TIEA » Tax Research UK

Liechtenstein: the alternative view

Aug 112009

In between BBC appearances (I think there will be 5 today) I note that Christian Aid have commented on the UK / Liechtenstein deal, saying:

The UK government’s new tax deal with Liechtenstein amounts to a welcome admission that much-hyped tax information exchange agreements (TIEAs) do not work, Christian Aid says today.

‚ÄòThe fact that the UK has signed two agreements today – a TIEA and a second one, ensuring that uncooperative UK taxpayers have their Liechtenstein accounts shut down – is a clear sign that TIEAs are almost impossible to use,’ says Christian Aid Policy Manager Alex Cobham.

‚ÄòThey are extraordinarily bureaucratic and riddled with get-out clauses. If TIEAs were an effective way for tax authorities to combat tax dodging, then there would have been no need for the second agreement.

‚ÄòNow that the UK has acknowledged that it needs more than a TIEA to crack down on its own tax dodgers, we hope it will apply the same logic to developing countries. Their tax authorities have far fewer resources than our own in the UK and are therefore even less able to use TIEAs to collect the revenues that are rightly theirs.’

Christian Aid estimates that developing countries lose at least $160 billion a year to tax dodging by multinational companies alone.

Mr Cobham adds: ‚ÄòThe G20 should now reflect this acceptance that TIEAs do not work by urgently bringing forward a new multilateral agreement on tax information sharing. Information must be exchanged automatically, to ensure that developing countries benefit.’

I think the point that the second deal proves that the TIEA does not work is absolute valid.

And I see no way that a deal of this sort will be offered to a developing country so Christian Aid are right to complain on that score.

And there’s no doubt, Automatic Information Exchange is the only way forward: it’s AIE that puts the E into TIEA. Without it the prospect of Exchange is minimal.

And that’s what continues to worry me.

UK / Liechtenstein moves us towards Proactive Information Exchange (PIE)

HMRC, Liechtenstein, Secrecy jurisdictions, Tax evasion, TIEA 1 Response »

Aug 112009

I’m not going to get over-excited, I hope, but I think the new UK / Liechtenstein Tax Information Exchange Agreement moves information exchange into a new era.

This deal is like no other Tax Information Exchange Agreement. Take this from the preamble:

The Government of the Principality of Liechtenstein and the Government of the United Kingdom of Great Britain and Northern Ireland (together “the Contracting Parties”) desiring to:

(a) regulate the exchange of information with respect to taxes between the Contracting Parties and facilitate tax cooperation and taxpayer assistance, and

(b) assist the maintenance and development of the Principality of Liechtenstein’s financial services industry,

have on this date reached an understanding covering various matters including the introduction by the Government of the Principality of Liechtenstein of a five-year taxpayer assistance and compliance programme and the introduction by the competent authority of the United Kingdom of a five-year special disclosure facility.

It is the Contracting Parties’ intention that by the conclusion of the five year period contemplated by the taxpayer assistance and compliance programme, there will be no beneficial owners who are liable to taxation within the jurisdiction of one Contracting Party who are using the laws of the other to disguise such liability without paying appropriate tax in the manner contemplated by the understanding.

Then look at the standard TIEA. You’ll see they are poles apart.

The standard TIEA is, to all intents and purposes, a passive document. The tax haven / secrecy jurisdiction signs it, sits back and waits for something to happen. In the case of the rush of them with the Faroe Islands I am sure nothing will ever happen. I suspect that may be true of others: the Belgian / San Marino one, for example.

But even if something happens the entire onus for action is on the requesting party, which will almost always be the major state. And only when they have surmounted the enormous impediments to action built into the standard TIEA will they actually have to respond to the request received, to which the answer can be ‚Äòsorry, can’t do’.

Not so in the case of the Liechtenstein deal: this deal requires action of Liechtenstein, action that will be audited. What is more, that action has a timescale attached to it and a performance criterion is set: there will be no UK tax evaders left in the place after five years.

This is something altogether new in information exchange: so new I’ll give it a name: Proactive Information Exchange (PIE), giving rise to Proactive Information Exchange Agreements (PIEAs).

