Monday, November 26, 2012

UK mini-FATCA Agreements Spells The End for UK Tax Haven Territories!

There are rumours that the UK government is about to reveal legislation imposing automatic client disclosure provisions on financial institutions in the Crown Dependencies and British Overseas Territories.

The journal International Tax Review claims to have seen draft UK legislation imposing client disclosure provisions on financial institutions in the Crown Dependencies and the British Overseas Territories.
The draft, described as a UK version of the US Foreign Account Tax Compliance Act (FATCA), is said to mandate the automatic reporting of financial and beneficial ownership information for each account of each offshore financial institution to the UK's HM Revenue and Customs.
A leaked government document seen by International Tax Review reveals that the UK is planning to impose its own version of the US Foreign Account Tax Compliance Act (FATCA) on its Crown Dependencies and Overseas Territories. The move will deal an almost-fatal blow to tax evasion through the UK's tax havens.

Responding to an International Development Committee report earlier this week, the government publicly rejected the need for a UK version of FATCA, which would require tax authorities to automatically exchange information relating to UK citizens or corporations.
In private, however, the government has already drafted FATCA legislation which it will impose on its Crown Dependencies and Overseas Territories. These include some of the world's most notorious tax havens such as the Cayman Islands, the Channel Islands and the Isle of Man.

The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies

It will also require the account number, name and identifying number of the reporting financial institution as provided when registering with the IRS for FATCA purposes, and the account balance or value as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure.

The UK Treasury declined to comment, but said that it is assisting the Crown Dependancies and Overseas Territories in their response to FATCA.

Quoting Tax Campaigner Richard Murphy, the Observer newspaper says the UK government will force other jurisdictions to comply by threatening to veto their own FATCA agreements with the US. Most international financial centres are anxious to comply with FATCA, because the US Treasury plans to impose a 30 per cent levy on all payments from US sources to non-compliant foreign financial institutions.
The evidence is now clear: the writing is on the wall for secrecy in the UK's tax havens. There are now two options for those hiding their funds in these locations. The first is to own up now. That's the wise option. It's the only safe option. The alternative is to flee. My suspicion is that it's already too late for that to work.

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  1. The "death knell", if there was one, for UK subsovereign tax jurisdictions as tax avoidance havens came in the 1990s with the pursuit by the Inland Revenue (as it then was) of Roy Clifford Tucker (made bankrupt) following the shutting of the Rossminster Group, a tax evasion facilitator. While in those cases an English involuntary bankruptcy was used as a collection measure, something unlikely in the US (except as an action ancillary to foreign main proceeding, as in US Chapt. 15).

    The interesting thing, to me, is that the USA and the UK are to a certain extent tax havens with respect to each other. The reporting requirements for certain US and UK entities are trivial. Even without using facially suspect Panamanian (and the like) entities, shadow directorships and beneficial ownerships are difficult to detect beyond the lifestyles of those persons. Popular anger in Britain (of the Occupy or the 99% Campaign sort) has focused on corporate tax avoidance as it has in the USA. And the next budget could well address the fact that UK land is outside the scope of capital gains taxation when held by nonresidents, and the extra taxation of corporate and trust intermediaries (thus exempting from estate duties and in some cases stamp duty land tax (transfer tax, 7% or 15% on properties over £2 million) is trivial except when occupied full-time by a UK tax resident.

    There has for some time been an OECD consensus that income and assets "must" be taxed "somewhere". I'm not sure how sympathetic foreign governments are to what many see as exorbitant tax jurisdiction that the US claims over its citizens, even those who have never been to (much less lived in) the USA and have another "effective nationality". Expatriation taxes are not unknown (Canada and France, to name two). But these issues mainly affect individuals. UK (and Dutch, etc.) tax havens are more relevant to corporate (and family office) tax avoidance, or tax delay. As I see it, tax treaties largely reflect the interests of multinationals and of the US Chamber of Commerce, speaking for them. Where treaties help avoid individuals' double taxation they seem to do so because it interests those companies in relation to their expat workers. Accidental Americans are nobody's constituency, by definition.

    So: there is no "death knell" except in the sense of hidden flight capital no longer being hidden. There appears no willingness anywhere to tighten the rules on royalty payments to tax haven corporations or to do anything about the CGT concession for "carried interest" so as to compromise the expectations of the politically powerful.

    George Osborne will make his Autumn Statement to Parliament on the state of the economy on 5th December 2012, called the "mini-Budget". We may learn more then on the issues I just mentioned.

    As far as US (tax) persons, there is rather little UK concern and I suspect HMRC (the tax agency as it now is) is happy to give IRS what it wants and is happy to exchange information. But there are so many conflicts in tax issues that I wonder how much beyond the bankruptcy-law field mutual collection cooperation could go. And how effective client-disclosure provisions will be so long as there is an intermediary taxed in principle (if not in reality) in a high-tax country like the UK.

    While Amazon and eBay and dozens or hundreds of others trading in the UK have incorporated in Luxembourg and avoided tax, zillions of Frenchmen have incorporated in England/Wales and reduced or avoided theirs. And the Secretaries of State of Nevada, Delaware and Florida are doing quite well also just from incorporation fees. Can this mess ever be cleaned up, or at least have the light of day shine upon it? I wonder.

    As for Switzerland, which you didn't mention: they seem to have abandoned their US non-corporate business. Perhaps Russians and Chinese and Indians have more to offer these days.

    Posted by Andrew Grossman

  2. Yes... Son of FATCA

    Posted by Bertrand Boulle

  3. Looking at the itemized conditions, that doesn't exactly look reciprocal to me. Does it to you?

    But then, Mexico has wanted information on resident Mexicans for a long time, (but NOT Mexican citizens living in the US) and Florida and Texas banks will suffer from the capital flight that will occur.

    This IGA action was not the intention of Congress when they passed FATCA. The technocrats in Treasury are effectively negotiating Tax Treaties but just calling them Executive agreements so they don't rise to the level of 'advise and consent' process in Congress.

    Congress was not thinking about how U.S. Banks need to become tax transparent in relation to non resident holdings when they created the FATCA fiasco, so wonder if anyone in Congress will balk now?. A few have, but no legislation I have seen yet has been proposed to stop the reciprocal DATCA.

    One thing I do find interesting, is that German banks are PO'd that Treasury will not impose the reserve requirements on US Banks as agreed to in Basil III. They are too fragile still, apparently, to be setting aside 7% reserves. Germany is imposing it on their banks and they are upset that they will not be competitive with US banks who will not have the requirement.

    So the U.S. continues to act unilaterally whenever it wants to disregard agreements it has entered into.

    Now, one has to ask, what impact will all the Capital flight (and ability to maintain reserve requirements) have on the Trillions in US banks that Treasury is requiring to be disclosed by their unilateral actions related to DATCA? (the Domestic blow back of FATCA)

    Different side of the same coin, it seems to me. It will harm US Banks by effectively reducing their ability to raise reserves and their ability to lend. The question is, will it harm them as much or more than Basil III, and is anyone on the Banking committees in Congress paying attention?

    Still amazes me that this story is not in the MSM.

    Posted by Marvin Van Horn