FATCA has been the catalyst for a dramatic change in global tax transparency between taxpayers and their home jurisdictions. It started as a US effort to compel international financial institutions to report on the international accounts of US taxpayers, using its global dominance of the world’s financial system to get the show on the road. But as the bandwagon started to roll, so other countries joined the effort. First it was the UK who used their constitutional influence over the Crown Dependencies and overseas territories (countries like the BVI, Cayman and the Channel Islands) to compel reporting from those jurisdictions back to the UK authorities but the real rush to join comes from the so called "early adopters group" who have signed up to OECD tax transparency rules in a joint statement released on 14 March 2014. By this statement, a further 44 countries have agreed to mutually exchange information. The list of countries involved is set out below. It includes South Africa and the British Virgin Islands and Lichtenstein but excludes Australia, New Zealand and Switzerland.
What will global tax transparency mean to taxpayers in the countries which have signed up to it?
The interests they hold directly or indirectly in bank accounts, trusts, companies or similar entities in any other country on the list are likely to be notified automatically back to their home jurisdiction’s tax authorities. The world’s financial industry has been harnessed as a machine of this massive reporting engine. The machine will eventually result in tax authorities having an enormous pool of data on their taxpayers, a window into their affairs which they have not previously had, except directly from the taxpayers themselves. The decisions about what is reported under the extremely complicated rules which have been imposed will be made by multiple institutions from multiple different perspectives. We hope that the flow of information might be understood and controlled by taxpayers but this is unlikely to survive long.
When will the reporting start?
FATCA is upon us. Financial accounts held for US taxpayers which are in existence as at 30 June 2014 will be the subject of reporting by the world’s financial institutions to the US authorities. Admittedly, the reports will only be filed in the course of next year and may take up to six months even after filed, to get back to the US. In addition, the initial reporting is only of balances. As time passes, so the nature of the reports increases and in due course, full reporting on movements is required. For the UK, taxpayers with accounts in the UK overseas territories and Crown Dependencies, the reporting also starts from 30 June 2014. For taxpayers in the Early Adopters Group jurisdictions, it is expected that reporting will start with effect from 31 December 2015, in 18 months’ time.
What will be the effect of this reporting?
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Tax authorities expect over the years to build a comprehensive database of international interests of their taxpayers. They will expect the fact that they are collecting this information to cause a considerably higher level of compliance amongst their taxpayers than they do at present. They also expect to have sophisticated data analysis tools which will enable them to extract from the mass of information supplied to them, information relevant to the tax affairs of individual taxpayers whose returns they are checking or investigating.
Taxpayers will be reviewing their affairs before these new reporting rules become applicable. Some, who have held their own views about the confidentiality of their international arrangements, secure in the belief that their decisions are unlikely to be reviewed by their home tax authorities, may find their planning viewed in an unsympathetic light. The rule about tax planning, that you should act as if your arrangements were going to be audited by the tax authorities, bites with renewed vigour when you discover that in fact your planning is extremely likely to be disclosed to and reviewed by tax authorities.
Impact on the international financial community
The cost of FATCA to the international financial community has been, and continues to be considerable. The cost will be passed on to clients of the industry. This alone will make the international and offshore financial services industry more expensive and less competitive.
In addition, the loss to the international financial community of the benefits of discretion vis-a-vis the home tax authorities of its clients may well have an effect on the willingness of taxpayers to use the services of offshore financial centres. True offshore financial centres should focus on other ways in which they add value to their clients, providing a tax neutral international platform which will facilitate international investment and trade. Nonetheless, it is interesting to consider whether the result will be a real reduction in the use of offshore financial centres. Time will tell.
The early adopters group
Argentina, Belgium, Bulgaria, Colombia, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Malta, Mexico, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, Spain, Sweden, and the United Kingdom; the UK’s Crown Dependencies of Isle of Man, Guernsey and Jersey; and the UK’s Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands.