Analytics, Direct Speech, EU – Baltic States, Financial Services, Latvia, Legislation, USA

America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. The Tax Justice Network, a lobby group, calls the United States one of the world’s top three “secrecy jurisdictions”, behind Switzerland and Hong Kong. All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. “Europe has been outfoxed.”

The Foreign Account Tax Compliance Act (FATCA), passed in 2010, is the main shackle that America puts on other countries. It requires financial institutions abroad to report details of their American clients’ accounts or face punishing withholding taxes on American-sourced payments. America’s central role in global finance means most comply.

FATCA has spawned the Common Reporting Standard (CRS), a transparency initiative overseen by the OECD club of 34 countries that is emerging as a standard for the exchange of data for tax purposes. So far 96 countries, including Switzerland, once favoured by rich taxophobes, have signed up and will soon start swapping information.

Because it has signed a host of bilateral data-sharing deals, America sees no need to join the CRS.

This leads some to brand America a hypocrite. But a fairer diagnosis would be that it has a split personality. The Treasury wants more data-swapping and corporate transparency, and has made several proposals to bring America up to the level of the CRS. But most need congressional approval, and politicians are in no rush to enact them. Some suspect that their reluctance, ostensibly due to concerns about red tape, has more to do with giving America’s financial centres an edge.

No one knows how much undeclared money is stashed offshore. Estimates range from a couple of trillion dollars to $30 trillion. What is clear is that America’s share is growing. Already the largest location for managing foreign wealth, it has picked up business as regulators have increased information-exchange and scrutiny of banks and trust companies in Europe and the Caribbean. Money is said to be flowing in from the Bahamas and Bermuda, as well as from Switzerland.

Investigation, by Die Zeit, a German newspaper, concluded that for the tax cheat looking to pull money out of Switzerland, America was now the safest bet.

It has shown little appetite for helping enforce foreign tax laws and, unlike some other countries, does not count the banking of undeclared money as money-laundering. “Foreigners looking to evade tax in America are usually safe because of its secrecy,” says Jason Sharman of Griffith University in Australia.

Foreign banks losing business to America can sometimes share in the profits, explains one tax consultant. A Swiss bank, say—generally a smaller one, as big ones are too scared—tells its client to close an account and open one with an American custodian bank. The client then appoints the Swiss bank as investment manager on the custodian account, and that bank instructs the custodian which funds to buy, often the Swiss bank’s own products. The Swiss bank earns fees for advice and fund-management; the custodian picks up business; and the account is deemed for regulatory purposes to be American, meaning it avoids the disclosure rules.

Frustration with America has grown in Europe, which forms the core of the CRS. A group in the European Parliament argues that, if America refuses to reciprocate fully, it should be hit with a reverse FATCA: a levy on payments originating in the EU that flow through American banks. “We don’t want a tax war, but nor can the US have it all its own way,” says Molly Scott Cato, one of the MEPs. One obstacle is that tax measures must be approved unanimously by the EU’s 28 member states.

America deserves great credit for taking on Switzerland and other long-standing tax havens. And a Treasury official insists that stashing undeclared loot there will not remain possible for long: “This is something that will be fixed.” Until it is, America will be the biggest tax loophole of all.

Source: The Economist, Februry 2016.

Global processes from Latvia’s viewpoint

Janis Taukacs.

Partner of SORAINEN law office and  tax expert Janis Taukacs (Jānis Taukačs), lawyer Martins Rudzitis (Mārtiņš Rudzītis) and tax manager Kaspars Strazds share their views of global tax processes in relation to the accession to the OECD:

BC: What changes, do you think, EU Member States expect from the OECD Tax Convention and who initiated these changes?

SORAINEN: The accession of EU Member States to the convention developed by the OECD on automatic exchange of financial account information (OECD Convention) will not cause any significant changes for them. The accession to the OECD Convention means that starting from 2017 or 2018 the State Revenue Service (SRS) will automatically receive information also from non-EU jurisdictions, which acceded to the OECD Convention. Some of these jurisdictions (for example, Bermuda, Cayman Islands, British Virgin Islands) have historically been considered offshore zones (but not any more), which are, inter alia, used to evade taxes. The SRS’s access to the information on revenues of Latvian tax residents in these countries will contribute to combating tax evasion and might reduce the use of holding companies or bank accounts in these countries for tax optimization purposes.

This interest was fostered by the global financial crisis that started in 2008, which made many countries to reduce their budget costs and to increase taxes, incl. also consumption taxes. Although the EU has been having a valid directive on exchange of information about savings since 2005, these were the United States which initiated the most comprehensive exchange of information by concluding bilateral agreements on exchange of information between countries about revenues of US nationals outside the United States (the so-called FATCA agreements). Based on FATCA information exchange agreements amendments were made to EU laws and regulations, as well as the OECD convention was drafted.

BC: Why the United States is left as the only OECD member state, which has not signed this convention?

SORAINEN: Currently, the United States have FATCA agreements on information exchange, which are, in fact, similar to the OECD Convention, with 112 jurisdictions. Therefore, the United States do not currently see the need for or benefit of acceding to the OECD Convention. By concluding FATCA agreements, the United States stay more flexible, because the agreements actually envisage that the second contracting party and its financial institutions ensure adherence to the US FATCA law with regard to US nationals in their country. The United States may amend the FATCA law unilaterally ensuring more flexibility than the conclusion of amendments to a multilateral agreement provides. Moreover, the second contracting party may choose to apply the principle of reciprocity with regard to provision of information about savings of its tax residents and the status of their financial accounts in US banks. Moreover, in the case of the OECD Convention, the automatic exchange of information takes place based on the principle of reciprocity. The contracting party may ask the United States to observe this reciprocity. For example, the FATCA agreement between Latvia and the United States provides that the United States automatically provide Latvia with the following information, which includes a smaller amount of data than Latvia has to provide the United States with.

BC: Can we say that Latvia is dragged into a more global competitive fight for customers in the financial sector?

SORAINEN: Competitiveness of the financial sector across the world has always been the focus of attention of countries, especially, if the input of the financial sector in the national economy is considerable, like in the case of Latvia. Taking into consideration the speed and cheapness of cash transfers, which are well-developed nowadays, companies and private persons can easily transfer their funds from one country to another. Therefore, the conditions, which may affect such a decision, incl. also national tax policies (tax rate changes, application of special provisions to individual tax payers, the introduction of beneficial tax regimes) largely affect also the financial sector and the number of customers of banks, which, in its turn, affects the opportunities of banks to gain profit. Latvia would have to take a strategic decision whether it wants and in what way it wants to attract non-resident business at this time of changes. Therefore, it would be important to attempt to attract those clients of the Latvian banking sector (non-residents), who would be ready to do real economic activity here and to create new jobs.