signing by Luxembourg on 29 May 2013 of the OECD Convention on Mutual Administrative Assistance in Tax Matters.
Luxembourg called upon all countries participating in the G-20 and OECD discussions to join this initiative.
As part of the 6th meeting of the OECD Global Forum held in Jakarta on 21 and 22 November 2013, the rating for Monaco, based on the phase 1 and phase 2 reports, was approved, as were as those for 49 other States.
Following the phase 2 review, which led to a report approved in June 2013 in Paris, Monaco was rated "largely compliant" with international standards on transparency in tax matters (like, for example, the United Kingdom and Italy). This evaluation is recognition of efforts made by Monaco over several years.
As a reminder, on 5 November 2013, Monaco signed a letter of intention to join the OECD's Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The Principality of Monaco is therefore pursuing the policy desired by H.S.H. Prince Albert II with regard to the transparency and exchange of tax information and positions itself as an active member of the current international movement.
As a result of international pressure various jurisdictions have enacted legislation relaxing laws on the exchange of information, or signed additional Tax Information Exchange Agreements (TIEA), or Double Tax Treaties, committed or signed up to the OECD Convention on Mutual Administrative Assistance in Tax Matters. Other jurisdictions are consulting on the next steps to take.
The European Union is finalising its consultation process on the Fourth Money Laundering Directive, which largely follows the changes FATF implemented in 2012.
On 5 February 2013, the European Commission adopted proposals to reinforce the European Union's existing rules on anti-money laundering and fund transfers. These proposals included a draft directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (the “4th AML Directive”).
The next steps will involve the proposal being adopted by the European Parliament and the Council of Ministers under the ordinary legislative procedure, and the adoption of equivalent legislation by each individual EU country.
In order to put in place some of these measures additional tools have been developed. These tools often allow governments to obtain information concerning non-resident nationals that is not available for nationals resident in their home country. Billions of dollars are being spent by private institutions to implement this legislation.
Income from interest on capital is one of the most mobile tax bases, and tax competition is rife. In order to ensure the proper operation of the internal market and tackle the problem of tax evasion the savings tax Directive was adopted by the EU in June 2003. It has been applicable since 1 July 2005.
The Directive applies to interest paid to individuals resident in an EU Member State other than the one where the interest is paid. Member States had to transpose its provisions into national legislation.
The European Commission on 13 November 2008 adopted an amending proposal to the Savings Taxation Directive, with a view to closing existing loopholes and better preventing tax evasion.
The European Union's (EU) Economic and Financial Affairs Council (ECOFIN) reached an agreement on a mandate to allow the European Commission to negotiate amendments to agreements under its Savings Tax Directive.
In May 2013 ministers agreed to give the Commission the go-ahead to launch talks with Switzerland, San Marino, Andorra, Lichtenstein and Monaco.
Despite broad support for the amendments in November 2013 Austria and Luxembourg announced that they would block the European Union's attempt to pass new savings income rules intended to curb tax avoidance and increase transparency in international banking until Switzerland and other alleged tax havens also agreed to new reforms.
At a hearing in Brussels, Luxembourg Finance Minister Luc Frieden said the European Commission, should hold off on passing the proposal until Switzerland, Liechtenstein, Monaco, Andorra and San Marino agree to equivalent measures. Luxembourg's position was backed by Austria's Finance Minister Maria Fekter. (See Luxembourg’s position on exchange of information above).
To support his position, Frieden cited agreements those third-party countries signed with the EU in 2004 requiring that they agree to reporting rules that are on par with the EU. The EU has been pushing to pass enhanced information sharing agreements and tougher reporting rules by the end of the year.
Frieden released a statement stating that any commitment from Luxembourg needs to be accompanied by commitments from other countries to ensure a “level playing field." He said that the council should wait to pass the new savings income rules until after negotiations with the third-party countries are completed.
France recently published a list of 60 measures to fight against tax evasion. In November they signed a FATCA Agreement with the US.
During 2013 France has updated its list of territories considered to be non-cooperative. The list now comprises Nauru, Guatemala, Brunei, Marshall Islands, Montserrat, Botswana, Bermuda, British Virgin Islands and Jersey (n.b. Bermuda and Jersey removed 2014).
Certain transactions with these jurisdictions will be subject to 75% withholding from 1 January 2014.
It also intends to extend this list to include countries that will not engage in automatic exchange of information from 1 January, 2016 (n.b. in December this legislation was censured by the Conseil Constitutionnel because the deadline of 2016 was considered unrealistic).
Wealth management for private clients, the traditional private banking business, is hugely important both for the Swiss financial centre and for the Swiss economy as a whole... Few other areas of business are currently undergoing more extensive changes than private banking..
We hope that this extensive report has given you a feel for the rapid evolution in transparency and tax matters. There is no certainty as to where the legislative river will meander in the short and longer term. We can however see where the OECD is trying to steer the boat!