IFCs should still lead on transparency initiatives to counter negativity
KEITH BOYFIELD discerns signs of flagging in the crusading zeal of the G20 for greater financial regulation, as one of the most provocative assaults yet launched on offshore centres is published.

January 2011: London’s Guardian newspaper ushered in the New Year by publishing extracts from Nicholas Shaxson’s latest assault on international financial centres, a book provocatively entitled Treasure Islands: Tax Havens and the Men Who Stole the World. Shaxson’s thesis repeats the claim that nearly all tax centres are preoccupied with helping major companies and the ‘super rich’ avoid paying tax. The author reckons the sum foregone by the world’s tax authorities amounts to an astonishing $1,000 billion a year. Shaxson’s book adds to the mounting literature that erroneously argues that finance centres are part of a conspiracy aimed at defrauding the hard pressed domestic taxpayer, who is left to fund the widening fiscal gap apparent in so many advanced OECD economies.
Keith Boyfield

Such inaccurate and highly exaggerated assertions are likely to be repeated many times through the course of this year. Given this hostile populist perception, as Mark Field - the Member of Parliament for the City & Westminster points out - there will be an even greater need for pro-active initiatives in the field of transparency by finance centres, notably Crown dependencies such as Jersey, Guernsey and the Isle of Man, if such wild claims are to be countered. The onus as Mark Field puts it should be on privacy, not secrecy. Yet in actual fact, international finance centres have a good record to promote and one that is often far better in terms of governance and regulatory standards than some of the jurisdictions arguing for extreme measures to be implemented against so called tax havens.

The IMF, for example, has recognised Jersey ahead of the UK with respect to how it complies with international regulations and supervisory rule. Furthermore, as Malcolm Couch pointed out in the November issue of Financial Centres International, ‘the Isle of Man is a model international financial services centre’, which was the reason it was included on the OECD’s white list when it was first published.

The start of the year was also marked by the publication of the OECD’s Briefing Paper on the Global Forum on Transparency and Exchange of Information for Tax Purposes. This report, issued under the watchful eye of Jeffrey Owens, the Director of the OECD Centre for Tax Policy & Administration, contains 64 recommendations for improvements in the field of transparency and information exchange.

But significantly the overall message of the report is the degree to which the 95 member jurisdictions have implemented a range of enhanced standards. Indeed, to date more than 600 separate agreements have been signed by these jurisdictions while thirty three jurisdictions have now signed at least a dozen agreements to the benchmark standard required. Since January 2010 no less than 147 tax information exchange agreements (TIEAs) have been signed and a further 46 double taxation conventions (DTCs) upgraded. Again, as Malcolm Couch comments, ‘it is now clear that threats work: and that ‘naming and shaming’ can be as effective as imposing sanctions’ It is certainly the case that a clutch of international financial centres failed to make it on to the white list as originally published and that as a result their economies were seriously damaged.

The OECD has developed a set of standards that are meant to strike an appropriate balance between privacy - the point highlighted by Mark Field MP - and the relentless demand by a wide range of jurisdictions to enforce their own individual tax laws. İIn this context the OECD has enumerated five key principles in its Model Tax Convention (see Article 26) and the 2002 Model Agreement on Exchange of information on Tax Matters. These five key principles can be summarised under the following five headings:

- Respect for taxpayers’ rights;
- Strict confidentiality with respect to information exchanged;
- The need for reliable information and appropriate powers to obtain such information;
- No restrictions on exchange attributable to bank secrecy or domestic tax interest requirements;
- The free exchange of information on request where it is deemed ‘forseeably relevant’ to the tax adminstration concerned and the enforcement of the domestic laws of the Treaty partner.

Last year the OECD reviewed 15 jurisdictions including Australia, Norway, India and Ireland along with a raft of much smaller financial centres, namely Barbados, Bermuda, Cayman Islands, Jersey, Monaco and Panama. With a veritable sword of Damocles held over them by G20 leaders, few jurisdictions found it in their interests to resist measures by the OECD and others to impose what were claimed to be stricter standards.’We stand ready to use countermeasures against tax havens’ was the ominous threat issued by the G20 Leader’s Statement published at the Toronto summit in June 2010.

