The automatic exchange of information (AEOI), registers of beneficial ownership, and the disclosure of tax avoidance arrangements are three of the key ‘storylines’ in the wealth advisory industry for the past six years, Jennifer Smithson, a partner at law firm Macfarlanes, told an audience of senior trust professionals at PAM Insight’s annual eprivateclient Trust Dinner held in London on 27 November 2018.
There are also three key ‘actors’, which are: the EU, the OECD and the US, although the UK has also played an important role.
Ms Smithson explained she had recently found herself having to consider the UK/Switzerland tax agreement, which only came into effect in 2012, but, since then, in terms of transparency, the landscape had changed out of all recognition, meaning that this now felt like “eons ago” rather than just six years.
She stated that the first automatic information exchanges were “essentially bilateral and fairly limited in their scope.” However, the US Foreign Account Tax Compliance Ac (FATCA) followed the UK/Swiss agreement almost immediately in 2013. When this was first announced, a prominent US lawyer said that it would not work and would instead be the “death of the US investment industry” as clients moved away from US investments to avoid the more draconian elements of the proposed regime.
However, the UK saw the advantages of FATCA as a means of closing the tax gap and designed a similar exchange with its own Crown Dependencies and British Overseas Territories. Equally other countries like Mexico were “keen on the theoretical reciprocity” of the exchanges, so they “gained traction”.
The OECD swiftly followed and decided to create similar exchanges on a global, multi-lateral scale in the form of the common reporting standard (“CRS”). Despite there still being some “slightly contentious and slightly unclear” aspects of CRS, particularly with how different jurisdictions implement the standard, it is now “part of our everyday conversations with clients” and is something that “we all live with.”
Ms Smithson moved onto the second storyline, the creation of registers of beneficial ownership, which “has not yet played out and is still very much ongoing.” These registers were started by the EU, but the UK was also there “forcing things forward.”
The implementation of the first of these registers, being a register of persons with significant control of EU companies (the “PSC” register), differs between jurisdictions. Not all countries have followed the UK’s standard of making the information public on a service like Companies House. Some countries require a court order or suchlike, but regardless the “information is there if you want it”.
The next step is the creation of a register of beneficial owners of trusts, which is far more contentious than the PSC register for companies.
Ms Smithson explained that the problem with a trust register is “what it captures.” They go beyond even the Common Reporting Standard (CRS) in terms of what’s disclosable and “all of this presupposes that we’re talking to clients in safe jurisdictions.”
One of CRS’ impacts is that “in the hands of unpredictable authorities, dangerous information is out there”, which is something “you need to be aware of” when managing clients’ concerns. If a trust register is created which not only holds more information than is disclosed under CRS but is also open to the public, clients are not unreasonably likely to feel a significant threat not only to their privacy but in some cases to their safety.
Ms Smithson mentioned two new developments in terms of the creation of beneficial ownership registers. Firstly, the UK is trying to force the public register of persons with significant control of corporates onto the Crown Dependencies and British Overseas Territories, which the UK Parliament believes is possible within the existing constitutional framework.
Secondly, there is the EU’s Fifth Anti Money Laundering (AML) Directive, which goes further than previous directives and enforces its own standards extraterritorially.
The directive states that the EU will extend the trust register to trusts with a “business relationship with an EU jurisdiction.”
A ‘business relationship’ is “very broadly drafted,” which gives the legislation a wide scope. In addition, the register then becomes public if the trust owns a company that is not on an EU PSC register.
Ms Smithson believes having the sort of information that is captured under the EU’s register of trusts on a public register “is overreaching” and “potentially harmful” particularly as the information available can include beneficiaries who do not even know they are beneficiaries of the trust.
There is also the EU’s introduction of transparency blacklists and there is a possibility that, together with the actions of the UK Government, this could eventually push the Crown Dependencies and British Overseas Territories to accept the introduction of a public PSC register for companies, “resulting in a snowball effect.”
These PSC registers could “gain momentum and become the norm”, as once a certain number of jurisdictions adopt them, any country that doesn’t, starts to look “a little bit out on a limb”, Ms Smithson told the audience.
Ms Smithson moved onto the third storyline, disclosure of tax avoidance, in which the UK was the “prologue,” having had domestic disclosure obligations since 2004. In fact, the EU directive DAC6, which the “UK had quite a strong hand in the drafting of,” reads very much like the UK’s domestic disclosure of tax avoidance schemes (DOTAS) rules. The OECD is also implementing a similar regime.
The EU regulations are already in force, having become effective from June 2018. This means that “any projects we as intermediaries are implementing now come within the scope of these rules,” Ms Smithson explained.
The hallmarks are varied and a lot of them are “probably less relevant for private clients.” However, of particular relevance to private clients was one of the “hallmarks”, which was the avoidance of automatic information exchange, where because the emphasis is on “effect not purpose” it could impact structuring not designed to avoid CRS but where that is nonetheless the effect (for example, the creation of a US domestic trust structure for US resident beneficiaries).
Over the longer term, Ms Smithson anticipated that this new era of transparency would come to be accepted as the normal environment within which intermediaries would be operating. Nonetheless, Ms Smithson hoped that the three main actors would soon come to agree that “this far and no further. I would like to think the pace of change will calm down a bit, but that may be slightly optimistic of me.”
The second eprivateclient Annual Trust Dinner was held on Tuesday 27 November at The Goring Hotel in London. The dinner was attended by heads of trust or fiduciary services (or the like), senior & managing partners, chief executives and managing directors. It was co-chaired by executive vice chairman at Rothschild, Paul Stibbard, and James Anderson, founder PAM Insight. The Dinner was kindly sponsored by Julius Baer International.
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