Liechtenstein is now a party to ensuring tax compliance in the UK (as is the UK to ensuring tax compliance in Liechtenstein, I should add): and it’s not a passive party, but an active one. It has a duty to ensure that no one uses its secrecy to evade UK tax (and vice versa, which is not without problems for the UK – which is why I also welcome this deal).

I mentioned the OECD meeting planned for 1-2 September yesterday. This deal blows the agenda for that meeting apart in my opinion: Tax Information Exchange Agreements look crazy when something like a PIEA might be available.

Where now for information exchange?

Well, I stick by the need for Automatic Information Exchange (AIE), and the need for an agreement on what must be exchanged to make AIE work of the sort I have proposed. But all credit to the UK’s HM Revenue & Customs: we now have a new agenda of PIEAs into which AIE can fit – and that is very good news indeed.

Liechtenstein: the sort of deal we need

HMRC, Liechtenstein, Tax evasion, TIEA 4 Responses »

Aug 112009

The FT reports that HM Revenue & Customs has finally concluded a Tax Information Exchange Agreement with Liechtenstein, except it’s a deal like none before.

Negotiated personally by Dave Hartnett, Permanent Secretary of HM Revenue & Customs, and a man for who I have a high regard, this deal moves the goalposts on information exchange. As the FT notes:

About 5,000 British investors with an estimated £2bn to £3bn in secret Liechtenstein bank accounts will be asked to come clean under a ground-breaking deal to be signed on Tuesday.

The deal is unusual because Liechtenstein banks will be asked to close the accounts of customers who do not voluntarily disclose the existence of their accounts to HM Revenue & Customs and an audit will be undertaken to check that they have done so. This is the novelty of the deal: Liechtenstein is not just signing a Tax Information Exchange Agreement which it knows will have little impact. In this case it has to take action and rid the place of British tax evaders. that is completely new ground, and to be warmly welcomed.

The customers in the meantime get a generous variation on the current voluntary disclosure rules for overseas account holders wishing to declare past evasion.

As the FT again notes:

Although the Liechtenstein investors would in principle be free to move their money without telling the UK tax authority, they would risk triggering a disclosure under anti-money laundering rules.

and

The deal between Liechtenstein and the UK will accompany an agreement to exchange tax information on request. But by itself this would probably have a modest impact on tax evaders because the UK tax authority could request information only if it had good grounds for suspicion.

This shows that the awareness in the press of the criticism we are making of Tax Information Exchange Agreements is growing: they do not work by themselves. The UK has opened up a new front that has much to commend it.

But at the end of the day it is automatic information exchange that we need, and I’ll venture to suggest that the proposal I have made on how to achieve this is the most realistic on the table right now.

In the meantime – the funds this will produce have to welcome. On £2 – £3 billion over ten years or so expect £600 million or more in tax. That’s serious money recovered. It’s just a shame that an implicit guarantee of non-prosecution appears to have been given. But at least HM Revenue & Customs have the power to name those who settle now, which is very good news and should feed a useful media frenzy.

The OECD meeting 1-2 September 2009

OECD, Secrecy jurisdictions, Tax Havens, TIEA 4 Responses »

Aug 102009

The OECD is holding a meeting of the Global Forum on Transparency and Exchange of Information on September 1-2 in Los Cabos, Mexico.

There are three objectives. The first is to discuss creating new ways of concluding Tax Information Exchange Agreements.

The second is to decide whether the Cayman and St Kitts & Nevis legislation that allows unilateral information exchange is acceptable for information exchange purposes.

The third is to set up a peer review monitoring group on information exchange.

Documents on the first two agenda items are here. The document on monitoring is here.

And I have to say this is the most massive waste of effort. Tax Information Exchange Agreements do not and cannot work. There is good reason for that. As the standard TIEA makes clear. a TIEA request must provide or state:

(a) the identity of the person under examination or investigation;

(b) what information is sought;

(d) the grounds for believing that the information requested is held within the jurisdiction of which request is made;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information.

The reason for the low number of information requests that they have, and might, give rise to becomes obvious immediately. By definition there is considerable secrecy within secrecy jurisdictions about trusts of all sorts. Determining from readily available sources the ownership and control of companies is almost impossible in most such locations. Many have official banking secrecy. In that case the chance of linking assets, such as a bank account, owned by a company which is in turn controlled by a trust of which the person under investigation may or may not be settlor and / or beneficiary is remote in the extreme. The existence of TIEAs is immaterial in that case: without a ‚Äòsmoking gun’ to trigger an enquiry under the Tax Information Exchange Agreement the reality is they have no practical value.

