Owen, Christopher: Offshore Survey Supplement January 2014

29 November 2013, the Cayman Islands signed a Model 1B Intergovernmental Agreement (IGA) with the US that will pave the way for the automatic exchange of tax information under the US Foreign Account Tax Compliance Act (FATCA), which is due to take effect in July 2014. It was the first British Overseas Territory to sign an IGA with the US.

As a result foreign financial institutions (FFIs) in Cayman will be required to report tax information on accounts and non-financial entities worth more than $50,000 that are “substantially owned” by US citizens and residents to the Cayman Islands Tax Information Authority, which will in turn relay that information to the US Internal Revenue service.

Failure by an FFI to disclose information on their US clients, including account ownership, balances and amounts moving in and out of the accounts, will result in a requirement on US financial institutions to withhold 30% tax on US-source income.

Cayman’s Minister of Financial Services, Wayne Panton said the agreement would “implement the standardised data-reporting framework for FATCA … this should help defray administrative costs for financial institutions.”

The Cayman Islands was also the first British overseas territory to sign a FATCA-style IGA with the UK on the automatic exchange of tax information on 5 November 2013 and to join OECD/Council of Europe Convention on Mutual Assistance in Tax Matters by extension, which will be effective as of 1 January 2014.

It has also issued a public consultation document to assess whether a central registry of beneficial ownership would be the most appropriate and effective way to improve transparency in compliance with the G8’s Action Plan on 4 November 2013.
“The Cayman Islands will continue to engage in the discussion, and to support the UK and the global financial industry in developing effective standards,” said Panton.

9 December 2013, the Channel Islands Aircraft Register (CIAR) was officially launched in Guernsey. Negotiations for a joint registry with Jersey had failed in September because a single registry could not “meet the separate operational and commercial interests of the two islands”.

The CIAR is to be run as a public-private partnership between the Guernsey government and Dutch company SGI Aviation. Commerce and Employment Minister Deputy Kevin Stewart welcomed the project and its potential benefits to fiduciary, finance and legal sectors of the economy.

Just three days before the launch of the CIAR, Jersey’s Economic Development Department announced that Jersey was to press ahead with plans for its own aircraft registry. The Jersey register is scheduled to launch by the end of summer 2014.

29 September 2013, China’s first pilot free trade zone was launched in Shanghai. Eighteen sectors, ranging from finance to shipping, will have regulations loosened in the pilot zone. Commerce Minister Gao Hucheng said the zone, which covers 29 sq km, would help “implement a more active opening-up strategy”.

At the opening ceremony, 36 companies were given licences to operate in the zone. Banking regulators also gave the green light to 11 financial institutions including Industrial and Commercial Bank of China, Bank of China, Citi (China) and DBS (China) to set up branches in the zone.

“Under the precondition that risks can be controlled, China will create conditions to test yuan convertibility under the capital account, market-set interest rates and cross-border use of the Chinese currency in the zone,” said a blueprint for the FTZ.

“The establishment of the Shanghai free-trade zone is a significant move for China to conform to new trends in the global economy and trade,” Gao said.

Ai Baojun, head of the free trade zone’s administrative committee, said on 28 November that 1,434 companies had registered in the zone, with a further 6,000 in the process of applying. The number of foreign banks that had established branches in the zone had risen to 12, including HSBC and Deutsche Bank.

Foreign companies are now able to obtain business licences in four days, down from an average of 29 days outside the zone. Chinese companies investing in projects have also gained approval within five days.

Ai said the FTZ was being used as a vehicle to experiment with administrative innovations that could be rolled out on a nationwide basis if successful. A “negative list” currently specifies 190 sectors in which investment is prohibited. Ai said next year’s version would be shorter.

12 September 2013, the European Commission confirmed it has requested information about corporate tax arrangements in several member states including the Netherlands, Ireland and Luxembourg.

The enquiries centre on tax rulings and details of advance assurances given to specific companies. The Commission’s move follows revelations about the tax-planning practices of major corporations such as Amazon, Apple, Google and Starbucks that have enabled the firms to pay minimal tax despite multi-billion revenues and profits.

“The Commission is simply gathering information about tax rulings. Requests for information have been sent to several member states,” said the European Commission’s spokesman on competition issues. Depending on what the requests for information produce, a formal investigation could follow.

11 December 2013, the European Parliament adopted a legislative resolution on the proposal for a Council directive amending Directive 2011/16/EU as regards mandatory automatic exchange of tax information.

