Walls of banking secrecy appear to be coming down

With the U.S. leading the way in governments seeking to tax citizens’ revenue, wherever in the world they may live, the pressure has intensified in recent years on financial centres to put an end to confidentiality of depositors and the contents of their accounts. Earlier this month, Singapore and Switzerland – the two largest offshore financial centres and a reputation for maintaining financial confidentiality – both agreed to join the OECD’s system for the exchange of banking information.

Origins

One of the massive fallouts of the 2008 global financial crisis was that several governments felt they had to bail out major banks in their countries to enable them to keep trading. The objective behind the injection of massive amounts of public money was to avoid all deposit-holders withdrawing all their money in panic, creating financial collapse on an apocalyptic scale.

Since then, these governments have of course been looking to recoup that money in order to pay for all the public services they provide and the staff they employ. The problem is that the public purse will never see all of the money it laid out. The UK Treasury, for example, admits that: “The GBP 5 billion (transferred from taxpayers to the financial sector) can be regarded as part of the cost of preserving financial stability in the crisis.”1 By the way, that figure of GBP 5 billion doesn’t include the cost of holding the shares which have not paid a dividend or seen a capital gain.

Thus, governments the world over are looking for quick ways to refill the public purse. They are reducing public sector salaries (as in Spain), taxing pension lump sums (as the latest UK budget proposed) and bringing in corporate and income tax from those companies and people who do business and live in different countries.

Avoidance & Evasion

There have been some high profile cases where multinational companies, as well as sportsmen and entertainers, have been publicly made an example of for trying to avoid tax in their ‘home’ country. The cases are too varied to comment on; yet they have drawn attention to the smudging of the lines between tax evasion and tax avoidance. Whilst avoidance by definition is not illegal, leading political figures have mentioned it in the same breath as evasion.

It is interesting to note that when governments give tax breaks to companies or high earners, in order to attract them to their shores, the ministers regard this as providing a competitive advantage for their country; yet when those taxpayers find somewhere more competitive, that is considered as “immoral” as UK Prime Minister David Cameron has described certain avoidance schemes.2 Harsh words coming from a politician.

The lines between evasion and avoidance have been made even more difficult to distinguish by the implementation of General Anti-Avoidance Rules (GAAR) in countries such as the U.S., Canada, Australia, Hong Kong, New Zealand and South Africa. These rules prohibit what they call tax aggressive avoidance; yet the subjectivity of that term’s definition raises the question of whether they are in line with the Rule of Law.3

Secrecy

When European Union finance ministers tried to hammer out an agreement to approve the automatic exchange of personal savings account information by the end of 2013, they hit a brick wall in the shape of Luxembourg. The Duchy’s government stated that, “Any step towards more exchange of information had to be accompanied by an enhanced ‘level playing field’”4 with non-EU countries, doubtlessly looking south at Switzerland.

Nevertheless, Luxembourg has now agreed to the automatic transfer of bank account information within the EU. With Switzerland and Singapore agreeing to sign the OECD agreement, it looks like the ‘level playing field’ Luxembourg was seeking may become a reality. Although this won’t happen until 2017 at the earliest.5

Of course, we’re talking about tax and international agreements – two of the world’s most labyrinthine areas of law. Unsurprisingly, things are not as clear-cut as they first appear. While on the face of it, the Swiss have agreed to automatically exchange depositors’ information, they will have to change their current legislation6 and therefore get a draft law through parliament. That may be tricky, as the pre-existing alternative agreed in 2010 was to provide details when other countries name specific individuals and banks7 – a neat halfway house.

What is out of legislators’ hands, however, is the fact that in 2013 over 300 Swiss private banks expressed a willingness to co-operate with the U.S. government in checking on high net worth American citizens’ accounts in Helvetia. The tide could indeed be turning.

Amongst the 60 countries who have signed up, Singapore has also pledged to implement the OECD’s automatic disclosure system. It is unclear as to whether Singapore will adopt the OECD at the earliest point in 2017, or later. Of course the island state remains a low-tax destination and thus a favourable place in Asia to do business. The only difference in the future is that the regulator (MAS) will ensure greater transparency for foreign tax authorities to check their tax residents or citizens’ bank accounts.

Crypto-currencies

Paradoxically, as the walls of banking secrecy appear to be coming down, crypto-currencies are on the rise. These currencies – the most well-known of which is Bitcoin – allow funds to be transferred securely over the internet with what are claimed to be lower fees than those charged by banks and financial institutions for wire transfers. Thus as tax authorities finally persuade banks to share information, it is now possible to transfer and hold funds without using banks.

Consult an expert

There are several hoops to jump through, both regulatory and practical, before the OECD’s system becomes a reality. That’s why if you are concerned about this brave new world’s implications for you or your company, it’s best to seek advice from an independent expert to anticipate the effect of these changes.

Footnotes:

1 UK National Audit Office http://www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/

2 http://www.ibe.org.uk/userassets/briefings/ibe_briefing_31_tax_avoidance_as_an_ ethical_issue_for_business.pdf

3 Prebble R, Prebble J. (2010). Does the Use of General Anti-Avoidance Rules to Combat Tax Avoidance Breach Principles of the Rule of Law?. Saint Louis University Law Journal.

4 http://www.mondaq.com/x/287016/tax+authorities/Luxembourg+dents+EU+hopes+ to+end+banking+secrecy

5 http://www.swissinfo.ch/eng/politics/Swiss_sign_on_to_global_bank_information_ exchange_.html?cid=38525466

6 http://www.moneycontrol.com/news/world-news/switzerland-detailssharing-tax-infoforeign-nation_970751.html

7 http://www.lpoffshore.com/eng/end_of_swiss_bank_secrecy.html