So here is the OECD putting massive effort into creating a system that cannot deliver unless it simultaneously creates the environment in which the ‚Äòsmoking gun’ is automatically provided by the secrecy jurisdiction that holds data on tax abusers to the jurisdiction in which they really reside and where tax is likely to be due on the structure hidden in the secrecy jurisdiction.

There is a relatively easy way to do that: I have outlined it here where I argue that the data required to trigger an effective information exchange request is not precise information on the interest, profits, gains or other income accruing to offshore structures created by, owned by, or which benefit people resident within other jurisdictions. All the country where that beneficiary of the offshore structure really lives needs to know to trigger an effective information exchange request is:

1. That a structure exists in another jurisdiction (a bank account qualifying by itself as a structure for this purpose);

2. What each component (trust, company, or foundation) is called;

3. Who manages it;

4. Where it banks;

5. Who in their jurisdiction benefits from it.

If this data were available it is likely that almost every country in the world could and would substantially increase the number of tax information exchange requests that they might make using the proposed network of Tax Information Exchange Agreements.

Only if this is done do Tax Information Exchange Agreements make sense. But there’s not a hint that the OECD is looking at creating this so of automatic information exchange (and nothing less will do). As such what they are proposing on 1 and 2 September is window dressing that cannot deliver.

We’re trying to offer options that could make TIEAs work: it would be good to see some action that at least recognises the concerns of civil society on this issue.

The farce of the OECD tax haven standard

OECD, Secrecy jurisdictions, Tax Havens, TIEA 3 Responses »

Aug 092009

Belgium, like Luxembourg, Singapore, San Marino, the Seychelles, the Isle of Man and Monaco, is a tax haven.

The OECD has now declared Belgium to be “clean” because it has signed some of its pitifully weak exchange of information agreements with 12 countries, getting it over the hurdle required for the country to be declared “clean.”

And who, pray, has Belgium signed its latest exchange of information agreements with?

Step forward Singapore, San Marino, the Seychelles, the Isle of Man and Monaco.

It couldn’t be cosier, could it?

It’s time the G20 upped the anti: 12 was OK in April. Now it’s been proven 12 is easy the next step is 36, at least. Will they have the courage to do that at their September meeting? I hope so. But I’m not holding my breath.

Hat tip to TJN

Will Swiss banking secrecy survive?

Banking, Switzerland, TIEA, USA Comments Off

Aug 042009

There is much speculation about the nature of the deal the US has come to with Switzerland over the UBS case and the US demand for 52,000 names concerning accounts they think might have resulted in US tax abuse.

No one knows what the agreement is, but there’s lots of noise. In that there’s considerable spin going on.

I can say one thing for sure: the US won’t get what it asked for and Switzerland will claim it’s banking secrecy will survive.

The latter claim seems unlikely to be true. First, it’s thought that maybe 5,000 names will be given. That shatters secrecy. If 1 in 10 names are disclosed the rest will fear that the dam has burst: that’s the end of trust in bank secrecy.

Second, it’s widely recognised UBS were not the only people doing this. You can be sure that the remaining Swiss banks will be subject to much greater scrutiny now – at least as far as their Swiss operations go. Most are moving to Singapore anyway.

Third, although it seems possible that income details may not be provided on the accounts in question – just names, my answer is so what? As I’ve argued, the key issue is the provision of a ‚Äòsmoking gun’ to the country in which the tax evader lives so that they might begin an enquiry in which the state in which they have relocated their assets acts as information supplier on demand.

It looks to me as if this is the direction of travel in the negotiations between the US and Switzerland: names will be given and it will then be up to the US to ask for the details having begun investigations on their own account back home into the affairs of the people who have been named.

There are some who won’t like this: who want full information exchange on all income, gains, profits, distributions and the rest. I’d like that too: but I’m also pragmatic; just defining these terms will take a decade. I can’t wait that long for smoking guns to be delivered. So whilst this should remain a goal (and I stress: I think that is appropriate) an interim step is needed. As I argue in my paper on this:

The key concern when tackling capital flight is the illegal, disguised nature of the illicit fund flows. Ignoring transfer mispricing, the key mechanisms used for this illegal purpose are offshore financial structures such as trusts, companies and foundations.

