G8 is Gr8 but the transparency tango needs the G20

The G8 is nearly upon us, Lough Erne beckons on the 17th and 18th of June. The leaders of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the USA will meet to discuss trade, tax and transparency.

Prime Minister Cameron has put transparency centre stage driven by public disquiet over the tax affairs of multi nationals and the needs of developing countries. What the development economist Professor Paul Collier has termed ‘the bottom billion’.

Some in the business community have observed the UK cannot position itself as the poster child of economic growth and recovery, hence the focus on tax.  If you ask countries to collaborate to collect more of the tax they feel is due, no one is really going to disagree, especially given politicians everywhere are facing replacement by austerity weary citizens at the first electoral opportunity.

The world’s media have bought PM Cameron’s message about sorting out the British Dependencies and Territories and dealing with the ‘Tax Haven’ issue. I know because I have met large numbers of them over the last two weeks, from BBC Business to RTL, from Le Monde to the Wall Street Journal, from the Los Angeles Times to El Pais. They all want to know how Jersey will cope with this new world of transparency. So what is on the table and how will it affect the CDs and OTs, and Jersey in particular?

There are three principal G8 objectives for PM Cameron, firstly to address base erosion and profit shifting (multinational tax) secondly to promote automatic information exchange as the new global standard, and thirdly to improve record keeping and data capture so that there is something to exchange.

Let's deal with each in turn

Multi National Tax - Base Erosion and Profit shifting

Nations have competed for much of the post war period on tax. Ireland, Luxembourg and the UK have all promoted low corporation tax rates to entice business. PM Cameron is aiming for the lowest corporation tax rate in the G20 but it is also clear that firms are expected to pay tax at this rate.  There are a number of problems with this approach.

US corporations such as Amazon, Google and Starbucks have been at the heart of this controversy. They have done what their government wanted, that is expand overseas, compete on the international stage, and they were encouraged to do this with tax breaks.  As long as they don’t repatriate their profits they don’t have to pay US corporation tax on overseas earnings. Clearly with the advent of the internet and intangibles the motivation to place business and profit in low tax centres has been incentivised. Small wonder then that Ireland and Luxembourg have built a business model around this in Europe. The Europeans were delighted with the inward investment and jobs, now they want the sheltered corporation tax as well. The OECD are working on this so we should expect proposals to address this at the next G20. Don’t be surprised if the UK loses out. The penny doesn’t seem to have dropped in the Treasury, but by my reckoning most of the FTSE companies achieve a substantial portion of earnings in Asia, and the Asian economies will be the likely beneficiaries of fundamental change.

International tax planning and tax rates do not sit in isolation, they are placed in an often complex web of reliefs, allowances and rebates built up over many decades. Reliefs introduced by successive governments to incentivise investment in particular aspects of their economies. Tolley’s guide to the UK tax code now runs to in excess of 11,000 pages. If countries want companies to pay low flat taxes they need to simplify their tax systems and deconstruct the enormous complexity that encourages complex tax planning.

 

Automatic Information Exchange

The current international standard on information exchange between tax administrations is the OECD Tax Information Exchange Agreement programme. On request information exchange for tax matters was introduced in the late 90’s, adopted by Jersey in 2002, and given a significant boost by the G20 in 2009. Over 800 agreements have been signed to date and with significant amounts of data now flowing between countries.  So where does Jersey stand on fighting tax evasion through information exchange?

On information exchange we signed up voluntarily to the OECD programme (the international standard) not in response to G8 pressure nor due to the G20 focus in 2009, but in 2002!. Jersey now has over 40 tax information exchange agreements in place. Add to this our commitment to US FATCA, UK FATCA, G5 multi-lateral pilot, EU 17, and OECD multi lateral conventions and you have a leadership position in transparency. But to exchange information you need to have it in the first place.

Clearly the systems to back up the fight against tax evasion need to underpin information exchange arrangements. On fighting tax fraud and money laundering Jersey made tax evasion a crime in the late 90’s. If you help people to cheat their taxes in Jersey you can be prosecuted and go to jail, and people have. The UK brought all crimes legislation in too, but years after Jersey did. In most countries cheating the tax man is still a civil offence, transgression results in a slap on the wrist and a fine.

Jersey has a suspicious transaction reporting regime and a financial crimes unit to ensure when trouble is spotted it is followed through. All reports are assessed and followed up. In the UK it is estimated that only a round a 1,000 of the 280,000 or so Suspicious Transaction Reports per annum are actually assessed.

 

Record keeping and Data Capture (Beneficial ownership)

All Jersey corporate service providers (CSP’s) are regulated and subject to inspection by the regulatory authority, the Jersey Financial Services Commission or JFSC. The CSP must hold detailed client records and know who owns the money. In the UK company formation and trust services are unregulated.

