UK government to take British tax havens to task? Up to a point

Nov 25: updated to add non-dom loophole.

International Tax Review has just published the following story, which we think is potentially significant, but we'd add several important, even major, caveats: see underneath the story.)

A leaked government document seen by International Tax Review reveals that the UK is planning to impose its own version of the US Foreign Account Tax Compliance Act (FATCA) on its Crown Dependencies and Overseas Territories. The move will deal an almost-fatal blow to tax evasion through the UK’s tax havens.

Responding to an International Development Committee report earlier this week, the government publicly rejected the need for a UK version of FATCA the need for a UK version of FATCA, which would require tax authorities to automatically exchange information relating to UK citizens or corporations.

In private, however, the government has already drafted FATCA legislation which it will impose on its Crown Dependencies and Overseas Territories. These include some of the world’s most notorious tax havens such as the Cayman Islands, the Channel Islands and the Isle of Man.

The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies

It will also require the account number, name and identifying number of the reporting financial institution as provided when registering with the IRS for FATCA purposes, and the account balance or value as of the end of the relevant calendar year or other appropriate reporting period or, if the account was closed during such year, immediately before closure.

The move will come as a huge blow to tax havens and companies and individuals hiding money in them. But it is a coup for the Tax Justice Network (TJN), which has long been arguing for automatic information exchange.

“This is a requirement for full, open disclosure,” said the TJN’s Richard Murphy. “It looks through trusts, companies, who owns the assets. It’s full automatic information exchange.”

(Continue reading to see the whole story.)

If this goes ahead as flagged here, it does represent a very significant advance, not least for its embrace of the concept of automatic information exchange. We would add a couple of important, even major, caveats, however.

First, FATCA was originally designed as a unilateral mechanism to protect the fiscal position of the United States from offshore erosion. That is a valuable goal, but that does not help other countries. This looks, on the face of it, to be a similar move: the UK government moving to protect the fiscal position of the United Kingdom. It will do nothing - at least immediately - for developing countries. So this does not signal any end of the 'feeder' relationship that Britain's tax havens have with respect to the City of London, as Treasure Islands outlines in detail.

Second, as usual Britain's "non-domiciled" taxpayers, who pay tax only on their domestically-sourced income, will be exempt from all this. These include the majority of Britain's very wealthiest citizens, so the non-dom loophole is a very large one indeed.

Third, this section will require careful analysis

"That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies."

That sounds good but trusts can be so very slippery - discretionary trusts are a particular case in point - that it is possible that billions or even trillions in assets would remain out of the scope of this. Britain's tax evasion and avoidance industry has made a living out of navigating these complex distinctions. Will this include foundations? (We recently noted, for instance, Guernsey introducing foundations, which "gave a multiplicity of control retention mechanisms over key decisions for the founder while offering a higher level of confidentiality than trusts.") We will remain skeptical for now, but would be delighted to be proved wrong.

Fourth, these jurisdictions will still offer zero percent and low tax rates, and tax exemptions, which even if all this comes to pass will enable a whole cornucopia of abuse, even by British companies.

Fifth, we note this recent UK parliamentary exchange:

We recommend that the Government introduce legislation similar to the relevant section of the US Foreign Account Tax Compliance Act (FATCA), requiring tax authorities automatically to exchange information relating to UK citizens or corporations. The Government should also use its influence (via the OECD Tax and Development Task Force, and similar avenues) to persuade other governments to follow suit. (Paragraph 41)

Disagree. The Government is fully committed to tackling tax evasion and sees transparency and information exchange as key tools but does not regard the introduction of FATCA in the UK as an appropriate means to achieve this. FATCA is unilateral and extraterritorial in its approach and has created significant difficulties for the US as well as affected countries in its implementation. The UK approach is to work in partnership with other governments, including those in developing countries, to increase tax transparency and exchange of information. The Government works closely with the G20, EU and OECD to deliver real progress in international tax transparency and substantially increase levels of information exchange. 

It would seem, however, that the Department for International Development may have been misled on this one.
 
However, even after saying all that, this new initiative behind the scenes could be significant. Change takes place step-by-step and FATCA has been, is, and will continue to be a major factor in the implementation of automatic exchange of information. 

The British government should now throw its weight firmly behind the principle of automatic information exchange, on a multilateral basis, in addition to moving on this apparent Son of Fatca - if that is what it is - as soon as possible.  

Britain's appalling track record in this general area constitutes grounds for severe caution. But that is not to take away from the fact that if this move is genuine, it represents genuine progress. And among other things - as Robert Palmer notes - it does show that Britain remains in a position to require its satellite tax havens to submit to its authority.