There is at present no automatic information exchange with regard to such structures within the EU, let alone elsewhere.

The automatic information exchange arrangements which currently exist relate only to interest income paid to accounts held in individual’s names. The European Union Savings Tax Directive (EUSTD) is the key example of this arrangement.

Suggestion has been made that the EUSTD should be extended to developing countries. If and when the EUSTD is extended, as the Commission plans, to trusts and companies in offshore locations this might provide some benefits if extended to developing countries but in its current form the EUSTD is unlikely to do so: it is quite unlikely that significant deposits resulting from illicit financial flows are held in individuals own names. It is relatively easy, and cheap, to set up trusts and corporate structures that can hide these flows from view.

This does, however, suggest exactly what information is required to trigger an effective information exchange request by a developing country. Those countries do not need to know the precise details of interest, profits, gains or other income accruing to offshore structures created by, owned by, or which benefit people resident within their jurisdictions to enable them to make an effective enquiry under a tax information exchange agreement. They simply need to know:

1. That such a structure exists (a bank account qualifying by itself as a structure for this purpose);

2. What each component (trust, company, or foundation) is called;

3. Who manages it;

4. Where it banks;

5. Who in their jurisdiction benefits from it.

If this data were available it is likely that almost every country in the world could and would substantially increase the number of tax information exchange requests that they might make using the proposed network of Tax Information Exchange Agreements.

What is therefore required is that this information, which the regulatory authorities of every single jurisdiction subject to IMF /FATF regulation must have available to it, be automatically exchanged with the jurisdictions in which the beneficiaries of those structures are located; that location to be identified by both the place of main residence of a beneficiary and by the country which issues them with their passport (with those places issue passports of dubious repute to be specifically blacklisted for anti-money-laundering identification purposes).

If this data were to be automatically exchanged then no further information on income need be exchanged, at least in the early stages of any information exchange process. That is because sufficient data to firstly disincentive use of such arrangements and secondly to allow information exchange requests to be made would exist. Pragmatically, that is most of what is desired of the automatic information exchange process. This does, however, have the benefit of massively reducing the risks inherent in automatic data exchange by removing entirely from that process, at least in its initial stages, any reference to specific income details.

With this data Tax Information Exchange Agreements become meaningful: the ‚Äòsmoking gun’ required to make them useful would exist.

This is not an answer for the purists. Nor will the Swiss deal suit them. But this is a way of making real progress in the relatively short term that paves the way to more comprehensive arrangements in the long term, if they are needed. And like the Swiss deal, the power of such an arrangement will be that it will dissuade considerable numbers from even contemplating abuse because of the increased fear of being caught.

The reality is we’ll never stop tax abuse. I know that. Stopping a lot of it is the goal. That’s a pragmatic goal. This is a pragmatic solution. The Swiss deal, imperfect as many will consider it to be, might just be a step in that direction.

If it is then Swiss bank secrecy won’t survive as a matter of fact, whatever their law says. Which will definitely be a step in the right direction.

Tax Information Exchange Agreements really do not deliver

Guernsey, Isle of Man, Jersey, TIEA Comments Off

Jul 282009

I hope people have noted I’m not a great fan of Tax Information Exchange Agreements. The basic reason is that they are virtually impossible to use. As the standard TIEA makes clear, a TIEA request must provide or state:

(a) the identity of the person under examination or investigation;

(b) what information is sought;

(d) the grounds for believing that the information requested is held within the jurisdiction of which request is made;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information.

The reason for the low number of information requests becomes obvious immediately. In many cases these hurdles are insurmountable because of the secrecy in the target jurisdiction.

Some practical evidence always helps illustrate this. Private Eye recently made Freedom of Information requests in the UK regarding information exchange between the Uk and four of its secrecy jurisdictions with which it has had agreements (if not TIEAs) for some time. They have now shared the results with me, and they are as follows:

Several things become immediately apparent. Firstly, the number of information exchange requests has fallen steadily from 2005 to 2009 (107 to 25 – excluding ‚Äòspontaneous requests’). This is a sure sign of how limited are the resources the UK can now dedicate to enquiry work. It is also clear indication of how little follow up has been done to the 2007 tax disclosure / amnesty.

