Confidentiality And Exchange Of Information

The IFS Newsletter this month summarises the discussions held at the inaugural meeting of the European branch of The International Business Structuring Association (IBSA) in Geneva on 24 February on the topic of ‘Confidentiality and Exchange of Information’. The topic centred on FATCA, the Common Reporting Standard (CRS) under the proposed Exchange of Information multi-lateral agreement, and the Automatic Exchange of Information (AEOI) which is intended to distribute masses of information regarding bank accounts to all countries participating in the scheme.

As Chairman of the IBSA, I am concerned that the Association devotes itself to the needs of the international business community and the multi-disciplinary professional advisors who work with the business entrepreneurs. It has no interest in discussing the private affairs of wealthy individuals, particularly where income, gains and wealth are not reported to the Tax Administrations in which these individuals reside. However, it was quickly understood that the interests of the international business community are severely affected by the proposed laws, and how the rush to AEOI has ignored legitimate concerns as to Rights to Privacy and Data Protection rules which are only now just surfacing.

For example, Article 8 of the European Convention of Human Rights relates to the right to respect for private and family life, and states that any interference with information cannot be disproportionate to the needs of law enforcement. The Data Protection Directive in the EU imposes severe constraints on transferring information to third country States outside of the EU without positive vetting of that State by the European Commission. There are many countries which will not pass the vetting procedure, yet AEOI appears to allow those countries rights to information which is against the provisions of this Directive.

In short, the meeting concluded that the CRS and AEOI provisions could create a minefield for the proper protection of the international business community. For example:-

* The proposals recommend that the beneficial owners of all companies be disclosed, with lists being prepared and available to Tax Administrations, negating the protection afforded by nominee arrangements which may be valid for justifiable commercial reasons. Moreover, beneficiaries of trusts would need to be disclosed, along with protectors and the trustees themselves, even where the beneficiaries may be minor children who are unaware of their interests in the trusts.

* The disclosure of relevant information relating to beneficial ownership has to be provided to the countries where the relevant individuals reside. However, professional advisors are only too well aware of the difficulty in determining residence in certain situations where an individual is present in more than one country. Whilst bilateral double tax treaties may address the issue of dual residence where an individual is considered tax resident in two countries under the unilateral legislation of each country, AEOI would not appear to restrict information to the relevant country which has the overriding rights to tax income, gains and wealth. It would appear that information may be provided indiscriminately to several tax jurisdictions, or perhaps to the ‘incorrect’ jurisdiction where on a technical analysis of the situation, the relevant individual may not, indeed, be resident.

* The international business community has a need for data protection to secure confidential information that may otherwise affect the economic activity of an individual and his or her business interests. The meeting discussed concerns that unscrupulous individuals within Tax Administrations in certain countries may use relevant information to create both personal danger for an individual and commercial risk for the continuity of his or her business interests.

* The need to disclose bank account balances may not be relevant for countries where there is no wealth tax, although it must be accepted that non-disclosure of income and capital gains, for example, may be identified by large changes in bank account balances. But there is considerable sensitivity amongst law abiding individuals that their bank account balances worldwide may be available to persons who could use the information for their own personal benefit.

* What is clear is that there will be an overwhelming volume of information exchanged which tax authorities around the world (even sophisticated ones) will not be able to assimilate. The entire AEOI will be dependent on the convergence of IT systems which amongst more than fifty nations, is a dangerous prospect.

The rush to AEOI has certainly been fuelled by media coverage. This has been welcomed by the OECD which has developed the Base Erosion and Profit Shifting (BEPS) action plans to prevent artificial tax avoidance. The IBSA has, as its members, professional advisors who adhere to the principles of integrity and transparency when advising their international business clients, and therefore supports action plans such as country by country reporting.

IBSA members also understand the need to prepare transfer pricing memoranda showing functionality assessments within each member of an international group, which must be an accepted development of the need to collect the appropriate level of taxes from the international business community. However, whilst AEOI may have developed as a means of countering tax evasion, it needs to be proportionate and not an over-reaction to press frenzy, such as the condemnation following the HSBC disclosures recently. Out of the 11,000 account holders, approximately half were UK resident but non-domiciled individuals who were not subject to tax on overseas income and gains, and approximately half paid the tax evaded with the appropriate fines; this led to just one prosecution out of 11,000 account holders.

The Confederation Fiscale Européenne (CFE) has launched a Model Taxpayer’s Charter project in an attempt to stabilise relationships between taxpayers and Tax Authorities in an attempt to create an atmosphere of mutual trust. It is consulting with the European Commission and other organisations and wants to strike a balance of fairness in the procedures to enable revenue authorities to protect their tax base. Members of the IBSA will support this initiative, and we hope that the implementation of AEOI will take into account the issues raised at our discussion group in Geneva as explained above.

I will be developing these discussions further at the next branch meeting of the IBSA in the UK at a discussion group to be held at Close Brothers, Crown Place, London EC2A 4FT on 15 April at 17.30, and at the next European branch meeting in Luxembourg to be held on 12 May, and I look forward to welcoming all IBSA members to these discussion groups.

With kind regards

Roy Saunders