There is much speculation about the nature of the deal the US has come to with Switzerland over the UBS case and the US demand for 52,000 names concerning accounts they think might have resulted in US tax abuse.
No one knows what the agreement is, but there’s lots of noise. In that there’s considerable spin going on.
I can say one thing for sure: the US won’t get what it asked for and Switzerland will claim it’s banking secrecy will survive.
The latter claim seems unlikely to be true. First, it’s thought that maybe 5,000 names will be given. That shatters secrecy. If 1 in 10 names are disclosed the rest will fear that the dam has burst: that’s the end of trust in bank secrecy.
Second, it’s widely recognised UBS were not the only people doing this. You can be sure that the remaining Swiss banks will be subject to much greater scrutiny now – at least as far as their Swiss operations go. Most are moving to Singapore anyway.
Ernst & Young have published their latest “Tax policy and controversy brie?ng: A quarterly review of global tax policy and controversy developments”. On page 13 they say:
Country-by-country reporting concept attracts attention
At the Berlin [OECD] meeting, a report which advocates the introduction of country-by-country reporting by multinational companies received some attention. The report, Country-by-Country Reporting: Holding multinational corporations to account wherever they are was authored by the Task Force on Financial Integrity and Economic Development, a global group of civil society organizations. It was reported that at the Berlin meeting of ministers there was interest in the concept by Sweden, Norway, Belgium and Korea.
While some commentators agree that an additional reporting requirement of this nature may bring increased transparency in the area of transfer pricing in developing countries, there is a broad consensus in the business community that it would create an additional, expensive compliance burden.
In a response to the Country-by-Country Reporting paper, the Oxford University Centre for Business Taxation in a paper titled Tax evasion, tax avoidance and tax expenditures in developing countries:
Oxford Journals (linked, of course, to the University of the same name) says in its FAQs:
What is a ‘Conflict of Interest’?
Any financial interests or connections, direct or indirect, or other situations that might raise the question of bias in the work reported or the conclusions, implications or opinions stated – including pertinent commercial or other sources of funding for the individual author(s) or for the associated department(s) or organization(s), personal relationships, or direct academic competition.
How can I be sure if I should declare something?
Please consider the following Conflict of Interest test: Is there any arrangement that would compromise the perception of your impartiality or that of your co-authors if it was to emerge after publication and you had not declared it?
Who should make the declaration?
The corresponding author is expected to obtain the relevant information from all co-authors
How should the declaration be made?
This journal requires declaration of any Conflict of Interest upon submission. This information will be available to the Editors. If your manuscript is published, this information will be communicated in a statement in the published paper.
I hope people have noted I’m not a great fan of Tax Information Exchange Agreements. The basic reason is that they are virtually impossible to use. As the standard TIEA makes clear, a TIEA request must provide or state:
(a) the identity of the person under examination or investigation;
(b) what information is sought;
(c) the tax purpose for which it is sought;
(d) the grounds for believing that the information requested is held within the jurisdiction of which request is made;
(e) to the extent known, the name and address of any person believed to be in possession of the requested information.
The reason for the low number of information requests becomes obvious immediately. In many cases these hurdles are insurmountable because of the secrecy in the target jurisdiction.
Some practical evidence always helps illustrate this. Private Eye recently made Freedom of Information requests in the UK regarding information exchange between the Uk and four of its secrecy jurisdictions with which it has had agreements (if not TIEAs) for some time. They have now shared the results with me, and they are as follows:
The IASB has issued a two page plus new accounting standard for small and medium sized enterprises. As Accountancy says:
The international standard-setter has today published its long-awaited International Financial Reporting Standard for SMEs after five years of consultation on the standards.
The International Accounting Standards Board aimed to produce a standard which is less complex than full IFRS and which would improve comparability for SME users of accounts, who comprise 95% of businesses.
Commenting on the standard, IASB chairman Sir David Tweedie said: ‘For the first time, SMEs will have a common high quality and internationally respected set of accounting requirements. We believe the benefits will be felt in both developed and emerging economies.’
That is ludicrous. These things are too complex for developed economies – in developing and emerging economies they would represent madness – and add no value at all to users or tax authorities. These countries should adopt the UN’s SMEGA – Accounting and Financial Reporting Guidelines for Small and Medium-sized Enterprises. These make vastly more sense – and are short, comprehensible, sensible and appropriate.
Just about the opposite of the IASB offering.
The FT has reported:
UBS shares outperformed the Swiss market strongly on Thursday as investors digested the latest twist in the battle of wills between the US and Switzerland over bank secrecy.
The Miami judge presiding over a crucial court hearing next Monday has called on the US authorities to specify how far they would go to force the Swiss bank to comply, should the court rule in their favour.
Alan Gold, the US district judge presiding over the case, late on Wednesday gave the US government until midday US time on Sunday to clarify whether it might go as far as seizing assets of the bank’s US operations, or forcing them into receivership, should the court rule against UBS and the bank not comply.
The move followed a deposition by the Swiss government saying it would forbid UBS to hand over confidential client information if the court ruled against it.
Bern warned on Wednesday that it might go as far as confiscating the data, should the court rule the bank was obliged to transfer the client names requested.
As the FT also notes:
The good news about the government’s new Tax Code of Conduct is that it exists. It would be churlish not to recognise that.
But, that said, it really does not go far enough. In keeping with the government’s lack of willing to tackle the banking industry it tackles the issue and then fails to address it.
The issue is that:
The Government believes that, in the light of the significant taxpayer support provided to stabilise the banking system, taxpayers are entitled to expect that banks, important taxpayers in their own right, and their customers pay their fair share of tax.