The Commission plans to oblige EU countries by 2017 to collect and automatically share data on income from employment, directors’ fees, life insurance, pensions and property. Current rules do not oblige countries to collect this data. By 2017, the new rules would also require them to collect and share information on other income, including that from dividends, capital gains and bank account balances.

In the plenary vote, Parliament further rejected its Economic and Monetary Affairs Committee’s recommendation that the “availability principle”, whereby a country need only exchange income data which it itself decides to collect, should be maintained.

It approved the latest Commission proposal, subject to the following amendments:

• The addition of new categories of income and capital in respect of which the Directive introduces an obligation to exchange information to be established in accordance with their interpretation in the law of the Member State communicating the information;
• Member States shall take appropriate measures to protect the exchanged information from unauthorised access by third parties or by third countries;
• Member States must make available the human, technological and financial resources needed for the implementation of this Directive, given the amount and the complexity of information, subject to the automatic exchange starting on 1 January 2015;
• From the date of entry into force of the Directive, only the Commission may negotiate agreements with third countries on automatic exchange of information on behalf of the Union. Member States may not engage in bilateral agreements;
• Member States shall lay down effective, proportionate and persuasive penalties for breaches of the Directive and take the measures necessary to ensure compliance;
• The Commission must inform the European Parliament on an annual basis of the evaluations made by Member States regarding the effectiveness of automatic exchange of information.

MEPs also considered that the Commission should clarify the relationship between the Directive and the regulatory provisions of FATCA and the work at the OECD in order to ensure that the national tax authorities and the financial institutions responsible for applying those amendments are able to implement them.

The Directive must be unanimously adopted by the European Council, after it has consulted the European Parliament. On 20 December, the Council called on the Council of Economic and Finance Ministers (ECOFIN) to reach unanimous political agreement on the Directive on administrative cooperation in early 2014 and for speeding up the negotiations with European third countries and asked theCommission to present a progress report to its March meeting.

In the light of this, it said the revised Directive on the taxation of savings income would be adopted by March 2014. Under the existing rules on savings, EU countries exchange information on the interest non-residents earn on bank deposits, but do not share data on interest earned from other financial products such as investment funds, pensions, trusts or foundations. The EU Commission has been pushing governments to tighten the rules since 2008.

Luxembourg and Austria currently impose a withholding tax on interest instead of exchanging information. Luxembourg has announced that as of 1 January 2015, it will no longer make use of these transitional arrangements, and will comply with the Directive’s rules on information exchange.

However the two countries stood firm at the ECOFIN meeting on 10 December and insisted that they would not agree to a reformed savings tax Directive until the EU has reached agreements designed to secure the application of measures equivalent to those provided for in the proposed revisions to the Directive with Switzerland, Liechtenstein, Monaco, Andorra, and San Marino.

EU Tax Commissioner Algirdas Šemeta said that although talks with the five third-party countries had progressed “we have some way to go before we have signatures on dotted lines.” He urged that Luxembourg and Austria “recognise the changes that have occurred” and that the amended Directive be adopted without delay, adding that the two countries’ intransigence was “incomprehensible” and “out of sync” with the public mood. He said the EU “must not be left behind” as global initiatives toward greater transparency gather pace.

28 November 2013, former UBS banker Raoul Weil agreed to be extradited to the US to face charges that he assisted American clients with $20 billion of assets to evade US taxes. Weil, a Swiss national, was arrested in October while holidaying in Italy and had been held in an Italian jail for more than five weeks.

Weil became the chairman and chief executive officer of UBS global wealth management and business banking in 2007. From 2002 to 2007, he was head of the Swiss bank’s wealth management international unit. A 2009 US indictment accused Weil and other bankers of aiding tax evasion by failing to implement regulations designed to prevent US clients from evading taxes after the bank agreed in 2001 to identify US account-holders and report their income.

UBS avoided US prosecution in 2009 by admitting it aided tax evasion, paying $780 million and handing over data on 250 accounts. It later disclosed information on about 4,450 more accounts.

Weil left UBS after being indicted and was declared a fugitive from justice by the US courts in 2009. He had been working as chief executive of Swiss wealth manager Reuss Private Group.

20 September 2013, the finance ministers of Singapore, Australia, South Korea and New Zealand signed a statement for the joint development of an Asia Region Funds Passport (ARFP) to facilitate the cross-border offering of funds in Asia.

The ARFP, when implemented, will offer fund managers operating in a passport economy a direct and efficient route to distribute their funds in other passport economies. It is intended to strengthen the region’s fund management capability, deepen capital markets, and provide finance for sustainable economic growth. In the longer term, it could also facilitate funds from the Asian region being marketed in Europe by way of an Asian/European mutual recognition agreement.

