Marcus Leese of Ogier explains how financial institutions in Asia can deal with the increasing scrutiny they will face on tax non-compliance of their clients as the focus of regulators’ attention shifts East.

Date: Dec 2010

Tags: Tax, Transparency, Compliance, Disclosure, Risk

• Information exchange can impact Asian clients through things like pressure on locally-based banks, Western governments taking an expansive view on their taxation ability, and Asian governments looking to raise additional revenue
• The most effective way for institutions in Asia to minimise risks from information disclosure is to ensure their relationships with their clients are as close as possible
• RMs need to educate their clients on the value, positive outcomes and benefits from being as forthright and transparent as possible in order to get the right advice

There is the potential for information exchange agreements to impact Asian clients in various ways, according to Marcus Leese in an interview.

First, he said, relates to the situation where a number of onshore jurisdictions in West which are playing an active role in this area are taking a very expansive view on their taxation ability. The US is an example where he said it takes very little for there to be a sufficient connection between an individual and the country to justify a US tax liability.

For those Asian clients with significant wealth or interests in the US, or perhaps some family connection with the jurisdiction, Leese said it is therefore very possible for them to face a US tax liability – or at least for the US government to be able to investigate them.

A second issue, he explained, is connected to the fact that many financial institutions represented in Asia are part of multinational groups. As a result, any pressure put on these firms in their headquarters elsewhere in the world is likely to be felt indirectly through their branches and subsidiaries operating in Asia.

A third aspect, said Leese, is that although to date the need to raise revenue has been seen most clearly in Western economies, it is reasonable to assume that as time goes by this need will also arise in Asia.

Local governments in the region might then start to take a similar approach to those in the West, he warned.

Avoiding the pitfalls

According to Leese, the most effective way for institutions in Asia to minimise risks from information disclosure is to ensure their relationships with their clients are as close as possible.

In line with this, he said firms need to ensure their clients disclose to them – fully and clearly – their relevant financial interests.

This can minimise the risks of undisclosed assets which could later be discovered through an investigation.

Getting closer to clients

Given the sensitivity of such issues for clients, however, Leese said individual relationship managers (RMs) and other advisers must handle such conversations with care, delicacy and real thought.

This means there is a limit as to how far general policies and institution-wide procedures can solve these issues.

Instead, Leese said there is a role to play for education – not only in relation to advisers, but also by RMs to their clients.

This should focus on the importance of this issue, and especially on the value, positive outcomes and benefits for clients from being as forthright and transparent as possible, he explained.

Leese said that it is only if clients are prepared to be open that they will then be able to get the right advice from their advisers.