This morning I asked my daughter, aged 20, whether she would like the details of her bank account made public. She was indignant – it was her private bank account! What she earns and how she spends it are not the business of anyone else in her opinion.
However, the global commitment to transparency and stamping out tax evasion would appear to justify having one rule for the rich and another for the less well off. And before you say, but is only the rich who have money offshore take a little time to consider where and how your pension is invested and yet the automatic exchange of information does not apply to pensions which are administered and managed offshore so as to enable them to accumulate tax free.
For many UHNW families privacy is very important, and I can already see more and more of them making arrangements to protect it.
In the US ,FATCA, the Foreign Account Tax Compliance Act contained in Sections 1471 to 1474 of the US Internal Revenue Code, was adopted on 17 January 2013 and effective as of 28 January 2013.
The purpose of this legislation was to prevent US persons from using foreign accounts and foreign entities to evade US tax on their assets deposited abroad. US taxpayers; banks, brokers, and investment management companies are obliged to withhold 30% of payments to foreign entities unless those foreign entities are either exempt or they have an agreement with the IRS to disclose all account details of US persons to the IRS. The withholding requirement became operative on 1st July 2014.
The OECD studied FATCA and then took it one step further generally known as the Common Reporting Standard (CRS). This is heavily based on the Intergovernmental Agreements introduced by the US under FATCA but is two way; not one way. The details of these proposals were first published in February 2014, with more details in July 2014.
To date all 34 OECD countries support it and more than 90 countries are committed to it, including all members of the EU, the BRIC countries and most major global economies such as Japan, Australia Canada and Switzerland. (Although the UK has voted to leave the EU, given the prominent role it played in shaping the CRS, I doubt whether it will not remain committed to it).
The way CRS works is that each country signs a bi-lateral agreement with every other country to agree to the automatic exchange of information dealing with tax matters. The only fig leaf offered to protect the privacy and confidentiality of the residents of any one country is that if it is concerned as to the confidentiality of data exchange with another country, it can decline to enter into an agreement with that other country.
But like so many proposals the ‘devil (or opportunity) is in the detail’. The countries which are committed to CRS all have different laws and rules. In some countries a company is resident in the country from which it is controlled, in others it is where it is registered and in others it is from where it is effectively managed. This means that if a company is owned by Mr Jones who is a resident in country X, is registered in country A, controlled from country B, and has its effective management in country C, information about the profits to which Mr Jones is entitled could be automatically exchanged with country X from three different countries; A,B and C depending on their bi-lateral agreements. This could mean triplication of information about the same profits to which Mr Jones is entitled.
Then of course what happens if you put a US entity in the mix. If a US resident Mr Wilson, has an account held by a bank in Switzerland, under FATCA the bank has to disclose Mr Wilson’s account details to the IRS but what about the other way around? A Swiss resident has a company in Delaware from which he receives dividends, which he does not declare to the Swiss tax authorities. There is no obligation on the company administrators in Delaware to disclose this information to the Swiss tax authorities. The Intergovernmental Agreement Switzerland has with the US is for a one-way traffic of data exchange.
For many UHNW families, who value their privacy whether they fear for the safety of family members, theft or adverse publicity, the fact that the US engages in only one-way exchange is attracting interest and ‘Privacy Planning’ is already on the minds of many UHNW families. However, exploiting the difference between the US and the rest of the world is not the only area attracting interest.
If country A and country B agree to exchange information with regard only to companies registered in their jurisdiction, but country B and C agree to exchange information only with companies controlled from their jurisdiction it may be possible to register a company in jurisdiction C, but control it from country B for a resident of country A. In this case neither country will be required to exchange information about this company to country A. This may be a facile example, but already fears and opportunities are being discussed across the globe as UHNW families become aware of the dangers of automatic exchange of information.
What are your views on ‘Privacy Planning’?