Second, the tiny volume proves how meaningless it is to say that these types of arrangement create financial transparency. Over 40,000 people using these jurisdictions voluntarily disclosed involvement in tax evasion in these locations in the 2007 tax amnesty in the UK. It is clear that information sharing did not contribute to that process.

Third, unsurprisingly the flow it to the havens and not from them.

Fourth, spontaneity has increased (I presume European Union Savings Tax Directive driven – but I cannot be sure) – but this is a different type of exercise and so should not be confused with targeted work.

Last, as expected Jersey leads the pack with the isle of Man and Guernsey following, and Montserrat insignificant. The volume of funds held follows the dame order, unsurprisingly and is good indication of the likelihood of tax risk.

But most important – how depressing that procedures that so clearly offer so little are being promoted by the OECD as the solution to the tax haven / secrecy jurisdiction problem when it is so obviously clear that automatic information exchange must be the answer.

12 is not enough!

Country-by-country, Development, Tax avoidance, Tax evasion, TIEA 5 Responses »

Jul 072009

I blogged the UK / French Summit comments on tax havens earlier today and mentioned the problems of the ‚Äòinternational standard’ for tax havens / secrecy jurisdictions being just 12 Tax Information Exchange Agreements.

France and the United Kingdom will also address the task of implementing the decision of the G20 concerning uncooperative jurisdictions and remain vigilant in ensuring that the 42 countries on the OECD "grey list" meet their commitment to apply international standards for the exchange of tax-related information.

It is essential that we maintain the momentum set by the London Summit. We are therefore clear that where jurisdictions have not reached the standard of information exchange agreement by March 2010, they should be subject to coordinated international counter-measures agreed in London.

Both our countries also stress the importance of combating tax evasion and undertake to combine our efforts to reinforce the coherence and effectiveness of international action in this domain. We agree that the threshold of 12 tax information exchange agreements should be seen as a starting point in the move towards greater tax transparency. If progress stalls we will expect the threshold to rise above 12, bringing those who have not made further progress back into the "grey list".

We will work together through the G20 to ensure that proposals are developed by the time of the next G20 Summit to ensure that developing countries can benefit from the new cooperative tax environment, including through a new multilateral tax information exchange agreement. We also call on the OECD to look at country by country reporting and the benefits of this for tax transparency and reducing tax avoidance.

I’ve added the emphasis.

Now we’re talking – and that’s another government now supporting country-by-country reporting too.

Tax haven crackdown

Secrecy jurisdictions, TIEA 1 Response »

Jul 072009

Associated Press has reported:

British Prime Minister Gordon Brown said he and French President Nicolas Sarkozy agreed at a summit in this Alpine resort to call for a March 2010 deadline for sanctions against tax havens that fail to bring their transparency up to international standards.

"The world should be in no doubt that the writing is on the wall for tax havens," Brown said. "Tax transparency, full exchange of tax information and reducing tax avoidance are crucial for the health of the global economy," Brown said.

Sanctions under consideration include cutting investment, imposing taxes on funds held in tax havens, and the withdrawal of aid, Brown said.

So that’s the good news.

The bad news is that signing just 12 Tax Information Exchange Agreements gets you off the hook. And there is no evidence they work.

As I said in my recent article for the Cayman Financial Review:

As the standard TIEA makes clear[1], a TIEA request must provide or state:

(a) the identity of the person under examination or investigation;

(b) what information is sought;

(c) the tax purpose for which it is sought;

(d) the grounds for believing that the information requested is held within the jurisdiction of which request is made;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information.

The reason for the low number of information requests becomes obvious immediately. There is considerable secrecy within Cayman about trusts of all sorts. Determining from readily available sources the ownership and control of companies is almost impossible in Cayman. Cayman has official banking secrecy. In that case the chance of linking assets owned by a company in turn controlled by a trust of which the person under investigation may or may not be settler and / or beneficiary is remote in the extreme. In consequence the existence of TIEAs is immaterial: the reality is they have no practical value.

That makes it harder to get excited about the threat.

But it is a move in the right direction.

[1] http://www.oecd.org/dataoecd/15/43/2082215.pdf accessed 1-6-09