Brendan Harper of Friends Provident International looks at developments in tax transparency and information exchange agreements globally, including what this means for individuals.

Date: Mar 2011

Tags: Tax, Transparency, Disclosure, Trusts, Secrecy

• While several jurisdictions in Europe don’t yet operate automatic information exchange, there is a large body of political pressure for them to change and do so
• There is also a proposed revision to the EU Savings Directive to try to drill through structures like trusts and offshore companies to the ultimate beneficial owner
• There is also behind-the-scenes political pressure on places like Hong Kong and Singapore to become participants in the EU Savings Directive
• Individuals based in markets like Hong Kong and Singapore should choose to structure their investments in a legitimate tax-deferral manner, rather than trying to rely on confidentiality or secrecy
• Some form of information exchange agreement regarding US citizens will be in place by the end of 2013

The world of exchange of information in relation to taxation is developing at a rapid pace, according to Brendan Harper in an interview.

Internationally – and especially in Europe – there are various developments occurring, he explained.

For example, the EU Savings Directive is a provision for the automatic exchange of information between EU member states, in respect of member-state residents who hold money in other member states.

While several jurisdictions within Europe don’t yet operate automatic information exchange and instead withhold a withholding tax from the interest payment before it is paid to the investor, Harper said there is a large body of political pressure to remove this in favour of automatic exchanges of information going forward.

In addition, there is also a proposed revision to the EU Savings Directive which will catch wider classes of income, as well as trying to drill through structures like trusts and offshore companies to the ultimate beneficial owner. The aim, he said, is to identify whether the owner is resident in an EU state.

Further, the revised agreement mentions Hong Kong companies and trust as potential targets.

At the same time, added Harper, there is behind-the-scenes political pressure on places like Hong Kong and Singapore to become participants in the EU Savings Directive.

Implications in Hong Kong and Singapore

Where individuals based in markets like Hong Kong and Singapore have a choice to structure their investments in a legitimate tax-deferral manner, Harper said they should take this route going forward, rather than trying to rely on confidentiality or secrecy.

The problem, he said, is that if someone deliberately evades their responsibility to pay tax in their home jurisdiction, the penalties and consequences are increasing.

The ultimate one, said Harper, is that the person is deemed to have committed a criminal offence in that jurisdiction.

Understanding US trends and reach

According to Harper, the influence of the US government spreads internationally – especially the passing in 2010 by US Congress of the Hiring Incentives to Restore Employment (HIRE) Act.

Within this, there are provisions for every financial institution outside the US to sign an exchange of information agreement with the US tax authorities which will force them to identify their clients who are US citizens.

If institutions don’t do this, then when they invest in US stock, for example, they will suffer a withholding tax of 30% on the capital proceeds when they are taken out of the US, explained Harper.

Although he said there is a large international lobby against some of the more draconian provisions within these measures, the way things are developing, Harper said that some form of information exchange agreement regarding US citizens will be in place by the end of 2013.