“I respect your right to be lower tax jurisdictions. I believe passionately in lower taxes as a vital driver of growth and prosperity for all… But lower taxes are only sustainable if what is owed is actually paid – and if the rules to achieve this are set and enforced fairly to create a level playing field right across the world. There is no point in dealing with tax evasion in one country if the problem is simply displaced to another.’’
David Cameron – Letter to the Crown Dependencies and Overseas Territories (March 2013)
Today, the world of finance faces increasing global scrutiny given the application of far-reaching laws and regulation. This scrutiny is further heightened by changing attitudes regarding whether it is morally right for high net worth individuals and international companies such as Apple, Starbucks and Amazon to manage their affairs through the use of offshore structures. How then will this increased scrutiny regarding taxation impact the Channel Islands’ financial services industry?
According to the Organization for Economic Cooperation and Development, both Jersey and Guernsey are categorized as “white list” jurisdictions, having substantially implemented internationally agreed tax standards and entered into numerous bilateral Tax Information Exchange Agreements (‘TIEAs’). At the last count, Jersey had signed 31 TIEAs and Guernsey 43 TIEAs with various jurisdictions worldwide. The International Monetary Fund’s latest review of both jurisdictions’ anti-money laundering and countering of financial terrorism regimes concluded positively on Jersey and Guernsey, compared with major onshore jurisdictions. Further, in 2011 a World Bank Study found that out of 40 jurisdictions reviewed, only Jersey required beneficial ownership to be identified and recorded.
Notwithstanding this status, international regulation is becoming evermore far-reaching. The United States’ Foreign Account Tax Compliance Act 2010 (‘FATCA’) is seen as one of the most significant regulatory changes in recent years. FATCA requires financial institutions to use enhanced due diligence procedures to identify US persons who have invested in either non-US financial accounts or non-US entities. The intent behind FATCA is to keep US persons from hiding income and assets overseas, thereby preventing tax avoidance.
FATCA requires the collection of certain information relating to US account holders or persons who show evidence or “indicia” of US status including US citizenship or permanent residence (i.e. a green card), US birth place or the making of regular payments into the US. As a result of this global regulatory development and following an approach by the UK Government in November 2012, Guernsey and Jersey recently agreed a package of tax measures with the UK which seeks to reflect the same FATCA principles of information exchange and tax avoidance to arrangements relating to UK persons (so called ‘UK FATCA’). These measures include:
- the main body of an intergovernmental agreement (‘IGA’) that closely follows the FATCA IGA being negotiated with the US;
- an alternative reporting arrangement for UK residents who are categorized as non-domiciled for tax purposes (i.e. resident “non-doms”), which will be finalized to the same timetable as US FATCA; and
- a disclosure facility which will allow investors with assets in Guernsey and/or Jersey to come forward and regularize their past tax affairs (i.e. from 6 April 1999) prior to information on their accounts being automatically exchanged with the UK.
Financial institutions in the Channel Islands now need to take the following action in regard to FATCA and UK FATCA:
- assess the level and detail of investor KYC and due diligence information held and identify US and UK tax payers;
- for any clients where there are indicia of US or UK tax payer status, obtain additional information to confirm or disprove such status;
- assess whether investor on-boarding procedures will comply with FATCA and UK FATCA after 1 January 2014;
- consider how internal procedures might need to be enhanced, so as to comply with increased reporting requirements;
- contact clients which may have a UK tax exposure to notify them of the Jersey and Guernsey disclosure facilities (available from 6 April 2013 until 30 September 2016) by 31 December 2013;and
- prepare for FATCA registration with the Internal Revenue Service (‘IRS’), starting mid-July 2013.
Kinetic is closely monitoring the development and implementation of FATCA and UK FATCA and can advise further as required.