Offshore scrutiny persists at G20

ST. PETERSBURG, RUSSIA — Though the Syrian civil war overshadowed much of the G20 meeting last week in St. Petersburg, Russia, leaders of the world’s 20 largest economies still found time for lengthy discussions on ways to reduce tax avoidance and evasion.

The dialogue, which included proposals to change tax policies and increase financial transparency around the globe, came two and a half months after similar discussions at the G8 meeting in Northern Ireland.

Meanwhile, the pressure mounting against offshore financial centres like the Virgin Islands shows no sign of abating any time soon. In his remarks last week while hosting the G20 summit, Russian President Vladimir Putin said that changing countries’ tax policy in order to fight “tax evasion through offshore schemes” tops the group’s agenda.

Information exchange
That type of rhetoric could translate into real change for offshore centres, according to Alan Alexandroff, director of the Global Summitry Project at the Munk School of Global Affairs at the University of Toronto. The summit’s signatories pledged to support efforts to create a global system in which countries would automatically exchange information about their citizens’ and corporations’ overseas holdings. This arrangement is part of an effort to crack down on perceived tax loss that is frequently blamed on offshore centres.

“The G20 summit could conceivably mean a fair bit for the BVI,” Mr. Alexandroff said. “Sometimes these kind of reports are just hot air, but I don’t think so here: I think there is real interest in Europe and the United States, and taxation has been a hot topic.”

United Kingdom Prime Minister David Cameron, who hosted June’s G8 summit, told G20 leaders that the UK, its Crown dependencies and overseas territories are “leading the [tax transparency] initiative from the front.”

Much of the G8 summit discussions centred on requirements that would establish registers of beneficial ownership, lists that would reveal the ultimate owners of a company rather than merely its directors or corporate service providers.

Days before the G8, VI Premier Dr. Orlando Smith and several other CD and OT leaders met in London at Mr. Cameron’s urging to discuss further efforts to increase tax information sharing. The VI subsequently agreed to automatically share tax information with the UK, the United States and other countries, and it has published an “action plan” detailing its steps to heighten transparency.

Those efforts have been met favourably by the UK, Foreign Commonwealth Office spokesman Neil Hulbert told the Beacon last week.
“The FCO and Her Majesty’s Treasury will continue to work in partnership with the government of BVI to help them take forward these commitments,” he said.

OECD’s model
Much of the work of drafting the automatic information exchange system has been undertaken by the Organisation of Economic Co-operation and Development, another group of large economies that frequently works on tax issues.

Last week, G20 leaders endorsed a model that would require participating states to collect data on income earned in their jurisdiction by non-resident parties.

It also would require states to collect data on non-residents’ earnings in their jurisdictions. This information would then be automatically transferred to tax authorities where the individual actually lives.

Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD, said the new system would discourage those who illegally avoid paying tax, leaving them no secrecy with which to hide their funds.

VI impact
The potential impact of the new system on the VI’s financial services sector is unclear, but research into previous information sharing agreements showed that impact in the past has been minimal.

Last year academic researchers Niels Johannesen and Gabriel Zucman examined the effect that Tax Information Exchange Agreements — information-sharing accords that many jurisdictions, including the VI, passed after a 2009 global crackdown against “tax havens” — had on financial movements between countries. In examining the value of countries’ bank deposits before and after a TIEA was signed, the researchers determined that the agreements caused only a modest decrease in deposits.

The researchers also noted that rather than repatriating funds, tax evaders were more likely to move their money to another jurisdiction not covered by the treaty.

Following the latest G20 meeting, Johannesen told The BVI Beacon, ‘Clearly, the business model of banking based on secrecy is under pressure, but this doesn’t mean there is no role to play for well-governed financial centers in the future. The impact on the VI will depend on its ability to adopt to the new environment of enhanced transparency and cultivate alternative business models.’

The OECD’s Mr. Saint-Amans added that gauging the effects the organisation’s model may have on the VI is further complicated because VI structures are often only one part of a long chain of foreign-registered firms used by a beneficial owner.

He added that the OECD hopes by next June to determine the full details of the information-sharing mechanism, including guidance on who should be collecting what data.

US ‘motor’
While many G20 leaders have been quick to support the automatic information-sharing concept, the US Foreign Accounts Tax Compliance Act has given them little choice.

The act, passed in 2010 but not fully implemented, requires foreign financial institutions to provide the country’s Internal Revenue Service with information about the accounts of US taxpayers. Institutions that don’t verify the identities of their accountholders and turn that information over to the US are set to face a steep withholding tax.

“FATCA is the motor in this debate,” Mr. Saint-Amans said. “By 2015 FATCA will be rolled out and by then all states, including the VI, will have to comply with FATCA.”

Because a substantial portion of the world’s funds eventually flow through US institutions, the country’s threat is encouraging other jurisdictions to pre-emptively sign inter-governmental agreements with the US to share information. Several jurisdictions have signed on — the VI is currently negotiating a similar agreement — and the UK has responded by imposing a similar law on foreign institutions, which some have dubbed “son of FATCA.”

The laws are prompting others to adopt automatic information exchange, but this won’t necessarily dissuade users from incorporating offshore structures, said Mr. Alexandroff, of the Munk School of Global Affairs.

“It’s hard to tell,” he said. “We already have some regulation in the United States, in FATCA, but it still carries on. It really depends on how energetic the regulators are in terms of prosecuting, or not prosecuting, those who are not providing the necessary information. We’ll have to wait and see.”

Multinational tax
In addition to efforts to stop the illegal practice of tax evasion, leaders are also taking aim at legal tax avoidance by multinational companies. In recent years, well-known brands such as Apple and Starbucks have gotten scrutiny from consumers who learned about their practice of using complicated series of offshore vehicles to minimise their tax burden.

The practice of “shifting” profits — registering income-producing subsidiaries in low-tax jurisdictions instead of high-tax ones — is often allowed under current laws.

But the practice can have harmful effects for some national economies, according to the OECD and several non-governmental organisations. The UK-based group Oxfam asserts, for example, that African nations lose nearly two percent of their gross domestic product each year as a result of such profit shifting.

G20 countries have signed on to a 15-point action plan produced by the OECD that would limit the practice of profit shifting. That plan is seen as good news by Sameer Dossani, an advocacy coordinator at the UK-based group Action Aid. The “anti-tax haven” organisation regularly argues that offshore centres like the VI should be compelled to release information about how multinationals are using offshore structures. “Transparency should be a key component of national and international banking systems to ensure that companies are paying taxes in the places where they make their money,” Mr. Dossani added.

 

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