In Jersey all CSPs have to hold what is technically termed beneficial ownership information, that is who ultimately owns the shares of a company or stands to benefit from the proceeds of a bank account or a trust arrangement, or any kind of means of holding financial value. For companies this information is held by our company registry and for trusts on the files of the licensed service provider, and subject to inspection by the regulator through on site supervision visits.

The UK on the other hand and indeed most large countries including the US do not routinely collect this information and in reality have no real idea who owns the companies they allow to be formed. This according to research by Professor Jason Sharman, of Griffith University Australia, is a gaping hole in the big country defences against money laundering, financial crime and tax fraud, as can be seen in the chart on page 24 of his comprehensive study, Global Shell Games.

In the only industrial scale test outside of the usual international fora checks by the IMF and FATF, Jersey ranks first equal for good compliance, and had a 100% detection rate for bogus business. The UK and US performed poorly ranking 46 and 50 respectively from the 63 countries in the survey.

How do you then get firms to comply? Simple, regulate them and take enforcement action under your regulatory laws to ensure compliance. Jersey does this, the UK and US do not.

There are some 2.5m companies on the UK company register with scant information about who really owns them and 2m LLCs in Delaware in the US with no beneficial ownership information at all.

PM Cameron has listened to the clamour from the NGOs and promoted the idea of public registries on all forms of business, the equivalent of publishing our bank statements online for public scrutiny. The NGOs want to rake over this information and have been described by Richard Hay, Principal of Canadian lawyers, Stikeman Elliot, as ‘tax vigilantes’. This is an extraordinary proposal, removing the right to privacy completely and a classic example of the sledgehammer deployed to crack the nut.

The NGOs justify this exposure as they say companies owe an obligation to the communities they are hosted in. They do of course, but they gain limited liability status because they risk their own capital in business ventures, creating the employment and taxes we all depend on. Ultimately they provide the payroll for governments and for NGOs.

The likelihood of this happening seems very slim as most countries and the US and China in particular are unlikely to play ball, seeing this as a European inspired attack on their corporations. Indeed PM Cameron would do well to drop this recommendation, as it is likely to put the whole of his transparency agenda at risk.

The IFC Forum, a body representing a significant number of firms in International Finance Centres has made the following points that are worthy of careful consideration:

  • The UK’s proposal of a multilateral regime, similar to the US Foreign Account Tax Compliance Act (FATCA) could see the UK and other G8 countries collecting more information from other countries on their taxpayers than they are entitled to collect at home.
     
  • It is not clear what purpose is being served by capturing information that goes beyond taxable interests.  The British Crown Dependencies and Overseas Territories, are important international financial centres in their own right, performing a key role in the global supply chain providing facilities to support cross-border trade and investment flows.  Damage to this utility ‘wiring’ could do serious harm to growth and jobs in recovering Western countries.
     
  • There is merit in more effective tax enforcement.  However, the initial and on-going costs associated with the UK’s proposals may be high, and the repercussions of data collected (or made public) could well be a boon for criminals, particularly those involved in cyber-crime and data mining for illegal purposes.
     
  • The British Crown Dependencies and Overseas Territories create a stable and well established infrastructure which facilitates investment and economic growth in developing countries.  Foreign and domestic investors are able to access efficient and impartial investment structures that are otherwise not available in developing economies due to local regulations and laws.  This lowers transaction cost and facilitates investment, which is a key driver of growth in developing economies.
     

So what is the Jersey position on this whole agenda. It is to support a level playing field and the adoption of sensible workable GLOBAL standards that are designed to be effective in fighting financial crime including tax evasion whilst balancing the cost of compliance and the legitimate rights of citizens to an appropriate level of privacy.

We support the general thrust of PM Cameron’s efforts to tackle financial crime. Tax evasion is wrong, it leaves honest citizens to shoulder an unfair burden, because others do not pay their dues and it deprives developing countries of vital revenues.

However, the big countries need to walk the talk, they need to level up to the standards already operated by Jersey and similar centres, they need to regulate their CSPs, to capture meaningful information, and to make on request information exchange work before they leap into a brave new transparency world they are ill equipped to deliver.

I am quoted by the Economist this week; ‘Geoff Cook of Jersey Finance, a trade body, says that giving authorities, but not the public, access to the information “strikes the right balance between being able to monitor potential wrongdoing and leaving legitimate privacy rights intact for the great majority who do no wrong.”

I hope PM Cameron gets to read Matthew Valencia’s article ‘The Transparency Summit’, and I wish him well in his efforts to deliver a more transparent world, and to help those most in need in  ‘the bottom billion’. He will receive every support from Jersey in doing this, and we are willing and able to offer our support in capacity building including in developing countries.

 

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