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FATCA, fat cats and tax

13 February 2014
by Patrick Love
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“It’s a wrong situation. It’s gettin’ so a businessman can’t expect no return from a fixed fight. Now if you can’t trust a fix, what can you trust? For a good return you gotta go bettin’ on chance, and then you’re back with anarchy. Right back inna jungle. On account of the breakdown of ethics.”

Johnny Caspar in the Coen brother’s Miller’s Crossing would have been pleased to hear that today the OECD is announcing a way to remedy the shocking lack of ethics in the increasingly globalised globe people do business on. Like Johnny, we’re concerned about the consequences when certain parties don’t play fair. Johnny’s way of levelling the playing field is to bury the scallywags underneath it, but this being the OECD, our proposal, developed with G20 countries at the G20’s request, concerns the international tax system and how to “inject greater trust and fairness”  into it.

It’s less exciting than machine guns and hit men, but the sums involved are literally millions of times bigger than the cash the Coens’ gangsters are fighting over. The Tax Justice Network claims that $21-32 trillion are stashed offshore – the equivalent of the combined GDP of the US and Japan. That only concerns tax havens. There are also a number of other means available for what is variously called tax evasion, tax avoidance or tax planning, depending on the degree of legality. Sometimes the neutral, non-judgemental term tax dodging is used, even by the OECD. Usually though, we use more technical terms like “base erosion and profit shifting” (BEPS) to describe the mechanisms firms exploit to avoid paying what most citizens would consider “fair” taxes. As we discussed in this article, BEPS schemes themselves can be extremely complicated, but the basic idea is simple: shift profits across borders to take advantage of tax rates that are lower than in the country where the profit is made.

As we’ve discussed before, the core of the problem is that taxes are a national affair while finance is international. The OECD has been helping governments cooperate on tax collection for decades, and the Model Tax Convention serves as the basis for the negotiation, application, and interpretation of over 3000 bilateral tax treaties in force around the world. The Convention was updated in 2012 to allow tax authorities to ask for information on a group of taxpayers without having to name them individually.

These are so-called targeted requests, but automatic exchange of information is the systematic and periodic transmission of “bulk” taxpayer information collected by the source country to the country of residence concerning income from dividends, interest, royalties, salaries, pensions, and so on. Automatic exchange seems to work both to detect tax evasion and as a deterrent. Clinical trials suggest it also cures memory loss. Denmark helped 440 of its absent-minded citizens to remember foreign income after the tax administration sent them a letter announcing that it received automatic information from abroad.

More than 40 countries have committed to early adoption of the Standard for Automatic Exchange of Financial Account Information published today, committing tax jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions annually. The Standard sets out what information has to be exchanged, the financial institutions that need to file reports, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions (verifying the address of account holders for instance).

According to today’s presentation, the “advantage of standardisation is process simplification, higher effectiveness and lower costs for all stakeholders concerned” (except presumably for tax dodging stakeholders).

The Standard consists of the two parts: the Common Reporting and Due Diligence Standard (CRS) describing the reporting and due diligence rules to be imposed on financial institutions; while the detailed rules on the exchange of information are in the Model Competent Authority Agreement (CAA). The CRS draws heavily on a model developed by the United States, France, Germany, Italy, Spain and the United Kingdom to implement the US’s Foreign Account Tax Compliance Act (FATCA) through automatic exchange between governments.

Of course companies and individuals who spend a fortune on experts to help them dodge taxes will try to get round the CRS. To avoid this, the financial information to be reported includes all types of investment income, account balances and revenue from selling financial assets. A wide range of financial institutions apart from banks have to report too, including brokers, certain insurance companies, and certain so-called collective investment vehicles – funds that pool money from a number of accounts. The Standard also requires those signing it to look beyond “passive entities” to report on the individuals that ultimately control the money from behind the screen of entities set up to hide where the money is actually going.

What’s the alternative to imposing a global standard? “A proliferation of different and inconsistent models would potentially impose significant costs on both government and business to collect the necessary information and operate the different models. It could lead to a fragmentation of standards, which may introduce conflicting requirements, further increasing the costs of compliance and reducing effectiveness.”

Or as Johnny Caspar pointed out, “… ethics is important. It’s the grease that makes us get along, what separates us from the animals, beasts a burden, beasts a prey”. I hope youse all agree.

Useful links

OECD work on exchange of information for tax purposes

OECD Centre for Tax Policy and Administration

OECD work on BEPS

OECD work on transfer pricing

OECD work on aggressive tax planning

 

 

2 Responses leave one →
  1. new providence offshore permalink
    March 10, 2014

    Patrick… For American taxpayers with good top tax advice/tax attorneys (Mitt Romney has a good one) FATCA is not going to put them out of business or fine them millions. For the majority however, FATCA could be a big problem.

    I’ve been offshore since 1990 and have formed many, many PFICs (offshore companies) for customers. I work with three British barristers in Anguilla since 2001. I formed over 350 companies in Anguilla – a no tax haven and British Overseas territory like the Cayman Islands. I am an overseas agent for the Anguilla government’s registrar.

  2. March 18, 2014

    FATCA is ridiculous in the first place. The United States should be adopting a residence-based tax system as opposed to a citizenship based system like 99 percent of the rest of the world. This legislation will only further impede on the national sovereignty of other nations and further fuel American resentment. FATCA has potential implications extending beyond ‘American persons’, this is an extremely expensive compliance program to enforce and customers of these banking institutions will most likely have to bear the weight of this in increase banking fees.

    Offshore banking is a serious issue, but the American governments need to target the real culprits, increase corporate taxation and those that have complex methods to divert income reporting.

    There are many Americans in Canada who have no ties other then its their place of birth. Is it really fair to tax them for economic productivity that was not generated in the United States? absolutely medieval thinking from the United States government.

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