UK clampdown on ‘tax havens’?

TAXING ISSUE: Island experts speak on inpending UK regulation on tax avoidance.

TAXING ISSUE: Island experts speak on inpending UK regulation on tax avoidance.

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ANOTHER dark cloud is looming on the horizon for the island’s finance sector with the UK poised to introduce more regulation aimed at clamping down on tax avoidance.

Over the weekend news broke that Treasury in the United Kingdom is set to exploit a United States law so as to ratchet up pressure on the Isle of Man, the Channel Islands and Overseas Territories such as the Cayman Islands.

The US Foreign Account Tax Compliance Act (FATCA) is aimed at cracking down on tax cheats among American citizens.

The Financial Times reported on Saturday that the International Tax Review had seen a draft agreement drawn up by the UK Treasury which will require an automatic exchange of information revealing full details of all account holders, including those whose identities might otherwise be hidden by trusts or companies.

If implemented the move could see some island business relocate to other offshore centres such as Hong Kong and Singapore. The related additional regulatory costs could also result in some Manx firms downscaling or even shutting up shop.

According to the International Tax Review the development would ‘deal an almost fatal blow to tax evasion through the UK’s tax havens’.

In October the three Crown Dependencies announced plans to negotiate an intergovernmental agreement with the US to implement the FATCA which requires banks to disclose details of their US clients.

The banks would have to report information to their respective governments, followed by an automatic exchange of information with the US. As a first step the Crown Dependencies would need to get UK’s approval. This prerequisite opens the door for the UK to demand the same level of transparency as the US.

According to the Financial Times the Crown Dependencies are to meet with Treasury officials soon.

Island-based tax expert Paul Hotchkiss said: ‘I have seen no detail whatsoever and it’s early days, it may not happen at all. Yet, I suspect this or something like this may come in at some point. However, if the US FATCA is anything to go by then it may take a little time to iron out the finer points.’

He said that if the new regulation is introduced it will undoubtedly ‘result in an administrative burden’ on fiduciaries and other companies on the island.

‘At first blush I don’t think Isle of Man businesses should be overly panicked [but] it does appears that the cost of compliance will be a significant consideration given the number of UK connected structures which are here,’ said Mr Hotchkiss.

He maintained that most people who set up businesses or entities on the Isle of Man are tax compliant, in both the spirit and the letter of the law.

‘Tax compliance is very high on the agenda for local businesses ... however, there will no doubt be UK residents who do not pay tax as and when it is due and do not make the necessary disclosures required by law.’

Phillip Dearden, director in charge of tax at PKF Isle of Man, said: ‘As yet it’s only a rumour but it would be understandable if UK and EU tax authorities were observing the US implication of FATCA and wondering is something similar could be achieved for the UK or the EU.’

He believe that there was ‘very little’ tax evasion practised on the Isle of Man so were the UK FATC to be introduced the ‘real impact will be in the legislative and administrative effort required to administer such a system’.

‘It is going to make life very difficult and more costly for many businesses which have nothing at all to do with tax evasion,’ said Mr Dearden.

‘If the idea of FATCA-type disclosures really gains traction then I can see a number of jurisdictions or groupings going on to develop their own rules this could lead to a number of different regimes trying to achieve the same thing for their own countries.’

Earlier this year, Malcolm Couch, the Isle of Man’s assessor of income tax, told the Examiner’s Business Word supplement that FATCA was likely to hasten the introduction of automatic exchange of information across the globe.

‘We are likely on the brink of another big change which we are probably going to have to conform with if we want to stay in the market,’ predicted Mr Couch back in April.

His views are shared by Andrew Corlett, managing director of Cains Advocates, who also believes that automatic exchange of information is inevitable.

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