The scenario above describes in a simplistic manner the background that has led to some quarters decreeing the death of International Financial Centres (IFCs). However, we believe that this new “operating model” which is now being accepted globally, only enhances the credibility of IFCs and in no way bring their demise.
IFCs have long been a focus of concerted measures proposed by international and supranational organisations to combat tax avoidance and evasion, with the collection and sharing of tax information on investors in these jurisdictions being a key element. The push for greater transparency has come from several fronts. The United States passed the Foreign Account Tax Compliance Act (FATCA) in 2010, a unilateral regime aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the Internal Revenue Service. Financial institutions that do not report information on accounts with American connections face a substantial 30% withholding tax.
Meanwhile, the OECD and G20 driven initiative on base erosion and profit shifting (BEPS), which started in 2013, has continued to shine a spotlight on the weaknesses in the international tax regime, with many of the recommendations highlighting BEPS opportunities popularly associated with low-tax (or zero-tax) regimes. And although BEPS will be applied via the adoption of domestic legislation, it’s take-up has been almost universal. Clearly, the possible clawing back of taxes unpaid is great encouragement!
The BEPS project consists of 15 action plans, organised around three main pillars - coherence of corporate tax at the international level, realignment of taxation and substance, and transparency - with four minimum standards agreed to by all participating countries who have committed to implement them under the Inclusive Framework. Two of the four minimum standards i.e. Actions 5 (Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance) and 13 (Transfer Pricing Documentation and Country-by-Country Reporting), clearly have transparency in mind.