The end of privacy?

March 2017  |  EXPERT BRIEFING  |  DATA PRIVACY

financierworldwide.com

 

How do governments secure their national tax base in a world where exchange controls have largely been abolished, money can be transferred instantly around the globe and ways of holding structures located in tax efficient jurisdictions are readily available, with multinational firms of professional advisers able to service the needs of international companies and families?

The answer is partly addressed by inter-governmental information exchange agreements, such as the Foreign Account Tax Compliance Act (FATCA), common reporting standards (CRS) and the creation of compulsory registers of legal and beneficial ownership and trusts. However, their effectiveness is limited by what is reported and on governments setting aside resources to ensure that the reporting systems work.

Nudge tactics

Behaviour is increasingly managed by public debate, which moves the boundaries of what is regarded as unacceptable. Tax evasion is deliberately confused with unacceptable tax avoidance by the media and politicians. Tax avoidance, tax planning and actions that were once regarded as innocuous are now the subject of hostile and uninformed criticism.

Evidence of how effective this is in changing behaviour can be found in a recent report published by the UK’s tax authority, HM Revenue & Customs (HMRC), whose survey of large businesses shows that attitudes to risk and against tax avoidance are hardening very quickly year on year. The debate over privacy has also become muddied. Secrecy is mentioned in the same breath as deliberate concealment and privacy is equated with secrecy.

Pressure on advisers

The larger banks and trust and company service providers (TCSPs) have been active in de-risking their businesses, closing operations and shedding clients. This is partly in response to the Mossack Fonseca exposés and other revelations, but much stems from the imposition of codes of conduct by tax authorities, professional bodies and trade associations.

Strengthening tax avoidance sanctions and deterrents

The EU has recently launched a consultation entitled ‘Disincentives for advisors and intermediaries for potentially aggressive tax planning schemes’. In the UK, a new penalty regime will apply to all those involved in the design, management, marketing or enabling of failed abusive tax schemes. It is likely to prove a major deterrent, but may make it increasingly difficult to obtain advice in some complex areas.

Professional indemnity (PI) insurers

Most professional advisers are required to carry PI cover. Insurers are taking a far greater interest in the type of work carried out by firms and the risk profile of the clients for whom they act, adjusting premiums or restricting cover accordingly.

Disclosure notices

Revenue authorities have significant powers to compel the disclosure of information, which are increasingly being deployed against agents. The information sought is extensive and is not limited to clients who may be under investigation.

Processing information

Tax authorities have also invested in powerful computer systems that can process huge amounts of data. In the UK, nearly 80 percent of tax enquiries are generated by the Connect system, which processes over a billion items of data fed from 28 sources, including onshore and offshore banks. Information obtained through FATCA and CRS will soon be added.

Declarations made on individual tax returns can be matched to data obtained independently from other sources, while the behaviour patterns of groups or sectors of taxpayers can be analysed to determine where resources should be targeted.

CRS and FATCA

FATCA applied the lessons learnt from the use of anti-money laundering measures in the battle against the drugs trade to fight tax evasion. International bodies such as the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF) recognised that a comprehensive multilateral programme would give rise to effective sharing of information. Jurisdictions could see that the benefits potentially matched or exceeded the cost and were prepared to buy into it. Meanwhile, offshore financial centres recognised that CRS would be imposed on them regardless.

Panama and reputational risk

Data is vulnerable to theft and publication. Following the Panama leaks, the names of professional firms that had used Mossack Fonseca to assist clients in looking after their offshore wealth, and in some cases concealing it, were exposed. Firms should consider the profile of the clients that they are prepared to take on and the work they are prepared to do. Substantial fees are inadequate recompense for a permanently damaged reputation.

The EU’s Fourth Anti-Money Laundering Directive (4th AMLD) was revised and calls have been made for its transposition into local law to be brought forward from 26 June 2017.

Most of the arrangements exposed by the Panama papers had been set up many years before international agreements against money-laundering and tackling tax evasion were in place. Nevertheless, the Joint International Tax Shelter Information Collaboration (JITSIC) Network is carrying out a major project in response to the revelations.

Hostility to trusts

The hostility of many civil law jurisdictions to trusts can be attributed to a number of factors; they are incompatible with systems that make no legal distinction between legal and beneficial ownership and their reputation has been damaged as a result of aggressive marketing by those who promote trusts as a way of defeating local taxes and succession law.

Anti-money laundering legislation

The EU’s 4th AMLD will require members to create registers of trusts and other similar arrangements. They will be available to those with a legitimate interest, including regulatory and enforcement bodies, and regulated businesses. Regulated businesses are required to confirm that the entity is included on a register.

The UK will not share the trust beneficial ownership information with private entities or individuals on the grounds of privacy; it will only be obtained and disclosed in accordance with the appropriate legal gateways.

What do we mean by a public register?

In England and Wales, registered companies and limited liability partnerships are required to file an annual return with Companies House. The return includes details of shareholders, directors and persons exercising significant control, together with an annual report and independently audited accounts. Comparable rules apply to charities. All documents that have been filed can be viewed online by anyone, free of charge.

As many international financial centres do not impose similar requirements, it can only be a matter of time before pressure is brought to bear at an international level for the adoption of common filing standards.

The end of privacy

Responding to the Panama revelations, Robert Barrington of Transparency International believes that this is the future that everyone – clients and advisers – will have to come to terms with. “A recommendation to any individual who feels that their wealth is both legitimate and private: keep it in a bank account in the UK. If you have nothing to hide, this will give you privacy without the need to set up complex structures in offshore jurisdictions. If you want to maximise your tax advantages, then of course you can still use an offshore structure. But the price for doing so is likely to be that it will be more open and less secret.”

 

Wilson Cotton is a tax partner at Smith & Williamson LLP, a member of Nexia International. He can be contacted on +44 (0)20 7131 4224 or by email: wilson.cotton@smithandwilliamson.com.

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BY

Wilson Cotton

Smith & Williamson LLP


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