Automatic Exchange of Information in Tax Matters: Towards a New World Order
“Big Brother is Watching You.”
― George Orwell, 1984―
On the chilly autumnal afternoon of the 29th October 2014, in Berlin, representatives from 51 jurisdictions got together to sign the symbolic multilateral competent authority agreement for the automatic exchange of information (the “CAA”). This event was intended to be a “step change” in the way in which jurisdictions share tax information to combat tax evasion, by creating a framework for the systematic and periodic transmission of bulk taxpayer information by the source country to the country of residence of the taxpayer.
Mauritius was one of the two countries from the African continent to sign the CAA (the other being South Africa). Our leaders patted themselves once more on the back for thrusting Mauritius at the forefront of such ground-breaking global action.
Forgive me if I don’t join in the celebrations just yet.
Putting aside the unsettling Orwellian reality of this topic, to my mind, rejoicing in the adherence to the CAA would be naïve and (if I may) somewhat ignorant about the practical, financial and economic challenges it entails.
Mauritius: a robust and efficient international financial centre (or a cautionary tale)
Mauritius has worked hard to establish itself as a transparent, efficient and reliable international financial centre. Tough anti-money laundering rules are in place, we are rated “largely compliant” by the OECD, our financial services market is well regulated and stable. But there is a just balance to be struck between transparency and protecting our clients’ rights.
Automatically equating banking secrecy with anti-money laundering and tax evasion is a dangerous generalisation. We need to be careful that our zeal to be seen as being in line with the first world does not drive our clients away.
A new and improved version of FATCA (or an unfettered access to everything and anything)
I still remember the days when FATCA was first heard of. Most people I came across commented on what an abominable and incomprehensible piece of legislation it was. Many thought it would never come into fruition. Few imagined this globalisation of this FATCA-inspired legislation only a handful of years later. The CAA purports to draw on the intergovernmental approach adopted under FATCA. However, the CAA is broader in scope than FATCA and contains fewer exemptions.
It is ironic that the OECD has the compelling headline that the aim of this initiative is to tax the superrich who hide their money offshore and yet, the CAA does not contain the de minimis financial thresholds for individuals which exist under FATCA. Similarly, purely local financial institutions are exempt under FATCA by reason of their client base. This is not the case under the CAA. The expression “fishing expedition” comes to mind.
Protecting taxpayers’ confidentiality (or surrendering to the control system)
One of the crucial points highlighted in the CAA and all complementary literature published by the OECD is that protecting taxpayers’ confidentiality is crucial. Robust and fail proof IT and administrative systems need to be built in order to collect and transmit information safely. The technical guidance discusses proposed transmission methods and encryption standards but it is clear that there is no single solution (or perhaps, no solution at all!).
But let’s face it. We live in a digital world where even the most secure systems appear to be hacked into effortlessly. The latest round of cyberattacks on Sony is but one example. The second related issue is the costs involved in putting such a system in place.
Does Mauritius have the resources (financial and human) to do it? And who will bear the ultimate cost? The taxpayer of course!
Proud to be part of the Early Adopters Group (or biting off more than you can chew)
Mauritius forms part of the so-called “Early Adopters Group”, being a group of nations which have committed to implement the CAA by September 2017. In practice this means that financial institutions in the relevant countries will need to have their systems fully compliant with the legislation by 1 January 2016. The group labels this deadline as an“ambitious but realistic timetable”. Ambitious? Absolutely. Realistic? I’m afraid that the jury is still out on this one.
The first step to be taken is for there to be a proper legal basis in the relevant jurisdiction for the CAA and accompanying guidance to be effective. Domestic legislation need to be enacted. Financial institutions need time to digest this legislation and implement it. For those local institutions in Mauritius who have taken great care to avoid taking on US clients so as not to be burdened by FATCA, the tremendous expense and burden they face with this new legislation is now an unavoidable reality.
While its objective in itself is laudable (i.e. to catch tax evading crooks), this initiative comes fraught with many challenges and obstacles which should not be underestimated nor overlooked. And as a final thought, I leave you with this question: is it a surprise that, after literally forcing FATCA onto the rest of the world, the United States has not signed up to this?
by Johanne Hague – Partner