By Alison Lowe
Nassau Guardian Business Editor
NASSAU, Bahamas -- A leading Queen’s Counsel (QC) has urged The Bahamas to “resist as long as we can” the mounting global pressure to agree to the automatic exchange of tax information, which this week reached a significant new milestone when the world’s largest offshore financial centre, Switzerland, agreed to commit to the initiative.
Brian Moree, senior partner, McKinney, Bancroft and Hughes, also pointed to the “enormous undertaking” that the expectation of widespread sharing of tax information represents, suggesting that this country will have “major issues” in meeting this demand from a government and industry administrative and resource perspective.
The Organization for Economic Cooperation and Development (OECD) heralded “the end of bank secrecy” in a statement issued on Monday when, following the organization’s annual Ministerial Council Meeting in Paris, 47 countries agreed to the automatic exchange of information on tax matters.
While many in the local financial industry have been presaging the onset of automatic exchange of information – that is, the systematic and periodic transmission of “bulk” taxpayer information by a source country to a country of residence – as an inevitability for some time, Monday’s development was nevertheless viewed as significant for The Bahamas and the offshore financial industry as a whole.
Moree said he views the declaration as a “harbinger” of what can be expected to happen in the major international financial centres worldwide. However, while The Bahamas should “prepare” for its arrival, he urged the government not to rush ahead.
“I have maintained for some years that the agenda of the international community and particularly the G20 countries is to achieve automatic exchange of information as a means of marginalizing what they perceive to be tax havens.
“I think the only redeeming factor in this is that it’s going to be an international requirement across the board, so there’ll be a level playing field in all other IFCs (international finance corporations), so I think this requirement will have to apply to everyone in due course. I think our role is to resist that as long as we can and to try to make sure we don’t get too far ahead of our competitors, as if we do, it will further marginalize our competitiveness,” said Moree.
The attorney told Guardian Business that automatic exchange of information is an issue on which The Bahamas should “be in lock step with the pack”.
“Frankly in my view it’s not a subject we want to be ahead of our competitors on. I think The Bahamas is already a well-regulated and managed financial centre; we have a history of complying with international standards. We were one of the first to put in place a robust anti-money laundering scheme, and it is in our interest to be well-regulated and comply with the expectations globally of IFCs, but having said that, we do not want to be ahead of some of our competitors on some of these issues.
“We should prepare for its ultimate introduction, but delay it as long as possible and make sure that if and when we have to adopt a version of it we don’t go beyond where our competitors are going and we don’t undercut our competitors.”
Declaration on Automatic Exchange of Information in Tax Matters
The Declaration on Automatic Exchange of Information in Tax Matters was endorsed earlier this week by all 34 member countries of the OECD – including Switzerland – along with Argentina, Brazil, China, Colombia, Costa Rica, India, Indonesia, Latvia, Lithuania, Malaysia, Saudi Arabia, Singapore and South Africa.
The declaration commits countries to implement a new single global standard on automatic exchange of information. The standard, which was developed by the OECD and endorsed by G20 finance ministers last February, obliges countries and jurisdictions to obtain all financial information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.
“Tax fraud and tax evasion are not victimless crimes; they deprive governments of revenues needed to restore growth and jeopardize citizens’ trust in the fairness and integrity of the tax system,” OECD Secretary-General Angel Gurría said. “Today’s commitment by so many countries to implement the new global standard, and to do so quickly, is another major step towards ensuring that tax cheats have nowhere left to hide.”
The OECD has committed to deliver a detailed commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.
Moree noted that to a great degree The Bahamas is “already beginning to face” automatic exchange of information-like requests, given developments such as the Foreign Account Tax Compliance Act (FATCA) and what is expected follow it, including Europe’s version of the legislation.
FATCA, which was approved in 2010 and is intended to come into effect on July 1, 2014, will require foreign banks and other financial institutions to hand over information to the Internal Revenue Service (IRS) about the accounts of United States citizens worth more than $50,000 or face a withholding tax penalty.
The attorney told Guardian Business that he is concerned about the burden both FATCA and its anticipated succeeding legislation, as well as an automatic exchange of information regime, will place on the government and the industry.
“In so far as how prepared we are, I think we have some major issues. We’ve adopted a model (under FATCA) that requires all financial institutions to report to the government and the government to report to the IRS.
“As we have seen with FATCA, it has required very major efforts and funding both by the government and private institutions to put in place the systems...I’m talking about software, IT (information technology) administration, management, due diligence on clients, the whole KYC (Know Your Customer) procedure, but probably most importantly, the systems required to comply with FATCA. The whole process involving IT is enormously expensive, and it also involves human resources, training, and so both in the public and private sector it has been an enormous undertaking which I think will be very costly and will increase the cost of doing business. In my view it’s inevitable that the Europeans will require something similar to FATCA soon, and that will further stretch the resources of the industry to comply with whatever the final arrangement.”
Moree said that he does not consider it feasible that the offshore industry itself could be tapped for significantly more funding to cover the costs that will be incurred by the government as the reporting body under FATCA or any further initiatives such as automatic exchange of information.
The government, in consultation with the industry, took on this role when it determined it would pursue a Model 1 Intergovernmental Agreement for FATCA compliance, rather than requiring individual local institutions to report to the IRS. It is unclear what the overall cost to the government of taking on these additional responsibilities will be.
“It’s a sensitive subject and certainly it would be in my view a massive mistake to assume that there is an unlimited capacity in the financial services industry to absorb the increase in fees and the cost of doing business; there is not an unlimited capacity, there is a point in time where the cost of doing business will actually undermine the viability of the industry.
“So we have to be careful about this. There is a limited ability for the government to pass on the costs to the licensed institutions; it is a question of judgement as to where that line is. You will already find there are many people who would think we’ve already reached that line or near to it and so the government needs to access international funding or subsidize some of these costs out of the consolidated fund or other revenue,” said Moree.
Minister of Financial Services Ryan Pinder, speaking last year, said he had doubts about the practicality of the expectation of extending FATCA-like reporting requirements to apply among all nations, via the automatic exchange of information on tax matters.
Pinder has argued that The Bahamas can protect itself as an offshore financial jurisdiction by demonstrating that operations in the country value “substance over form” and show The Bahamas to be a “legitimate and credible trade in services jurisdiction”.
Republished with permission of the Nassau Guardian