The Ministers also endorsed a framework document that sets out the high-level principles, basic arrangements and indicative timeline for developing the ARFP. Each of the four countries will conduct a joint public consultation in 2014 on the detailed rules and arrangements for the launch of the ARFP in 2016. Other countries that have expressed an interest include Hong Kong, Taiwan, Japan, Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Tharman Shanmugaratnam, Deputy Prime Minister, Minister for Finance, and chairman of the Monetary Authority of Singapore, said: “The ARFP will benefit investors and fund managers, and ultimately help in the much-needed deepening of regional capital markets.”

18 October 2013, Frey & Co became the second Swiss private bank to announce its closure due to “unsustainable costs” stemming from Switzerland‘s long-running dispute with the US over alleged tax evasion. Wegelin, Switzerland’s oldest bank, closed last January following an indictment in the US.
Frey, which had assets under management of SwF1.9 billion ($997 million) at the end of 2012, said it was one of 14 banks ineligible for a settlement programme with the US Department of Justice because it was already under investigation by US authorities.

Frey said it had not been indicted, nor was it under threat of indictment, but increased regulation of financial institutions has resulted in a rise in costs in recent months, meaning it was no longer possible for a small private bank to keep running. However, the business was financially healthy and would not be liquidated.

“As a result of developments in recent years, circumstances and challenges have presented themselves, especially in Switzerland, that mean it no longer makes sense for a small bank to continue its cross-border services,” said chairman Markus Frey in a statement.

21 November 2013, Liechtenstein and San Marino signed the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters on the first day of the meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes in Jakarta, Indonesia.
The Convention provides a multilateral framework for co-operation and complements other initiatives, such as the standardised multilateral automatic exchange model being developed by the OECD and its G20 partners. The Convention also provides for spontaneous exchange of information, simultaneous tax examinations and assistance in tax collection.

Canada, New Zealand, the Slovak Republic and South Africa deposited instruments of ratification, while the Philippines and the Seychelles signed letters of intent to sign the Convention. The UK also deposited declarations extending the territorial scope of the Convention to cover the Isle of Man (Crown Dependency) and Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat and Turks and Caicos (Overseas Territories).

The number of jurisdictions that have signed or are covered by the Convention has almost doubled since the previous Global Forum meeting in October 2012 – 63 countries have signed the Convention, four have signed letters of intention to sign and 13 jurisdictions are now covered by way of territorial extension. Recent signatories include Andorra, Hungary, Switzerland and Chile, while Monaco has signed a letter of intention. Thirty-six signatory countries have deposited instruments of ratification.

7 November 2013, Singapore’s Ministry of Finance (MOF) and Accounting and Corporate Regulatory Authority (ACRA) opened a public consultation on a draft ACRA (Amendment) Bill and key policies in the new regulations, which will strengthen the regulatory framework for corporate service providers (CSPs), and provide a transition framework to ease the transition of existing CSPs to the enhanced regulatory regime.

CSPs are defined as individuals or businesses that act for third parties as formation agent or legal person; act as a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons; provide a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement; or act as a nominee shareholder for another person.

The Bill’s draft provisions require CSPs to register or renew their registration with ACRA; and empower the Minister of Finance to make regulations setting out the obligations on CSPs to meet the revised FATF Recommendations, particularly the customer due diligence measures that need to apply when a business relationship is being established, as well as other regulatory requirements

The consultation closed on 6 December. The MOF and ACRA will publish a summary of the comments received during the consultation period, together with their responses, by early 2014.

13 November 2013, Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam stated that bilateral discussions to conclude a Foreign Account Tax Compliance Act (FATCA) inter-governmental agreement (IGA) with the US were progressing smoothly following the visit to the island of US Treasury Secretary Jacob Lew.

Last May, the Singapore government committed to signing a Model 1 IGA with the US that would facilitate financial institutions in Singapore to comply with FATCA. Model I establishes a framework of reporting account information of US persons by foreign financial institutions (FFIs) to the relevant domestic authority which in turn provides the information to the US Inland Revenue Service.

In his statement, Shanmugaratnam noted that the signing of the FATCA IGA between the US and Singapore would “underscore Singapore’s preparedness to engage in automatic exchange of information as long as it is undertaken on a level playing field basis with regard to all financial centres and is undertaken with countries that respect the rule of law with regard to confidentiality of information.”

In October, the Hong Kong Securities and Futures Commission revealed that the Hong Kong government was in discussions with the US Treasury Department “with the objective of concluding an inter-governmental agreement (IGA) designed to facilitate compliance with FATCA by FFIs in Hong Kong in a manner that reduces their overall reporting burden”. This would also be a Model 1-type agreement.