The OECD’s Global Forum is currently reviewing how 80 of its 95 member jurisdictions meet these revised standards, broken down into a further ten essential elements. The results of this current review will be communicated to the G20 at its next meeting in November 2011. With this goal in mind, the OECD is seeking to accelerate the development of what it judges to be adequate exchange of information networks. It has launched three pilot projects - two in the Caribbean one in the Pacific. As a result of this initiative more than a hundred agreements have been signed or are currently being concluded between the individual jurisdictions concerned.

It is clear from this summary that the OECD is pursuing a range of measures in a bid to maximise the tax-take from both companies and individuals who take advantage of the wide range of attractive services offered by IFCs. Yet the degree to which this raft of iniatives will deliver the desired objectives remains uncertain. In this context it is instructive to read the findings of a wide ranging analysis by the European Policy Forum, a London based think tank, into the implementation of the EU’s Savings Tax Directive. Your correspondent was involved in this research and it was striking to discover how unwieldy the EU’s Directive proved in practice.

It turns out that European finance ministries are often overwhelmed with the information they receive from other EU member states and that even some leading countries, notably the United Kingdom, are far behind in processing this welter of information. It is a regime characterised by long delays, inaccurate data and myriad problems identifying interest income received by taxpayers in other countries. In the closing months of 2008 half a dozen member states had yet to provide the European Commission with the required data for 2006. Furthermore, smaller European economies like Estonia are required to follow complex procedures for information exchange even though they have no domestic tax on interest income for their own citizens at all. As the Forum highlighted, in practice the EU system of information exchange was flawed in so far as it was:-

- Seriously affected by quality of data received;
- Prone to lengthy delays;
- Frequently requiring manual follow up and further inquiries by tax authorities;
- Prone to confusion on what is taxable with regard to the sum reported, which may be interest or dividend payments, sales proceeds or even a bank withdrawal;
- Disproportionate for small countries without large financial centres.

The Forum’s analysis also raised a range of concerns about the high compliance costs faced by banks in implementing the EU Savings Tax Directive. Based on the responses to its detailed survey received from banks of different sizes across Europe the Forum calculated that banks in the EU and Switzerland had incurred compliance costs of €753m. Even more worryingly, the Forum’s research warned that banks might be burdened with a further €693m of annual compliance costs coupled with an additional €682m in set up costs if the European Commission was successful in phasing out the withholding tax option. This is hardly a strategy for recovery at a time when banks are faced with far higher capital adequacy thresholds and dramatically weakened balance sheets.

What is more, as the Cato Institute’s Dan Mitchell points out, the EU’s Directive has failed to raise the hopelessly unrealistic levels of revenue anticipated by European legislators (see FCI November 2010 issue, page 8). Given these regulatory shackles it was no wonder to find that many of those surveyed expressed a real concern that implementation of the Directive was contributing to investors moving to Singapore, Hong Kong and other Asian centres. This trend is reflected in Asian centres ranking in the Global Financial Centres İIndex published by Z/Yen and sponsored, significantly by the Qatar Financial Centre. Hong Kong and Singapore’s bright prospects in the field of asset management are also highlighted in a recent report from PriceWaterhouseCoopers (see FCI, September issue page 7).

However, there are some encouraging signs that a more realistic strategy might be adopted by tax authorities in forthcoming years. In a deal agreed in principle back in October 2010 the UK and Switzerland have established an agreement whereby tax will be deducted at source on interest paid to holders of Swiss bank accounts, albeit it remains unclear whether this rule will apply to corporate entities and trusts. A similar agreement was also concluded between Germany and Switzerland in the same month. These initiatives are crucial in so far as they respect Swiss banking privacy. One leading accountancy firm is confident that anyone well advised will not be paying out substantial sums in withholding tax. Yet, as a UK Treasury spokesman noted to Agence Europe, ‘this was a reasonable, pragmatic approach by the Chancellor to recover cash that would otherwise not be collected’.

As FCI reported in December 2010 there are also signs that the G20 are beginning to lose their crusading zeal for greater financial regulation as reflected in the failure to deliver any substantial progress on global financial regulation at the Seoul summit in November 2010. With Prime Minister Gordon Brown defeated at the polls and both President Obama and President Sarkozy facing escalating difficulties with their own domestic electorates, there are no strong political figures around able to mobilise popular support for greater regulatory intervention in the world’s capital markets. Indeed, many political leaders have to keep the bond markets onside for fear of a downgrade in their rating: a reality that extends to the UK as well as high profile casualities such as Ireland, Greece and Portugal.