The increasing desire to eliminate tax evasion has marched on this week, led by representatives from the G5 who have agreed to a new initiative.
In a letter dated the 9 April 2013 to the EU tax commissioner, the G5 ministers declared their agreement for a pilot scheme whereby a wide range of financial information will be automatically exchanged between the five countries. The plan is that this will be modelled on the US Foreign Account Tax Compliance Act (FATCA).
The G5 ministers are hoping to roll the pilot across the rest of the EU, having invited them to join and have higher expectations for it becoming the ‘international standard’. This move will bring everyone involved up to the same level of transparency that we now or will shortly have with Switzerland, Guernsey, Jersey, Isle of Man.
Although the information exchange has been specified, what next?
On this basis that it will follow the FATCA model, financial entities will be obliged to identify those individuals who might be taxable in one of the G5 and then disclose their balances, receipts, and withdrawals etc. to the relevant body. Alternatively, one could incur a withholding tax on income from relevant assets held by the banks or financial entities.
Other particulars that will require clarification include: the rate of withholding tax if one chooses keep the amount private; whether there will be thresholds on the requirement to report as in the US; and the penalty on any understatement of income in undisclosed foreign financial assets.
Regardless, this will extend the remit of the EU Savings Tax Directive (EUSTD), previously focussed on interest. This new agreement will identify all other means of income that have not previously been reported, with the hoping of achieving full compliance regarding all offshore investments within these states. No doubt the ministers will be eager to get the other EU nations involved ASAP to cover all bases.
This will open a wealth of information to HMRC, but how will they respond?
Importantly, the amount of information retrieved will be vast. HMRC have recently been reputed to have a 38 year back log, which coupled with a reduced work force indicates that they will not be prepared for such a influx of information. Presumably, some of £77million that George Osborne mentioned in the Autumn Statement as being set aside to support HMRC clamp down on offshore tax avoidance will now be used.
It is also possible that this could bring about new enquiries into taxpayer who had previously gone unnoticed. How many of these will have outstanding tax and how much of the forecasted £2billion in lost revenue each year will then be collected as a result will remain to be seen.
As an aside, the timing is politically noteworthy. The PM is presently heading to Germany for discussions on new EU agreements and will be presiding over the G8 summit. Tax avoidance being a currently charged issue amongst the participants, discussing this agreement will be well received.
See HM Treasury announcement here.
We wait for further details with bated breath…
Please contact Piers for more information or comments: PPye-Watson@mdaviesassociates.co.uk