Private clients will want reassurance that their personal data and information exchanged will be kept secure and protected

Private client work has evolved. Practitioners must be more international in their focus as the world becomes seemingly smaller and clients spread their wealth across different countries. This means they need advice on the ownership of assets, tax liabilities and succession planning across multiple jurisdictions.

And there lies the problem. In the wake of the global financial crisis, many cash-strapped western governments, encouraged by the media and a public tired of austerity measures, have intensified their search for tax avoidance and evasion while also considering new ways to pursue high net worth individuals across borders.

Spain introduced a wealth tax in 2011. President Hollande in France declared plans to tax companies 75 per cent on salaries over €1m in 2013. Barack Obama, the US president, called on republicans to remove “special tax breaks and loopholes so millionaires and billionaires do their fair share to cut the deficit” in his 2014 budget. Meanwhile, here in the UK, we have seen a government impose tax on certain companies that own residential properties valued over £2m.

Undeclared assets

HMRC and many of its counterparts worldwide are placing tax transparency at the top of their agendas and the search for undeclared assets, incomes and gains is increasing.

David Cameron, the prime minister, is strongly supportive of a centralised company register open for public access. He believes this is crucial to meeting the challenges of tax evasion and recently stated his desire for the UK to become a world leader in tax transparency.

In an open letter to the UK’s crown dependencies, and overseas territories including the British Virgin Islands, the Cayman Islands and Bermuda, he said: “It will shed light on those who have provided false information, helping to tackle crime where it occurs and deterring people from providing this false information in the first place.

“And it will help reduce the cost of investigations for tax and law enforcement authorities here and overseas, particularly in developing countries, by making information more easily available to them at the very start of an investigation.”

Switzerland, the world’s largest offshore financial centre, has now pledged to automatically hand over the details of foreign bank accounts to other countries, which some have described as one of the most significant and surprising breakthroughs in this worldwide crackdown on tax evasion.

It agreed to sign up to a new global standard on automatic information exchange at a ministerial meeting in Paris, joining an ever-growing list of other jurisdictions that have signed the agreement, including other members of the Organisation for Economic Co-operation and Development, the G20 group of leading countries as well as international finance centres, such as the Cayman Islands and Jersey.

With US$2.2trn of offshore assets in its jurisdiction, Swiss cooperation is seen as pivotal in the battle for transparency and looking inside the hidden accounts of many of the world’s wealthiest individuals. It is a big step forward for governments looking to recover tax in the wake of the global financial crisis.

The Swiss government said the OECD agreement underscores its commitment to tackling tax fraud and evasion: “Switzerland supports the OECD ministers’ declaration concerning the development of a new automatic exchange of information (AEOI) standard in tax matters.”

And a statement from the Swiss Bankers Association advised: “The banks in Switzerland are willing to adopt the automatic exchange of information along with other financial centres, provided that the exchanged information is only applied for tax purposes.”

Wide-ranging impact

Speaking at Jersey Finance’s annual private client conference 2014 last week, Richard Hay, tax partner at Stikeman Elliott and counsel to the IFC Forum, said that the transparency agenda would have a wide-ranging impact on all private client advisers. “Governments will be pushed
to use their tools to raise money for the benefit of those that favour redistribution.”

On the news that Switzerland had agreed to join the global standard of transparency, Hay told SJ: “Switzerland came late to the transparency party yet Swiss compliance with the information exchange agenda now surpasses that of the larger countries to which it will be providing data.

“The Swiss move on automatic information exchange will refresh its proposition in the modern era for international private banking.” added: “Switzerland offers multicurrency and multilingual banking services and offers unrivalled client service. When a Swiss banker provides an assurance that ‘the money will be there by 5 o’clock, it be there by 5 o’clock.”

While the global standard is welcomed by many, there are still reservations about its potential impact. Campaign group Tax Justice Network recently stated that this was “the first big step in putting together the nuts and bolts of real change”. However, the group raised concerns that those countries in the developing world would not be able to fully participate because of the cost of implementing the agreement. It said that “the need for assistance to be provided to developing countries so that they may be able to reap the benefits of this form of cooperation”.

It has also been suggested that any tax transparency, enforced by the UK government would be in conflict with article 8 of the European Convention on Human Rights, which offers protection for a person’s private and family life, home and correspondence from arbitrary interference by the state.

Many practitioners may consider there should be a balance between providing transparency and having a legitimate right to confidentiality. Private clients will need reassurance that the
more personal data and information exchanged between them and various national law enforcement and tax authorities will be kept secure and protected.

‘A global war on tax evasion’

“The recent escalation of the global war on offshore tax evasion through a pact between 47 countries, including agreement to share tax and other financial information, should come as no surprise for people who have been following developments in the UK. For the last few years, HMRC has made a huge amount of headway into undeclared tax relating to overseas assets such as Swiss bank accounts.

“Huge amounts of data have already been provided to HMRC as a result of specific tax agreements, such as those signed with Liechtenstein and Switzerland. Arrangements with offshore territories linked in some way to the UK, as far afield as the Channel Islands and the Caribbean, have also been implemented, enabling data relating to holders of offshore assets to be passed automatically to HMRC.

“The news that 47 countries – with more to follow most likely – have now agreed to share similar information, means that the chances of escaping the tax radar are becoming very slim indeed.

“The sheer volume of data likely to be received under all these agreements is massive. With that in mind, HMRC should establish a general disclosure facility or extend the life of the Liechtenstein Disclosure Facility, which has yielded nearly £1bn to date for relatively little effort on HMRC’s part.

“Encouraging people to come forward en masse under a managed disclosure facility, rather than HMRC having to investigate everyone individually, provides the right balance between carrot and stick.”

John Cassidy is a tax investigations partner at Crowe Clark Whitehill

 This article was first published in the Solicitors Journal on 16 May 2014 and is reproduced with kind permission.