20 November 2013, the Swiss Federal Council adopted the dispatch on Switzerland’s first tax information exchange agreements (TIEAs), which will now be submitted to parliament for approval. The agreements are with the Isle of Man, Guernsey and Jersey. TIEAs govern the exchange of information upon request.

The TIEAs were signed on 28 August with the Isle of Man, 11 September with Guernsey and 16 September with Jersey. The agreements have to be approved by parliament before they can enter into force. They are also subject to an optional referendum.

TIEAs are concluded within the framework of Switzerland’s administrative assistance policy. The Federal Council gave its approval for the government to enter into administrative assistance agreements not only in the form of double tax treaties but also via TIEAs on 4 April 2012. Negotiations are being held with other interested jurisdictions.

18 December 2013, the Swiss Federal Council adopted a mandate for negotiations regarding a revision of the taxation of savings agreement with the European Union. Negotiations with the European Commission should commence at the start of 2014.
In May 2013, the Council of EU finance ministers (ECOFIN) instructed the Commission to initiate negotiations on the revision of the existing taxation of savings agreements signed in 2004 with third-party countries – Switzerland, Liechtenstein, Monaco, Andorra and San Marino. These provide that they apply equivalent measures – either automatic exchange of information or a withholding tax on interest paid to savers resident in the EU – to those provided for in the directive.

The Commission will negotiate on the basis of a draft directive amending the savings tax directive designed to reflect changes to savings products and developments in investor behaviour since it came into force in 2005. The amendments are aimed at enlarging the directive’s scope to include all types of savings income, as well as products that generate interest or equivalent income, and at providing a “look-through” approach for the identification of beneficial owners.

29 November 2013, the Swiss Federal Council approved the next steps for enhanced due diligence requirements by banks and other financial intermediaries when accepting assets in order to prevent the future inflow of untaxed assets.

According to the Swiss Federal Department of Finance (FDF), the new requirements are to be discussed in coordination with the conclusion of possible agreements on the automatic exchange of information between Switzerland and its main partner countries.

The extended due diligence requirements are the result of the Federal Council’s financial market strategy and serve to ensure a tax-compliant financial centre. They are to supplement the existing due diligence requirements to prevent money laundering.

The Council said that it considered that an internationally recognised standard for the automatic exchange of information (AEI) would exist in the foreseeable future, which would enable Switzerland to conclude the agreements necessary for implementation with important partner states. Enhanced due diligence requirements should also apply to those states with which no such agreement exists.

The Council instructed the FDF to submit a proposal on the structure of the extended due diligence requirements when agreements on an AEI in accordance with the international standard can be concluded with the main partner states or if it has been established that no AEI agreement can be concluded in the foreseeable future.

strong>Six more countries join G5’s tax information exchange pilot

27 November 2013, Columbia, Greece, Iceland, Liechtenstein, Luxembourg and Malta joined the G5 initiative to share tax information automatically, bringing the total number of countries involved to 37.

The UK, France, Germany, Spain, and Italy (the G5) announced plans for a multilateral programme based on the automatic exchange of tax information last April. The agreement is based on the five countries’ model agreement to implement the Foreign Account Tax Compliance Act with the US, which was published in July 2012.

In a joint statement, the G5 finance ministers said: “We very much welcome the announcement by Colombia, Greece, Iceland, Liechtenstein, Luxembourg and Malta to join the pilot initiative launched by the G5 on automatic exchange of tax information.

“The new global standard, to be finalised early next year, will mark a step change in our ability to clamp down on tax evasion … We reiterate our invitation to all countries to likewise commit to early adoption of the new global standard.”

29 November 2013, the Swiss Federal Council authorised certain unspecified banks to cooperate with the US authorities within the framework of the US programme to resolve their longstanding tax dispute. It encouraged the Swiss banks to give serious consideration to their participation in the programme and to make their decisions in a timely manner.
The framework, which was agreed by way of a joint statement on 29 August 2013, provided for a unilateral US programme in which any Swiss banks that were not already the target of a criminal investigation by the US and believe they have violated US law had until 31 December to notify the US authorities that they wish to participate. Under the deal, banks are expected to disclose previously hidden information and face penalties of up to 50% of the value of the assets they managed on behalf of US taxpayers.

Switzerland agreed to enable affected banks to participate in the programme voluntarily but they have to seek authorisation from the Federal Council in accordance with Article 271 of the Swiss Criminal Code. Information on the number and identity of the banks in question is confidential and will not be communicated. The agreement does not cover banks already under US criminal investigation, which include some of Switzerland’s biggest private banks such as Credit Suisse and Julius Baer.