The failure is a simple one: if the government really meant to tackle this issue it should have backed any Code of Conduct with statutory powers to enforce it. In this case that would require a General Anti-Avoidance Principle (GAntiP), an issue I explore in more depth here. In essence a GAntiP says that if a step is added to a transaction with the sole or principal aim of securing a tax advantage (which is defined as a saving in tax) then that step in the transaction is ignored for tax purposes. This is that the new Code of Conduct also seeks to say: why not back it with law?
The omissions from the Code are twofold. First there shoukld have been an obligation put on the government to make it easier to determine what the ‘spirit of the law’ and the ‘intention of parliament’ is. Again, I have written extensively on both issues, most accessibly here. The government has a duty to publish purposive legislation, and it must empower courts to interpret the law of tax purposively. If not we will always end up with the courts undermining any Code – a fate that an attempt at a general anti-avoidance rule (note, rule not principle – they are not the same) has suffered in Canada. Second, without a doubt HM Revenue & Customs should have said the Code demanded tax compliance. this can be defined as:
This is the Tax Code of Conduct for Banks on which the government is now consulting:
OVERVIEW
1. The Government expects that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament.
1.1 This means that banks should:
• adopt adequate governance to control the types of transactions they enter into;
• not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament;
• comply fully with all their tax obligations; and
• maintain a transparent relationship with HM Revenue & Customs (HMRC).
GOVERNANCE
2.The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.
2.1 This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.
2.2 Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision-making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree.
The government has published its consultation document on the planned Code of Conduct of Banks.
It justifies targeting banks for these reasons:
Tax avoidance is not exclusive to banks, but banks are uniquely placed in that they:
The Government believes that, in the light of the significant taxpayer support provided to stabilise the banking system, taxpayers are entitled to expect that banks, important taxpayers in their own right, and their customers pay their fair share of tax.
I’ll have more to say on this late.
More from the Robert Morgenthau testimony to the Senate:
We also receive regular requests from foreign law enforcement seeking to trace money moved through accounts held by U.S. corporate entities. A case indicted in Brazil involved criminal proceeds sent to an account at a U.S. bank. Again, a U.S. shell corporation was created and used to open the account. In this case, the defendants discussed using a British Virgin Island company as the nominee director of the corporation. Consider the following communication from the U.S. incorporating agent to the Brazilian defendant:
The recommendation is to open a US Limited Liability Company (LLC). This entity combine the advantages of a limited with the ones of a partnership, especially about the taxes (we will open “a pass-through entity).”
The instruction is to not mention in the public files the owners’ names.
It is possible to point a Registered Agent to receive the official letters.
The LLC might be managed directly by its owners, but it must be done preferentially by operating managers (equivalent to directors) and that will have duties and responsibilities similar to the corporation’s directors.
The Managers don´t need to be American citizens or to live in United States and their data may, but not necessarily, be disclosure to the public records.
The total cost for the opening procedures is US$ 6,000 including a Nominee Member. Per year the managing will cost US$ 1,600.
This communication, and the examples set forth above, demonstrate how the systems of anonymity in this country’s incorporation processes are being exploited by criminals. They also demonstrate why we need to be able to retrieve beneficial ownership information from the states directly, and not from the sham nominee of a domestic shell company.
Robert Morgenthau, New York District Attorney of enormous repute, gave evidence to the hearing of the Senate last week on the Bill requiring that the beneficial ownership of all US corporations be available to all regulatory authorities.
Amongst the classic comments he made are:
In so many areas of financial crime we see transparency as a simple solution to a host of problems. Systems promoting opacity and secrecy are the best friend of the money launderer, the child pornographer, the tax cheat, the fraudster, the corrupt politician, and indeed, the financier of networks of terror. The beauty of the bill we are discussing today is the simple solution it brings to a host of problems: Transparency. If there is one lesson we have learned in investigating financial crimes, it is that the best and easiest solution for many areas of criminal conduct is to encourage and require transparency in financial arrangements.
and
My goal in presenting this testimony is to provide the law enforcement perspective on the issue of beneficial ownership registration; to wit, that anonymous shell companies present current and ongoing problems to the law enforcement community
and
I’ve published a discussion paper on information exchange today. The full report is here (only 6 pages). The key question is what data do all countries but developing one in particular really need to receive, automatically, to ensure the smoking gun is available to ensure Tax Information Exchange Agreements work.
My answer is this:
The key concern when tackling capital flight is the illegal, disguised nature of the illicit fund flows. Ignoring transfer mispricing, the key mechanisms used for this illegal purpose are offshore financial structures such as trusts, companies and foundations.
There is at present no automatic information exchange with regard to such structures within the EU, let alone elsewhere.
The automatic information exchange arrangements which currently exist relate only to interest income paid to accounts held in individual’s names. The European Union Savings Tax Directive (EUSTD) is the key example of this arrangement.
Suggestion has been made that the EUSTD should be extended to developing countries. If and when the EUSTD is extended, as the Commission plans, to trusts and companies in offshore locations this might provide some benefits if extended to developing countries but in its current form the EUSTD is unlikely to do so: it is quite unlikely that significant deposits resulting from illicit financial flows are held in individuals own names. It is relatively easy, and cheap, to set up trusts and corporate structures that can hide these flows from view.
This does, however, suggest exactly what information is required to trigger an effective information exchange request by a developing country. Those countries do not need to know the precise details of interest, profits, gains or other income accruing to offshore structures created by, owned by, or which benefit people resident within their jurisdictions to enable them to make an effective enquiry under a tax information exchange agreement. They simply need to know:
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