Small world

  • Author : Fiona Fernie
  • Author : Dawn Register
  • Date : February 2012
ABOUT THE AUTHORS: Fiona Fernie is a Partner and Dawn Register is a Director in the Tax Investigations team at BDO in London

Just five years ago, the concept of the Swiss doing deals with foreign governments to tax secret bank accounts would have been laughable. Today it is a reality. The political landscape has facilitated a more global approach to tackling tax evasion. The economic difficulties of the US and European governments have resulted in a relentless pursuit of those who ‘bend or break the rules’ (in the words of the UK Treasury mission statement).

On 6 October, the UK government released the full text of its controversial agreement with Switzerland. The deal allows HMRC to tax undeclared funds in Swiss bank accounts in return for account holders retaining their anonymity. The UK agreement, very similar to the German-Swiss deal, is the second groundbreaking tax agreement signed by the UK in recent years – following hot on the heels of the Liechtenstein Disclosure Facility (LDF), a partial amnesty negotiated with Liechtenstein two years ago. So, where next?

‘The jersey authorities wish to be cooperative, but must preserve tax sovereignty’

As governments desperately look for innovative and popular ways to minimise their fiscal deficits, the pursuit of ‘wealthy tax cheats’ is high on the agenda. ‘Tackling offshore tax evasion’ is now a regular feature in summit debates and the work of the Organisation for Economic Cooperation and Development is being put into practice by both national governments and the European Commission (EC).

Taking action

Announcements in recent months clearly indicate the political appetite in the UK to deal with the issue effectively: the government has deployed an additional 2,250 tax inspectors to focus on tackling tax avoidance and evasion. An Offshore Coordination Group has been formed to manage the information HMRC regularly receives from third-party sources and governments across the globe. And HMRC announced it is targeting 6,000 UK residents and organisations holding Swiss bank accounts with HSBC, by using information it received in 2010 under a tax treaty with France (as widely reported, this data was derived from a disk stolen from HSBC’s Geneva office in 2008).

HMRC also declared it is setting up an ‘affluent team’ of 200 tax inspectors to focus on wealthy UK residents. On 31 October 2011, it said the first task was to use sophisticated data-mining techniques to identify individuals who own property outside the UK. HMRC will then use risk assessment tools to recognise people who do not appear able to afford the property legitimately, as well as those who do not appear to be declaring the correct income and gains from the property on UK tax returns. All of this is part of HMRC using GBP917 million of resources to reduce the tax gap over the next four years. The target recovery is GBP7 billion a year by 2014–2015.

The Swiss-UK agreement adds another string to the UK government’s bow in terms of its attempts to reduce the tax gap in the longer term. This is because of information-sharing provisions, which are expected to help HMRC decide where to strike next in the fight against tax evasion.

Moving funds

Fears that some account holders will move their funds out of Switzerland to other financial centres to avoid the one-off levy in 2013 have been addressed by a clause allowing HMRC to follow the money. Specifically, the Swiss banks have agreed to inform HMRC of the top ten destinations to which money removed from Swiss bank accounts is sent. Information to be provided will include the number of people who transferred their funds to each destination between August 2011 and four months after the date of entry into force of the agreement, i.e. the end of April 2013 if the agreement comes into force in early January 2013, as expected.

Because of the time delay between the announcement of the agreement and it coming into force, it is inevitable that some people will decide to move their money from Switzerland rather than get caught up in the deal and all it entails. The practical implementation of the agreement is still being worked through by the Swiss banks and it is expected HMRC and the Swiss Banking Association will need to issue further guidance on some of the questions raised. The basics of the agreement are a one-off levy of 19 to 34 per cent of the account balance as at 31 December 2010 and a future withholding tax from 2013 of between 27 per cent and 48 per cent on income/gains. Account holders will retain their anonymity if they enable the agreement to take effect – this was a key aspect of the deal from Switzerland’s point of view. However, the information about the top ten new destinations for money will be important data for future UK negotiations.

Prior knowledge

HMRC already has a good idea of which jurisdictions are the most attractive when it comes to banking secrecy, largely because of the notable increase in bilateral tax information exchange agreements (TIEAs). This new data could be used to either inform new TIEAs or, if used alongside existing ones, extract specific information from the countries in question and launch investigations into potential tax evaders. In fact, government-to-government pressure (as seen with the Swiss-UK agreement) is emerging as one of the most effective tactics for dealing with large-scale tax evasion, and such data is crucial in facilitating these discussions. Action taken by the US administration has been the catalyst for much of the activity by European governments. Take, for example, the high-profile UBS case: back in 2010, Switzerland’s parliament approved legislation allowing the transfer of the names of thousands of Americans suspected of evading tax owed to the US authorities. The US has used information obtained from HSBC in India to successfully prosecute US residents of Indian domicile for tax evasion.

‘A key focus for tax policy is now raising funds through tackling tax evasion’

It is likely the information obtained by the UK on the top ten destinations will be shared and used internationally by other tax authorities. Anti-money laundering and anti-terrorism legislation, among other things, also continues to facilitate a greater flow of information between countries than most people realise.

For European Union (EU) countries, the net is getting even tighter because of cooperation among member states on tax policy. Specifically, Council Directive 2010/24/EU of March 2010 is concerned with mutual assistance across EU member states in the recovery of claims. The Directive, which took effect on 1 January 2011, covers national and local taxes, duties and levies, and under its provisions member states may assist one another with the recovery of tax debts, notification of documents and exchange of information connected to the recovery of claims. Each country has to introduce legislation to ensure the Directive is given full effect. For example, it will be brought into UK law through a combination of primary and secondary legislation, the directly applicable EU Implementing Regulation, and the EU Implementing Decision.

The new Mutual Assistance Recovery Directive (MARD) replaces an earlier directive providing for member states to assist each other in the recovery of tax debts and duties. The new Directive extends the scope for exchange of information without request and for tax administrations to carry out cross-border enquiries. This information will be invaluable for governments intending to open investigations and pursue unpaid taxes.

The consequences of the financial and economic crisis are deeply reflected in member states’ government revenues. Having implemented a wide range of tax stimulus measures from 2008 to 2010, a key focus for tax policy is now raising funds through tackling tax evasion. This is even more necessary in light of the difficulties faced by some member states in refinancing their sovereign debt.

The message from all this is clear. Jurisdictions that allow banking secrecy will increasingly come under the spotlight of western governments in the approaching years, and HMRC has clarified it is willing to follow the money wherever it goes. Given the success of initiatives such as the LDF, it seems highly likely that time is running out for tax havens. Indeed, it seems the world is becoming a much smaller place.


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