By 16 December, more than half of Switzerland’s 24 cantonal banks had announced they would participate in the US programme The banks are in the cantons of Bern’, Geneva, Glarus, Zug, Schwyz, Aargau, Appenzell, Vaud, St Gallen, Nidwalden, Graubünden, Obwalden and Lucerne, as well as PostFinance, a publicly supported banking arm of the Swiss postal system. Two other cantonal banks in Zurich and Basel are under active investigation by the US Justice Department and are therefore unable to participate.

Other banks that have stated they will participate include Lombard Odier, Raiffeisen, Valiant Bank, Vontobel, Migros Bank, Bank Coop and Liechtenstein-based VP Bank (Switzerland). Not all participating banks are expected to publicly disclose their intentions.

Under the programme, banks apply under a category that determines the level of their penalty, if any. Category 2 banks expect they will disclose undeclared US accounts containing at least $50,000 and pay fines, while banks in the third and fourth categories will be required to prove they have not helped US taxpayers evade taxes.

Category 1 banks, which include Credit Suisse and Julius Baer, are those already under US investigation. These banks are expected to settle their outstanding issues with the US authorities and may face significant fines.

9 September 2013, UK Prime Minister David Cameron told the House of Commons – just after the G20 summit in St Petersburg, where tax evasion and tax-related issues were high on the agenda – he believed it was no longer fair to characterise the UK’s dependent territories as tax havens.

In response to a question about the timetable for the UK’s Overseas Territories and Crown Dependencies to sign the OECD Multilateral Convention on Mutual and Administrative Assistance in Tax Matters, Cameron confirmed that they had all agreed to take the necessary action on tax exchange with the UK, international tax co-operation and beneficial ownership.

“I cannot recall the exact timetable off the top of my head, but I will make this point: I do not think it is fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens,” he said.

“They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown Dependencies and Overseas Territories, which matter so much — quite rightly — to the British people have taken the necessary action and should get the backing for it.”

27 October 2013, tax officials informed the public accounts select committee of parliament that the UK Treasury had raised just £780 million under a withholding tax deal that was agreed in 2011 between the Swiss and UK governments and which, it was the estimated, would bring in £3.1 billion.

Under the deal Swiss banks were to impose an initial tax of between 19% and 34% of the total amount held in bank accounts controlled by UK taxpayers, with the money paid directly to the UK authorities. From this financial year, Swiss banks will also impose an annual levy of up to 48% on income produced by the same accounts.

The £780 million included an initial one-off £340 million paid by Swiss banks last January with a further £440 million raised this financial year. Edward Troup, tax assurance commissioner, admitted that HMRC would get “significantly less than the amount which we expected.” Some of the target accounts have turned out to be controlled by non-doms who are exempt from UK taxes while many UK taxpayers have also voluntarily disclosed their assets to the UK authorities to avoid charges.

19 December 2013, the US signed an Intergovernmental Agreement (IGA) to implement the Foreign Account Tax Compliance Act (FATCA) with Bermuda. FATCA, which was included as part of the HIRE Act of 2010, aims to combat offshore tax evasion by requiring foreign financial institutions (FFIs) to report on the holdings of US taxpayers to the Internal Revenue Service or face penalties.
Bermuda signed a Model 2 agreement, such that it will direct and legally enable FFIs in Bermuda to register with the IRS and report the information required by FATCA about consenting US accounts directly to the IRS. This requirement is supplemented by government-to-government exchange of information regarding certain pre-existing non-consenting accounts on request

Immediately prior to Bermuda, the US also signed Model 1 IGAs with the Netherlands on 18 December, Malta on 16 December and the three UK Crown Dependencies – Jersey, Guernsey and the Isle of Man – on 13 December. Under these agreements, FFIs will report the information required under FATCA about US accounts to their home governments, which in turn will report the information to the IRS. These agreements are reciprocal, such that the US will also provide equivalent tax information regarding individuals and entities from these jurisdictions with accounts in the US.

According to the Treasury Department, the US has now signed 18 FATCA IGAs, while a further 11 agreements are agreed in substance and it is engaged in related discussions with many other jurisdictions.

“FATCA continues to gather momentum as we work with partners worldwide to combat offshore tax evasion,” said US Deputy Assistant Secretary for International Tax Affairs Robert Stack in a statement. “This large number of signings in one week alone sends a strong signal to tax evaders everywhere: international support for FATCA is growing.”