In case you hadn’t noticed, the global fiscal transparency agenda – including Tax Information Exchange Agreements (TIEAs), FATCA and the Common Reporting Standard (CRS), as well as national transparency initiatives – has since 2008 been driving a paradigm shift in the macro economic environment in which offshore financial centres and fiduciary service providers operate.
The traditional secrecy model, upon which a number of centres had based their strategy and value proposition for so long, is now in its final death throes and we instead live and operate in a new era of “compliant confidentiality”. The willingness and ability of a number of key jurisdictions (including the Crown Dependencies) to anticipate, prepare for and embrace these changes in international regulatory and fiscal standards as early adopters has left them in far better shape for longer term, high quality growth than those offshore centres that failed to adapt and are now struggling to survive.
But let’s not kid ourselves for one moment; life is far from simple even for the centres that have embraced the new global standards. As the recent STEP research paper, Offshore Perceptions, points out, the emerging “premier league” centres – those that are well regulated, transparent and co-operative – are nonetheless facing a number of challenges and headwinds in the current climate, both from an increased cost of compliance perspective and also in terms of potential impact on new business flows. Indeed, 63% of offshore respondents felt that reporting obligations are deterring clients, while 86% said compliance is impacting client charges (and thus squeezing out the lower value clients).
The ability of individuals and corporates to plan and manage their financial affairs in a tax efficient manner is now subject to regular and intense scrutiny from all quarters, as evidenced by the recent and growing number of high profile cases relating to both personal taxation and corporate taxation of large multinationals, particularly those operating in the global technology sector. Public and government opinion with respect to the acceptability of tax mitigation and tax avoidance strategies is constantly shifting, with previously acceptable planning techniques and strategies increasingly being challenged as morally, if not legally, unacceptable.
The financial, reputational and legal risks of non-compliance continue to rise, not only for the taxpayers themselves but also for those who advise and/or provide services to them. Global tax transparency initiatives, data leaks such as the Panama Papers, and information provided by taxpayers seeking to regularise their affairs, have all allowed tax authorities to identify and pursue those who facilitate evasion or aggressive tax avoidance.
Authorities are themselves responding aggressively in such circumstances – the UK’s commitment to introducing a new corporate criminal offence of failing to prevent the facilitation of tax evasion being an obvious and pressing example. This new offence, to be introduced in September 2017, will seek to extend criminality to corporations where they fail reasonably to prevent their representatives from facilitating criminal tax evasion during the course of a business, and will act as a clear deterrent to unacceptable behaviour.
In his recent annual Autumn Statement, the UK Chancellor also confirmed that further new sanctions for taxpayers who fail to correct past tax affairs will be introduced in 2018, and that the Government will also introduce a new civil penalty regime for any person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC. It was also announced that the Government will shortly commence consultation on a proposed new requirement for intermediaries arranging complex offshore structures to notify HMRC of the structures and related client information.
Fiduciary tax risk is therefore clearly one of the most significant – and growing – risks facing the offshore fiduciary sector, and a failure to identify and manage it effectively can leave firms open to potential claims for breach of duty, regulatory censure, significant reputational damage and, in the worst case, criminal prosecution.
These challenges can, however, also present new opportunities for centres and firms that successfully understand and respond to the new paradigm. Forecasted increases in global wealth and the continued cross-border movement of both people and wealth will continue to create legitimate inbound/outbound wealth planning opportunities, with those seeking compliant confidentiality increasingly being drawn towards firms of stature operating in secure, well-established and well-regulated jurisdictions.