ALL THE UK'S OVERSEAS TERRITORIES with significant financial centres have signed automatic tax disclosure deals with the government.
The Cayman Islands, Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands have all agreed treaties and will pilot the automatic exchange of information bilaterally with the UK and multilaterally with the G5 - the UK, France, Germany, Italy and Spain - over the next six months.
The deals will see the UK, along with other countries involved in the pilot, automatically provided with much greater levels of information about bank accounts held by their taxpayers in those jurisdictions, including names, addresses, dates of birth, account numbers, account balances and details of payments made into those accounts.
It also includes information on certain accounts held by entities, such as trusts.
Gibraltar, which already operates the relevant transparency directives as part of the EU, has also made the same commitments.
Jersey became the most recent Crown dependency to strike such a deal with the UK, closely following Guernsey and the Isle of Man. Under those deals, UK residents with assets concealed on the islands will have until September 2016 to disclose details to the taxman and pay any tax owed to the HMRC, as well as a fine between 10% and 20% of the amount owed.
While in most cases, the deal will see evaders escape prosecution, HMRC offers no guarantees.
Unlike a similar deal with Switzerland, anonymity is not enshrined, while the deals will not have the immunity from criminal prosecution seen in the Liechtenstein Disclosure Facility. The UK received its first payment from Switzerland, amounting to £340m in January.
Chancellor George Osborne said: "This represents a significant step forward in tackling illicit finance and sets the global standard in the fight against tax evasion.
"I now hope others follow these governments' lead and enter into similar commitments to this new level of transparency, removing the hiding places for those who seek to evade tax and hide their assets."
Advisers questioned whether a potential increase in information could be managed by HMRC.
Saffery Champness private wealth partner Ronnie Ludwig said: "The department is under significant pressure to provide an immediate boost to recession-stricken Treasury coffers but remains severely under-resourced. As the flow of information to be analysed as part of its work increases, will HMRC have the manpower to make the most of increasing global tax transparency?"
A wealthy individual (aka Golden Goose) who feels they pay too much tax has three basic strategies that they can follow:
Option 1) "Play the Game Better": This means using all the LEGAL methods of avoiding tax under the laws of the relevant taxing jurisdiction(s).
Option 2) "Leave the Game": For most taxpayers, this involves becoming non-resident. For Americans this requires giving up their US citizenship or resident alien status. Generally it means bringing forward the payment of capital gains.
Option 3) "Cheat the Game": In years past, it was cheap and easy to engage in tax evasion. The morally challenged who were considering this option, did not seriously consider that they would ever have to pay the penalty of discovery. However the penalties of executing Option 3, are now real and unattractive. I think in a few short years, we will look back and as a result of Joe Doe summons, whistleblowers, new disclosure and exchange of information treaties, wide-scale tax evasion using undisclosed non-compliant accounts/structures in tax secrecy jurisdictions will be a thing of the past
The obvious impact of the Golden Geese no longer considering cheating the game, is that they will be focusing on the first two options. Initially, more Golden Geese will be taking advantage of legally available tax avoidance strategies. Obviously the government will respond by closing various currently legal opportunities. With cheating off the table and playing the game better having a decreasing value, the attention of the Golden Geese will focus on leaving.. As they discover that the cost and difficulty of leaving the game is not really that high (now that they have seriously examined it), you will see an ever increasing number of wealthy taxpayers leaving their current tax system.
Since in most G9 countries the top 1% account for just over 1/3rd of all personal taxes collected, even a slight increase in the number of Golden Geese who leave the tax system will have a dramatic impact on future tax revenues. The real question will be how will various governments legislatively respond to all of this. There will be naive efforts to try and lobby for a global "level tax playing field". This effort is doomed from the outset, because of the prisoner's dilemma. Even efforts to try to impose standards for government fiscal policies across the eurozone weren't possible. Try making a broader effort over a vastly increased number of independent countries, all of whole are trying to keep and attract Golden Geese to their shores, is hopeless.
Therefore the real action will take place domestically as governments examine their options. If they decide to increase the cost of leaving (the American approach), they will see the same result the US experienced. Specifically, RECORD numbers of Golden Geese leaving, before the cost gets even higher. If a government were smart, they would rather bring in policies that would attract more Golden Geese to their tax system. This means making if more attractive than the system that they are currently considering leaving. Just as a small number of departing Golden Geese has an asymmetric negative impact on total tax revenues, the attraction of even a relatively small number of Golden Geese will have a disproportionate positive impact.
I don't know if I am showing my geekiness by being so intellectually interested in the bigger implications of these various events, but I truly feel that there are a variety of things from Cypriot bank account seizures; to Putin's demand for no more offshore accounts; to outing of tax evaders which have caused a tipping point to be reached. It is increasingly obvious to me, that we are experiencing a major disruption to the standard government revenue model which has been in place for the past century. Namely, a progressive tax system. Whether you think such a system is "fair" does not change that fact that it is inherently unstable because of an extreme over reliance on a small number of Golden Geese for such a huge portion of total tax revenues.
Previously governments could a implement policies that continue to add to the tax burden to Golden Geese. If a Golden Goose reacted by cheating the game, they could prosecute them. If a Golden Goose reacted by trying to play the game better they could change the rules. However, in a globalized world where Golden Geese can set up their personal and business lives in many jurisdictions other than that of their birth, governments will now see a reaction to their increased burdens on the Golden Geese that will immediately and dramatically cause a drop in total tax revenues. Recognition of the paradigm shift is the first step. Properly reacting is ultimately the most important step.
Posted by: David S Lesperance, 03 May 2013 | 15:07
Will the little known province of Nowhereland, somewhere off the Cayman Islands (a fiction dreamt up by lawyers) be part of the deal or will same lawyers be looking for , or perhaps given the time taken so far have already found, alternative "new" significant financial centres?
Posted by: rob, 07 May 2013 | 09:50
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