Annis Lampard Deloitte

Global Transparency: A Brave New World | Annis Lampard, Deloitte LLP

The past decade has seen a rapidly accelerating trend towards automatic data exchange and the transparency of personal, corporate and trust asset wealth. This article provides an overview of some of these recent trends, how governments have responded to them (using the UK as a case study) and the impact of both global and jurisdictional policies on those potentially affected.

Automatic information exchange: where is it now?

Over a decade ago tax authorities globally began to realise that there were considerable reserves of undeclared funds held outside their borders which had never or rarely been subject to tax. Data leaks from Liechtenstein and Swiss banks began this realisation – and in the UK led first to the Liechtenstein Disclosure Facility and then the UK-Swiss treaty – followed by US FATCA, as the first prototype of automatic data exchange.

Initially limited to the assets of US citizens held abroad, but drawing in over 100 jurisdictions to feed data to the IRS, US FATCA was followed by ‘UK FATCA’ which affected the Crown Dependencies (the Isle of Man, Jersey and Guernsey) and the Overseas Territories. Finally, we saw the OECD develop a far more wide-ranging response to FATCA, namely the Common Reporting Standard (CRS). Over 100 jurisdictions have signed up to CRS, with over half of these electing to be ‘early adopters’, who start reviewing data in relation to the 2016 calendar year on 30 September 2017. The rest of those in the CRS ‘club’, including Switzerland, Hong Kong and Monaco, will review data for the 2017 calendar year from 30 September 2018. At the same time, data leaks such as the so-called Panama Papers from the law firm Mossack Fonseca continued.

The result of all of the above was that not only did governments become increasingly interested in the concept of automatic data exchange, but also that these policy developments became linked to the idea of defeating tax evasion by increasing tax transparency. This all resulted in a drive for greater tax transparency as a further means to defeat tax evasion. When the Fourth EU Money Laundering Directive was released, it therefore included a proposal for beneficial ownership registers relating to both trusts and companies. In the UK, the publically-accessible corporate register has been live since 30 June 2016, whilst the trust register, which will be accessible to HMRC and law enforcement agencies, will be forming over the coming months. Once again, the trend is towards automatic exchange of the data; as at December 2016, 54 jurisdictions had committed to automatic exchange of data held on the beneficial ownership registers between law enforcement agencies.

Finally, it should be noted that governments are not thinking about the automatic exchange of information in a purely abstract, theoretical manner. Authorities such as HMRC have been preparing for the CRS and other measures for some years by increasing their data analytic capabilities. A key example is HMRC’s “Connect” database, which allows inspectors to instantly connect individuals with businesses, employers past and present, investments, properties, other individuals, partnerships, cars, passport data and data from property valuation agencies. The inevitable result is that tax authorities will not just receive more data but also be able to process it and respond far more quickly.

The wider debate

The debate around data exchange and tax transparency is not happening in a vacuum. Instead it is taking place under the scrutiny of intense media interest and political concerns around whether economic performance and tax receipts are being undermined by deliberate tax evasion. Within companies there is also a corresponding rise in the interest at board level around taxation matters, including publication of corporate tax strategies, which are accepted as having a major reputational impact on a company’s profile.

HMRC responses

HMRC has been aware for some years that CRS and other data exchange would be coming down the track and has prepared accordingly. HMRC’s “No Safe Havens” policy, which aims to ensure that there is no area of the world where UK taxpayers can leave income or assets untaxed, has been in place for some years and there are several strands to it. Below are a few examples:

  • “Nudge” letters: these can vary in detail from naming a jurisdiction and source of income which does not appear to be taxed to more generic letters asking taxpayers to consider whether their affairs have been correctly reported. If matters are correct, HMRC is asking taxpayers to sign certificates confirming that this is the case. In some cases it has later emerged that HMRC’s data is flawed, or that the ‘new’ data is simply a repackaging of income already included on the tax return filed for the relevant year.
  • Tax-geared penalties for matters relating to offshore income or assets have increased incrementally over the past few years, with the latest changes taking effect from 1 April 2017. These include the ability for HMRC in some circumstances to charge asset-based penalties, ie the penalty charged is a percentage of the value of the asset, rather than a percentage of the tax due on the asset.
  • The Finance Bill legislation  published on 8 September 2017 reintroduced the notion of a statutory Requirement to Correct (‘RTC’) for UK tax liabilities that had been underdeclared for offshore income and assets. RTC lasts until 30 September 2018 when it will be replaced with the Failure to Correct (‘FTC’) regime. Under FTC penalties will be 200% of the tax due, unless any mitigations are due, a significant signal from HMRC that swift disclosure is encouraged.
  • On that note, the Worldwide Disclosure Facility opened over a year ago on 5 September 2016, and over 1,000 trust, corporate and personal disclosures have been made to date.

The impact of tax transparency

We can all agree that corruption and tax evasion are inherently wrong and should be tackled accordingly. What is harder for businesses and individuals, especially those with complex international affairs which may reflect the nature of their global family or business interests, is understanding how HMRC’s offshore policy can apply to them.

We need to realise that data exchange is here and here to stay; attempting to move assets to delay CRS reporting, let alone avoid it, is not an appropriate response and one that is likely to trigger significantly worse consequences both for the taxpayer and advisers. However, it is not a given that the data exchanged will be entirely accurate or easily understood, even with governments’ increased data analytics skills.

The best ways to prepare for this brave new world are therefore:

  • Be aware of what data will be exchanged, so that any further questions from tax authorities can be addressed in a swift and compliant manner;
  • Ensure that that data is also up to date: this could include re-valuing key assets so that financial institutions hold up-to-date information on what is held within a trust; it could also include checking that a financial institution has the correct residency information around an individual on whom a CRS report will be filed;
  • Be prepared for more HMRC activity in this area, whether more “nudge” letters or complex avoidance enquiries;
  • And finally, if the process of taking up-to-date advice reveals that there has been inadvertent non-compliance, act swiftly to take a voluntary disclosure to HMRC and rectify the situation.

Annis Lampard is a director in Deloitte UK’s tax disclosure and transparency team, and assists clients with maintaining their compliance and communicating appropriately with HMRC.