This article is written at one of the most significant periods of time in the history of taxation in terms of international cooperation, particularly in relation to tax transparency.
The backdrop is more than a decade of progress driven largely via the Organization for Economic Co-operation and Development (OECD) on behalf of the larger developed member countries. The additional dimension of the work undertaken by the Financial Action Task Force on anti-money laundering has added particular focus to the various leading developed countries.
The OECD set up the Global Forum on Transparency and Exchange of Information for Tax Purposes (The Global Forum) in the early 2000s to help address the risks to tax compliance posed by “tax havens”. Following calls from the G20 in 2009 it was restructured to strengthen implementation of various standards around the exchange of information.
In relation to UK taxation, since 2007 there have been a number of OECD designed initiatives introduced by HMRC and at this point in time we are watching as developments occur on an almost monthly basis, not least HMRC releasing its Offshore Strategy Report in the 2013 Budget along with the Memoranda of Understanding for further tax cooperation between the UK and the Crown Dependencies, Jersey, Guernsey and Isle of Man, and the ongoing discussions with the Offshore Territories on the potential Intergovernmental Agreements (IGAs).
We have also seen the European Commission make its own contribution with the introduction of the EU Savings Directive, which is in the process of being updated and enhanced, and the anti-money laundering (AML) Directive, the Fourth Directive [2013/0025] which is currently in draft form, particularly emphasizing that “tax crimes” are expressly included within “criminal activity” for the purposes of the Directive.
Offshore Disclosure Facilities
Various OECD member countries had introduced disclosure facilities or ways for residents in one country holding untaxed assets in another, particularly, but not exclusively, in tax havens to regularize their tax affairs. HMRC had largely resisted that approach; however, following the success of HMRC in securing production orders against the large high street banks in the UK to hand over personal details of UK resident customers holding offshore accounts, HMRC were able to secure significant databanks of thousands of UK taxpayers potentially holding untaxed assets overseas.
As HMRC clearly did not have the resource to investigate such a large population, in April 2007 they made their first foray into the world of offshore tax disclosures with the introduction of the Offshore Disclosure Facility (ODF). The ODF was very successful in that HMRC secured over £400m from around 45,000 disclosures at relatively low cost, and another £100m in follow up.
As a result of the success, HMRC issued around 300 notices against other financial institutions along with another disclosure facility in 2009. They secured data from 146 financial institutions and achieved around another £100m from around 15,000 disclosures. Both the ODF and the new disclosure opportunity (NDO) largely focused on holders of accounts in the Crown Dependencies of Jersey, Guernsey and Isle of Man.
The disclosure facilities contained a carrot and stick approach; the carrot being HMRC’s agreement to charge modest fixed penalties (usually 10%), the stick amounting to the risk of HMRC mounting a serious tax investigation, either criminal or Civil Investigation of Fraud, under Code of Practice 9.
Following the acquisition of data from a large financial institution in Liechtenstein, HMRC negotiated an agreement with the Principality of Liechtenstein whereby Liechtenstein financial institutions would effectively review their client base and require UK resident clients to demonstrate UK tax compliance, or face having their accounts closed. In order to assist those UK clients who were non tax compliant, HMRC introduced another tax facility, the Liechtenstein Disclosure Facility (LDF). Again, as for the previous facilities, the LDF introduced a 10% penalty but also reduced the number of years that HMRC would go back in time, plus a commitment that HMRC would not instigate any criminal proceedings where the offence was tax related. One other attraction of the LDF is that it is effectively a worldwide tax disclosure facility. Providing a person held an asset anywhere in the world outside the UK at 1 September 2009 and secured a Liechtenstein asset they could regularize UK and/or overseas tax issues. The LDF remains available until 5 April 2016.
In the 2013 Budget we saw the introduction of specific tax disclosure facilities for those holding untaxed assets in Jersey, Guernsey and Isle of Man. As with the Liechtenstein agreement, financial institutions are required to identify UK resident clients and advise them that the tax disclosure facilities are available. These disclosure facilities will run to 30 September 2016, but in many aspects they are less attractive than the LDF. What does that mean? We would expect many of the simpler disclosures to be made through the “local” disclosure facilities, but would still expect to see an interest in persons looking to regularize historical tax issues via the LDF.
But what sort of issues are we talking about? Are these facilities just for those who have committed serious tax fraud? The short answer is no, tax disclosure facilities provide a good commercial way for anyone with any sort of historical tax issue to regularize that matter without the risks and burdens that sit with a full blown tax investigation. In the vast majority of cases historical tax issues can be addressed in a quicker, less expensive manner, and with greater assurance; examples of such matters include offshore accounts, residence, domicile, untaxed remittances, or distributions from offshore trusts or for individuals, or transfer pricing adjustments for companies.
As we look on while many other exchange of information agreements are being signed between the UK and overseas territories, we would expect to see more disclosure facilities being offered alongside such agreements.
We would not anticipate any future disclosure facilities to beat the terms of previous ones, as HMRC seeks to retain the goodwill of those who negotiated early.
It is also very important to appreciate that one of the most dangerous aspects of any wait and see approach can result in a serious investigation, including a criminal investigation, occurring in the meantime, based on the large amount of international information already being exchanged.