GUEST ARTICLE: How To Thrive In An Age Of Tax Transparency
International tax regimes proliferate - with all the delights of reporting and compliance associated with them. This article examines life in a more transparent age.
As international tax regimes such as the Common Reporting Standard take effect, specific issues for wealth managers, advisors and clients proliferate. This article explores some of the terrain. It is by Clive Shelton, group compliance director of IFDS. The views are those of the author and not necessarily shared by the editors of this news service. The article is welcomed as an addition to debate – readers are invited to respond.
International taxation has become a dominant political issue, with the tax affairs of global corporations receiving greater public scrutiny than ever before. As this attention translates into government intervention, financial services firms, even those which are used to going below the radar, are going to have to pay more than just lip service to the matter. The US Congress estimates that the US economy loses $100 billion a year from tax avoidance and evasion, and governments across the developed world are increasingly prioritising the issue. As such, legislators have turned their focus to ensuring financial services firms (and their clients) pay their way and act reputably in their tax dealings. This is now driving a swathe of regulation changes in the taxation space.
The growing international acceptance of automatic exchange of information agreements such as the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) has focused attention on ensuring investors cannot avoid or evade paying the tax they owe. By collecting and sharing information on tax residency, it is now easier than ever before to track would-be evaders. The introduction of the OECD’s Base Erosion and Profit Shifting (BEPS) programme over the course of the next 18 months will crack down on tax arrangements that, whilst legal at the moment, are seen by politicians, the media and the public alike as ethically wrong.
Legislators globally are showing a growing determination to address issues and problems in the global tax landscape. Financial firms will face far more interest from tax authorities in spheres as varied as withholding tax, capital gains tax, treaty benefits and staff remuneration. In this new era of tax compliance, international agreements will expose firms to ever greater regulatory scrutiny and failure to meet these demands risks being very costly both in legal and reputational terms. All this will put increasing pressure on financial data systems to comply with transparency regulations.
Meeting new regulations
With the requirements to know more about the tax residency of investors, together with a clear trend towards pursuing criminal convictions against tax evaders and those who enable tax evasion, it will become even more important that know-your-customer and anti-money-laundering processes demonstrate high standards, along with the self-certification process for the automatic exchange of information agreements. The collection and safe maintenance of more data and information on clients will be essential.
How this data is used is important for both tax authorities and financial services firms. There is obvious risk in this area: ensuring processes are robust enough to avoid mistakes while adhering to data protection requirements. However, this also presents an opportunity for asset managers to enhance investor service and communications through a tailored approach, including in depth insight into tax matters and the diversity of tax strategies.
It remains to be seen whether the BEPS initiative is implemented consistently. If it is not, tax legislation will get more complex and further national divergence will appear. Investors may not be eligible for the treaty benefits they have access to now and corporates may need to change their arrangements due to new threshold and Controlled Foreign Company (CFC) rules. As a result, it may be that asset managers begin to offer products reflecting specific tax profiles. Where currently a fund domiciled in Luxembourg or Ireland may be marketed to investors all over Europe, it is likely that bespoke tax structures will mean that funds domiciled in certain jurisdictions will be designed for investors with tax interests in those countries.
The place of nominee accounts in the investment chain may also change. Are nominee accounts flexible enough to provide firms with both information that satisfies their tax transparency requirements and services requisite to their needs? In the UK, there are already net and gross nominees but this may not be enough in the future as new structures emerge. The number of accounts held directly with the asset manager may increase as a result.