The UK is exploiting the widespread adoption of the US Foreign Account Tax Compliance Act (Fatca) rules on tax information sharing with plans to launch its own version, effectively ending client tax anonymity across UK dependencies.
In a joint statement issued last week, the chief ministers of Jersey and Guernsey confirmed the UK Treasury had begun negotiations to adopt similar principles to those enforced by the US.
‘This will require a major shake-up,’ said Richard Morton, banking and finance partner at law firm Squire Sanders, adding that it would affect the islands’ finance industry at all levels.
‘I can see why it would be attractive,’ said Andrew Watts, partner at tax investigations specialist Watt Busfield. ‘Why leave the field open for the Americans to take all the benefits?’
The UK has a very big stick: it can effectively veto the islands’ Fatca authorisation if they refuse to agree to a British version of the rules, making transactions with US counterparties near impossible.Exchange of information
‘The UK has approached the Crown Dependencies and the overseas territories with a view to the principles being applied to an exchange of information with the UK,’ said the minister’s statement. ‘The UK and the Crown Dependencies share a common commitment to combat tax evasion and to participate generally in international efforts to combat financial and other crime including fiscal crime.’
This comes as a surprise, given that at the end of November the UK denied it was seeking to impose information sharing on its dependencies, while Jersey was making noises about its notional sovereignty.
That both parties have now accepted the principle – in the case of the dependencies, giving up on a historic and much cherished privilege – demonstrates how far the debate on tax secrecy has changed.
‘The UK is exploiting this situation to shatter the secrecy of the Crown Dependencies,’ wrote chartered accountant and tax campaigner Richard Murphy, who has seen the draft documents.
‘In due course I expect it to do the same to the overseas territories. And then a major step forward in breaking tax haven secrecy will have been made.’
While details of how the mechanism works remains unclear, most analysts said the assumption would be that any agreement would closely follow the US precedent.
Information sharing on clients’ tax status would be automatic, and non-compliant businesses would be subject to withholding provisions of up to 30% against income arising in the enforcing states.
Under a second round of enforcement due to take effect in 2017, businesses in non-compliant states will be subject to a so far unspecified penalty when they enter any transaction with businesses in compliant states.
In the case of the UK, this would presumably mean all clients with financial arrangements in the Channel Islands or Isle of Man would see their details automatically shared with HM Revenue & Customs (HMRC). While the UK could enforce its own sanctions, by far the greater challenge to the islands would be denial of compliance with US Fatca, which would put them far outside the financial mainstream.
Tax has emerged as a key reputational risk in recent years, and several celebrities and businesses have been publicly pilloried for using what were perceived as aggressive tax avoidance structures.
Starbucks in particular has seen its reputation tarnished by its tax arrangements, which allowed it to pay no corporation tax on sales of £398 million.
The company said this week that it would change its tax arrangements to ensure it paid corporation tax.
In a report on Monday, the parliamentary Public Accounts Committee said HMRC needed to be ‘more aggressive and assertive in confronting corporate tax avoidance’.