Huge threat to Crown Dependencies and Overseas Territories from UK

According to International Tax Review, a leaked government document shows that the UK is planning to impose its own version FATCA on its Crown Dependencies and Overseas Territories, such as the Channel Islands, the Cayman Islands and the Isle of Man.  This is something which could be a huge blow for those territories – although not for the reasons that many might expect.

The offshore centres are already facing a huge workload in preparing for compliance with FATCA which requires foreign financial intermediaries to report all activity with “US persons”.

During the summer, Britain’s International Development Committee recommended that the UK should introduce equivalent legislation to FATCA, requiring the automatic reporting of information relating to UK citizens or corporations. The proposals were controversial for many of the same reasons as the US equivalent has been controversial – including claims that the costs of compliance by the FFIs will outstrip any taxation benefits gained through the reporting, and that nationals of the countries who have FATCA-type legislation will face higher costs and less choice of service provider.  In the case of the UK, the cost/benefit analysis is likely to be even more skewed, because HMRC does not currently track the affairs of all UK citizens – only those who are resident in the UK.  The imposition of a citizenship based reporting would therefore require a huge change in HMRC infrastructure and reporting systems.  For those reasons, there were many who doubted that FATCA equivalent legislation would really get off the ground in the UK, at least unless and until its EU colleagues all agreed to do the same. 

However, in a development which will be seen as very worrying for the British offshore centres, it seems that the government may be determined to go down a route which, so far as the British offshore centres are concerned, is the worst of all worlds.  It is being claimed that the government has already drafted FATCA equivalent legislation which will be imposed on its Crown Dependencies and Overseas Territories. The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies.  However, by making the legislation apply only to the Crown Dependencies and the Overseas Territories, the government is putting them at a huge disadvantage to other offshore centres.  The costs of compliance will rise significantly, and therefore the clients are likely to move their financial arrangements to other centres which will not be affected by the legislation, such as Singapore or Switzerland. 

The Tax Justice Network is cock-a-hoop at the situation, saying that it shows that the UK government for the first time is really getting to grips with tax evasion and that it is the start of the end of tax haven secrecy.  I have never believed for one second the statistics put out by TJN on the scale of tax abuse in the tax havens and therefore do not think that FATCA-type legislation would have the hugely positive impact that they expect – as someone who worked in the offshore financial centres for almost 25 years, I think the days where people put their assets offshore and simply did not report them to the UK revenue are for the most part long gone.  However, even if the TJN was right and there are huge numbers of tax evaders in the Crown Dependencies and the Overseas Territories, this action by the UK government, if it does come to fruition, will not stop those who are determined to evade taxes – it will simply move them elsewhere.

And there is a real and much more damaging danger for the UK in that.  Numerous studies over the years (including the UK government sponsored Edwards Report) have shown that the funds which are routed through the Channel Islands in particular end up being invested in the City of London, and HMRC gets the benefit of that.  If those funds are moved to Asia or Switzerland, then chances are the assets will not be invested and managed through London, but through New York or Hong Kong.  The UK would therefore lose out rather than gain.

If the UK wants to introduce FATCA-type legislation then in my mind it can only make sense if it is done in a way similar to the US – ie impose it on a worldwide basis, not singling out a small handful of jurisdictions.  Doing the latter will mean it is doomed to be ineffective.  Personally, I am very far from convinced that it makes sense for the UK to have FATCA equivalent legislation at all (at least, until we have had a few years to understand the impact that is has on the US economy), but imposing it in relation to the Crown Dependencies and Overseas Territories alone would, in my view, be a massive own goal for the UK.

Unless there is a change of tack, the UK government is expected to announce the new rules this autumn, with the legislation coming into effect on 1 January 2014.