By Ross Munro From Harneys

The ongoing global initiatives around exchange of tax information and publication of beneficial ownership information, while ostensibly in pursuit of transparency, have their origins in the need for the larger, richer countries to increase tax revenues, and the perception that taxpayers are hiding assets abroad and out of the tax authorities’ reach. A lesser-reported factor in the development of these initiatives is that advances in technology have made feasible automatic exchange of information (AEOI) on a global and multilateral basis, whereas only a few years ago the costs would have been prohibitive.

The cost-benefit analysis of AEOI initiatives will no doubt be debated for many years to come. When considering the impact on the Caribbean region, however, two issues stand out. First, the financial costs of compliance are disproportionate for smaller jurisdictions, which must grapple with the complexities of initiatives developed by the very largest and richest countries and supranational organisations. Conversely, any significant benefits in terms of increased tax revenue are unlikely, due to the generally low rates of taxation in the region. Second, the international financial centres (IFCs) in the region must be able to properly explain the impact of AEOI to their clients and provide safeguards so that the information exchanged will be accurate and relevant.

EXCHANGE ON REQUEST

All Caribbean IFCs have responded to requirements set under the OECD’s tax information exchange agreement (TIEA) initiative. A somewhat arbitrary standard of a minimum of 12 TIEAs per jurisdiction was enforced, and has been met or exceeded by all of the major Caribbean IFCs.

While there is much focus on the implementation of AEOI, it is exchange of information on request under TIEAs that is happening now. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters (as amended by the 2010 Protocol) received wide support in 2011, and many Caribbean countries signed up and committed to its implementation. It has been somewhat superceded, however, by the march towards AEOI under the US Foreign Account Tax Compliance Act (FATCA) and the OECD’s Common Reporting Standard (CRS).

The implementing legislation of TIEAs inevitably varies between jurisdictions, and the fact that TIEAs are still relatively novel legal instruments means there is considerable scope for legal argument as to their proper interpretation and application. The judicial trend, however, has been firmly in favour of enforcing compliance with TIEA requests, save in those unusual cases where there has been an ‘impermissible fishing expedition,’ or some other abuse of the procedure by the requesting tax authority.

There have been a number of court judgments over the past 18 months, from IFCs such as Bermuda (Bunge Ltd v The Minister of Finance), Jersey (APEF Management Company 5 Ltd v The Comptroller of Taxes) and Singapore (Comptroller of Income Tax v AZP), that have considered the meaning and effect of TIEAs, their enabling legislation, and the legal validity of specific TIEA requests. These cases and others demonstrate that the legislative regime relating to TIEAs can be a legal and commercial minefield, especially for professional service providers and the national tax authorities that find themselves in the middle of a tax-disclosure dispute. Tensions that arise between the need for an appropriate level of confidentiality for sensitive tax investigations, the circumstances in which a ‘tipping off’ offence might be committed by a requested party and the protection of confidential information from improper disclosure without a prior court order remain major concerns.

FATCA AND UK CDOT

The Caribbean IFCs have all signed intergovernmental agreements (IGAs) with the US to implement FATCA. The Bahamas, BVI and Cayman Islands have all signed a Model 1 IGA, while Bermuda opted for a Model 2 IGA. Other Caribbean jurisdictions (including Anguilla, Barbados and Curaçao) have committed to signing an IGA and are treated as having done so for transitional relief purposes. With reporting of information on US account holders due to commence this year, implementation of the FATCA regime is very much a work in progress, as many jurisdictions are collecting tax information on the account holders of financial institutions for the first time. The nature and scale of information is new and development of infrastructure to enable effcient collection – typically in the form of an online portal – is ongoing. If anything is clear, it is the tight schedule, with the fi rst information due to be reported to the US on 30 September 2015.

The British Overseas Territories in the Caribbean also signed IGAs with the UK, committing to deliver information to HMRC with respect to UK-resident account holders (the arrangement is commonly known as ‘UK CDOT’ and ‘UK FATCA’). There is no withholding of income and reporting will not commence until 2016, although, as with US FATCA, the fi rst relevant period is from 31 December 2014.

COMMON REPORTING STANDARD

The British Overseas Territories are also members of the Early Adopters Group for the CRS. Other jurisdictions in the region are watching to see whether, as seems likely, CRS becomes the global standard. In anticipation that it will become the global standard, the implementation of FATCA and UK CDOT in the Overseas Territories takes account of some of the provisions of CRS – for example, entities in the BVI and the Cayman Islands may elect to be classified according to the CRS definition of ‘investment entity’.

BENEFICIAL OWNERSHIP INFORMATION

Despite a clear global standard emerging for AEOI, there are fewer signs of a level playing field on the question of beneficial ownership registers. The UK-chaired G8 summit in June 2013 resulted in a UK commitment to a central and public registry of company beneficial ownership. However, the information on that register would not be subject to any third-party verification, given the absence of any regulation of company formation agents. Pressure from the UK to create a beneficial owner central registry resulted in the British Overseas Territories issuing public consultation papers. To date, both Bermuda and the Cayman Islands have rejected the call to create a central registry unless (and until) it becomes a global standard. A recent statement from the Premier of the BVI announced that over 80 per cent of the respondents to the public consultation were confident that the existing regime meets the objectives of a public register, and, therefore, it would be surprising if the BVI does not also reach a similar conclusion and formally reject the creation of a central register.

Steps are being taken around the Caribbean to bring regulatory regimes into line with the revised Financial Action Task Force Recommendations of 2012. Importantly, the relevant sections of the 2012 Recommendations require that beneficial ownership information is ‘adequate, accurate, timely and capable of being accessed in a timely fashion by competent authorities’. The regulated company-formation agent regime has been in use by most Caribbean jurisdictions for many years, and most jurisdictions already meet this revised FATF standard. That is not to say that standards are not being tightened in some areas, especially with respect to the time allowed to produce information – indeed, the Cayman Islands has proposed that it will reduce the time period for a regulated entity to provide ultimate beneficial ownership information to just 24 hours.

Ironically, the lack of verification of information under the proposed UK regime is seen as falling short of the FATF Recommendations – something that was noted in the House of Lords recently in a debate on the Small Business, Enterprise and Employment Bill (in which the proposal is contained). In the same debate, a government minister reminded the House that governments of the Overseas Territories are responsible for their own fi scal matters and that the UK may only o. er advice and guidance in this area. Industry participants and governments will watch the ongoing path of the EU’s Fourth Anti-Money Laundering Directive over the coming years and whether that leads to the central registry becoming a global standard.

LOOKING FORWARD

Caribbean IFCs very much remain relevant in a more transparent (for tax purposes) world, but the jurisdictions that are able to provide clients, intermediaries and other industry participants with a clear explanation of what information will flow, when and how, and to ensure their regimes contain appropriate safeguards, are more likely to flourish
Previously published in STEP Journal, Volume 23/Issue 2 from March 2015.
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