As global anti-tax evasion efforts intensify, a system of multilateral agreements for the automatic exchange of financial information is emerging. As a result, the world is drawing closer to greater global tax transparency.
“When you see even the Swiss buckle, it certainly looks like that’s what’s happening,” says Rick Robertson, associate professor with the Richard Ivey School of Business at the University of Western Ontario in London, Ont.
Many low- or no-tax jurisdictions, including Switzerland, have been pressured in recent years into signing agreements to share tax information, effectively lifting the veil of banking secrecy in major banking centres long known as tax havens.
Many people applaud these initiatives, of course – targeting tax evasion is a political winner in most countries. Nevertheless, the implementation of a host of new compliance regimes over the past several years, with more expected, will present costly operational challenges for global financial services firms, including those in Canada.
“There are going to be co-ordination and alignment issues going on for a number of years, as each one of these programs comes online,” says Andrea Taylor, managing director with the Toronto-based Investment Industry Association of Canada.
Earlier this year, the G20 group of nations endorsed a common reporting standard (CRS) for the automatic exchange of tax information. Under the proposed agreement, released by the Paris-based Organisation for Economic Co-operation and Development (OECD), participating tax jurisdictions would exchange financial information about each other’s citizens on an automatic and annual basis.
So far, about 65 jurisdictions, including Canada and the U.S., have committed to the agreement, with about 44 countries signing on as early adopters: the latter group has agreed to implementation beginning in 2017. Other significant signatories to the agreement are Switzerland and Singapore, both jurisdictions that are considered to be major centres for offshore wealth.
Since the global financial crisis of 2008-09, cash-strapped governments around the world have been looking to boost revenue by targeting those among their citizens who hold assets offshore but don’t pay taxes on income or gains. At the same time, voters in many countries are demanding that their governments close the loopholes that allow wealthy individuals and corporations to move money offshore in order to minimize or eliminate taxation.
But the biggest push toward a global tax information exchange agreement may have come in 2010, when the U.S., in response to a scandal in which a Swiss bank was caught actively helping wealthy Americans set up secret offshore accounts, passed the Foreign Account Tax Compliance Act (FATCA). Under FATCA, foreign financial services firms effectively are compelled to report on their American clients or face a punitive 30% withholding tax on all U.S.-source income or gains. Governments around the world, including Canada, hurried to sign intergovernmental agreements with the U.S. to implement this law on a more co-operative and reciprocal basis.
Using FATCA as a template, the OECD was able to develop the CRS at a fairly quick pace, and also set an ambitious timetable for adoption and implementation. Each country that signs on to the CRS will have to enact their own domestic legislation to implement the standard.
Under the CRS, banks and other financial services firms in each country would be expected to provide information on “reportable accounts,” including account balances, interest income, dividends and the proceeds from sales. Reportable accounts include those held by individuals and entities such as trusts and foundations. That information would then be exchanged between tax authorities in the relevant jurisdictions on a reciprocal basis.
The CRS is intended to replace existing international compliance regimes that involve governments requesting data about suspected tax evaders, on a case-by-case basis, from other jurisdictions under tax-information sharing agreements. These regimes are now considered inadequate in deterring tax evasion.
“[The automatic exchange of information] can provide timely information on non-compliance where tax has been evaded either on an investment return or the underlying capital sum,” stated the OECD release announcing the CRS in July, “even when tax administrators have had no previous indications of non-compliance.”
In addition, individual countries are developing their own compliance regimes, either as a complement to international regimes or operating on a more unilateral basis. For example, the U.K. has developed its own FATCA-style legislation that covers Crown dependencies, such as Jersey and the Isle of Man, and overseas territories with financial centres, such as Bermuda and the Cayman Islands.
Canada has boosted its efforts in recent years. For example, the Foreign Income Verification Statement, or Form T1135, has been revised. Canadians with more than $100,000 of assets held outside the country now must disclose more information than on previous iterations of this form, and penalties for non-compliance now are more strictly applied compared with previous years. (See story, page B7.)
The development of compliance regimes such as FATCA and the OECD’s CRS are having an effect already, despite the fact that FATCA has not yet been fully implemented and the CRS still is not enacted. According to the OECD, some 37 billion euros (C$52.3 billion) of taxes from undisclosed offshore accounts has been collected since 2009 through voluntary disclosure programs offered by OECD member countries.
The new compliance regimes mean that it will be much more difficult to escape the attention of tax authorities, regardless of where a potential tax evader has accounts.
“If you’re compliant,” says Richard Marcovitz, tax partner with Pricewaterhouse Coopers LLP in Toronto, “then no problem. If you’re not compliant, you can be expected to be asked where you got the money.”
The burden may extend even further. “People may face a great probability of being audited,” says Robertson. “Even if you’re completely onside, there may be an added cost in terms of compliance because the audit forces you to provide additional information.”
For global financial services firms, absorbing various regimes of national and international compliance will continue to be a challenge, Taylor says, forcing the financial services industry to anticipate future compliance structures. For example, as firms have been building their systems to comply with FATCA, they’ve attempted to keep them flexible enough to be adaptable to a multi-jurisdictional regime, such as the OECD’s proposed CRS.
“The OECD common reporting standard has its own documentation requirements,” Taylor says, “when it comes to identifying the residences of clients of potentially 40-plus countries. That’s going to add a layer of complexity when it comes to account openings, both for the firm and for the client.”
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