Director MBMG Investment Advisory
Walls of banking secrecy appear to be coming down
With the U.S. leading the way in governments seeking to
tax citizens’ revenue, wherever in the world they may live, the pressure has
intensified in recent years on financial centres to put an end to
confidentiality of depositors and the contents of their accounts. Earlier
this month, Singapore and Switzerland - the two largest offshore financial
centres and a reputation for maintaining financial confidentiality - both
agreed to join the OECD’s system for the exchange of banking information.
One of the massive fallouts of the 2008 global financial crisis
was that several governments felt they had to bail out major banks in their
countries to enable them to keep trading. The objective behind the injection
of massive amounts of public money was to avoid all deposit-holders
withdrawing all their money in panic, creating financial collapse on an
Since then, these governments have of course been looking to recoup that
money in order to pay for all the public services they provide and the staff
they employ. The problem is that the public purse will never see all of the
money it laid out. The UK Treasury, for example, admits that: “The GBP 5
billion (transferred from taxpayers to the financial sector) can be regarded
as part of the cost of preserving financial stability in the crisis.”1 By
the way, that figure of GBP 5 billion doesn’t include the cost of holding
the shares which have not paid a dividend or seen a capital gain.
Thus, governments the world over are looking for quick ways to refill the
public purse. They are reducing public sector salaries (as in Spain), taxing
pension lump sums (as the latest UK budget proposed) and bringing in
corporate and income tax from those companies and people who do business and
live in different countries.
Avoidance & Evasion
There have been some high profile cases where multinational
companies, as well as sportsmen and entertainers, have been publicly made an
example of for trying to avoid tax in their ‘home’ country. The cases are
too varied to comment on; yet they have drawn attention to the smudging of
the lines between tax evasion and tax avoidance. Whilst avoidance by
definition is not illegal, leading political figures have mentioned it in
the same breath as evasion.
It is interesting to note that when governments give tax breaks to companies
or high earners, in order to attract them to their shores, the ministers
regard this as providing a competitive advantage for their country; yet when
those taxpayers find somewhere more competitive, that is considered as
“immoral” as UK Prime Minister David Cameron has described certain avoidance
schemes.2 Harsh words coming from a politician.
The lines between evasion and avoidance have been made even more difficult
to distinguish by the implementation of General Anti-Avoidance Rules (GAAR)
in countries such as the U.S., Canada, Australia, Hong Kong, New Zealand and
South Africa. These rules prohibit what they call tax aggressive avoidance;
yet the subjectivity of that term’s definition raises the question of
whether they are in line with the Rule of Law.3
When European Union finance ministers tried to hammer out an
agreement to approve the automatic exchange of personal savings account
information by the end of 2013, they hit a brick wall in the shape of
Luxembourg. The Duchy’s government stated that, “Any step towards more
exchange of information had to be accompanied by an enhanced ‘level playing
field’”4 with non-EU countries, doubtlessly looking south at Switzerland.
Nevertheless, Luxembourg has now agreed to the automatic transfer of bank
account information within the EU. With Switzerland and Singapore agreeing
to sign the OECD agreement, it looks like the ‘level playing field’
Luxembourg was seeking may become a reality. Although this won’t happen
until 2017 at the earliest.5
Of course, we’re talking about tax and international agreements - two of the
world’s most labyrinthine areas of law. Unsurprisingly, things are not as
clear-cut as they first appear. While on the face of it, the Swiss have
agreed to automatically exchange depositors’ information, they will have to
change their current legislation6 and therefore get a draft law through
parliament. That may be tricky, as the pre-existing alternative agreed in
2010 was to provide details when other countries name specific individuals
and banks7 - a neat halfway house.
What is out of legislators’ hands, however, is the fact that in 2013 over
300 Swiss private banks expressed a willingness to co-operate with the U.S.
government in checking on high net worth American citizens’ accounts in
Helvetia. The tide could indeed be turning.
Amongst the 60 countries who have signed up, Singapore has also pledged to
implement the OECD’s automatic disclosure system. It is unclear as to
whether Singapore will adopt the OECD at the earliest point in 2017, or
later. Of course the island state remains a low-tax destination and thus a
favourable place in Asia to do business. The only difference in the future
is that the regulator (MAS) will ensure greater transparency for foreign tax
authorities to check their tax residents or citizens’ bank accounts.
Paradoxically, as the walls of banking secrecy appear to be
coming down, crypto-currencies are on the rise. These currencies - the most
well-known of which is Bitcoin - allow funds to be transferred securely over
the internet with what are claimed to be lower fees than those charged by
banks and financial institutions for wire transfers. Thus as tax authorities
finally persuade banks to share information, it is now possible to transfer
and hold funds without using banks.
Consult an expert
There are several hoops to jump through, both regulatory and
practical, before the OECD’s system becomes a reality. That’s why if you are
concerned about this brave new world’s implications for you or your company,
it’s best to seek advice from an independent expert to anticipate the effect
of these changes.
1 UK National Audit Office
3 Prebble R, Prebble J. (2010). Does the Use of General Anti-Avoidance Rules
to Combat Tax Avoidance Breach Principles of the Rule of Law?. Saint Louis
University Law Journal.
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