Many people seem to think that secrecy and tax avoidance – which is not unlawful – are the only reasons why international financial centres exist. This is not the case. International financial centres play a crucial role within the international financial system, channelling resources in an effective and tax neutral manner into both developed and developing economies, and providing thriving industries with much–needed investment.
Almost every pension fund – as well as any charitable endowment which invests in the global market – will channel its investments through these centres. It is therefore not just the wealthy who use such centres for purposes of managing and protecting their wealth in a tax effective way, and ensuring its secure transfer to subsequent generations.
The “Panama Papers” saga sprung up against the backdrop of the OECD’s new international system for the automatic exchange of tax information – known as the Common Reporting Standard (CRS) – to which around 100 countries have committed. For some taxpayers, the CRS is already “live”; for others it is imminent. The uproar surrounding the leak appeared to overlook the fact that times have changed, and that numerous measures – the CRS being just one – are already in place for dealing with tax evaders. Unfortunately, these measures, including the CRS, go a whole lot further than that.
Right to privacy
The case for the CRS is made by governments and politicians on grounds of fairness. However, the evasion of tax by some – which is unlawful – has the consequence of increasing the burden on honest taxpayers and threatening their legitimate right to privacy. The CRS will also increase the costs associated with legitimately channeling and structuring investment through international financial centres, and by doing so could harm this essential mechanism.
Any costs imposed on international financial centres is not just a cost imposed on the tax cheats, it is a cost imposed on the global financial system, and will be paid by every user of the system, great or small.
Bearing in mind the enormous costs that have already been felt in relation to FATCA, there is a significant risk that the benefits of the CRS in terms of transparency, enhanced compliance and effective enforcement will be dwarfed by its cost.
‘There is room for privacy planning’
Some of the information leaked in the Panama Papers is better out in the open, and may improve the ethical and fiscal standards of politically exposed persons and wealthy individuals. But this is happening to a large degree in any event as the last few years have seen a significant shift in mindset across the financial services industry. Tax non–compliance is no longer seen as an acceptable state of affairs.
More importantly however, the vast majority of the information in the papers relates to transactions which were reasonably and appropriately the private affairs of those involved, untainted by bribery, corruption, criminal conduct, tax evasion, or even tax avoidance or hypocrisy. Data about international financial transactions is as deserving of privacy as data flowing between mobile phones. Taking steps to ensure privacy of personal data is not immoral but a basic human right, as fundamental as the right to have curtains in your house.
To the extent the information concerned is not properly required by taxation authorities, taxpayers should be entitled to draw their curtains without it being automatically assumed that they are hiding something. Individuals have legitimate concerns about the effects of the CRS on their privacy, and even on their personal security.
We believe there is room therefore for privacy planning ahead of reporting under the CRS. Privacy planning must never have the objective of, or result in, hiding the proceeds of crime, including the proceeds of tax evasion. Nor should it be done in a way that contravenes the very rules that are set out in the CRS. But it can include proactive steps such as ensuring that:
- reporting from structures is aligned with the needs of the tax authorities in the jurisdictions of the taxpayers concerned;
- structures do not give rise to misleading or irrelevant reports;
- the timing and manner of reporting is appropriate; and
- features of structures which could be a basis for additional, duplicate and unnecessary reporting are eliminated.
There may be only a limited time to take some of these steps.
In order to carry out privacy planning, advisors need to be clear about the legal framework within which that planning needs to be designed, and not be distracted unnecessarily by the numerous non–binding pronouncements that emanate from the OECD (which may mistakenly be taken to limit the scope for planning).
What is the status of the OECD pronouncements?
The OECD was mandated by the G20 to produce and implement the CRS with the objective of creating a standard and global system of automatic exchange of information between governments. And as we would expect, it has taken that role extremely seriously by authoring not only the CRS itself – in the form of an intergovernmental agreement (IGA) to be signed up to by governments – but also a detailed set of Commentaries, followed up by an Implementation Handbook and more recently a series of Frequently Asked Questions (FAQs).
It is important to remember that the OECD is not a government but simply an intergovernmental body with one of its objectives being to co–ordinate the process whereby governments put the CRS into effect. It does not itself have law–making powers. Nothing it says has any legal impact on the financial services industry, except to the extent that its statements are incorporated into the laws of a particular country.
It is also important to note that the IGA is only an agreement between governments, under which they agree to exchange information with each other. In order for them to be in a position to make such exchanges, they need to receive the information. This means introducing a set of rules domestically that serve to impose on their financial communities the obligations around due diligence and reporting. In general, these rules simply mirror the terms of the IGA and do not give any legal recognition to the Commentaries, other than as a source of guidance for the way the CRS should be implemented. And, typically, no legal recognition is given to either the Implementation Handbook or the FAQs.
The legal basis of privacy planning
When considering the impact of CRS on their clients, planners must focus on the domestic legal rules to which their clients are subject, and apply the normal rules of legal interpretation to such rules.
As part of this, it is important for advisers to give the appropriate degree of recognition to some of the statements coming out of the OECD, which have a limited legal effect, albeit having a political message. If they do this, then they will be in a position to provide their clients with the independent and robust advice they deserve.
This article was submitted by Andrew Knight and Anthony Markham, Partners, Maitland, pictured above L-R.