Secret's out: G20 agree on need for information sharing

It appears the leaders of the world’s most powerful nations
listened to anti-capitalist protestors who took to the streets during the G20
Summit in London demanding that governments bring to an end financial
corruption.

One of the key initiatives to emerge from the summit was an agreement to
ensure all countries comply with internationally agreed tax standards. Those
countries that fail to comply risk the threat of sanctions.

Soon after, the Organisation for Economic Co-operation and Development
produced a “white list” of tax centres that have “substantially implemented”
information-sharing agreements and a “grey list” that have pledged to do so.
There are now no countries on the third, black list: the last four countries all
made sufficient promises after the G20 Summit to get themselves promoted to the
grey list.

No more secrets
The thrust of the agreement is to relax laws governing secrecy, giving tax
authorities greater access to information and fundamentally change the way tax
havens operate.

But this will have little impact on the daily business of most finance
directors. “The changes proposed by the government will have an impact on
individuals seeking to evade tax, not legitimate companies,” said Philip Harle,
partner at Lovells’ international tax practice.

“It is an attempt to clamp down on the use of secrecy by those seeking to
evade paying taxes,” says Barry Murphy, tax partner at PricewaterhouseCoopers.
Rich executives who have money in tax haven accounts have nothing to fear “as
long as they have declared that income in their tax jurisdictions,” he adds.

But governments’ willingness to clamp down on secrecy could have an impact on
companies that use tax havens in international financing transactions, as it is
likely that the information-sharing measures are just the beginning of a process
of international pressure on these offshore centres.

Little impact
PwC’s Murphy says the clampdown on those locations with secrecy laws will have
little impact on ‘mainstream’ companies. “This clampdown does not stop companies
legitimately basing businesses in different locations around the world and
managing their corporation tax burden appropriately.”

For example, a company may choose to manage a brand out of Ireland, rather
than the UK, to take advantage of its lower corporate tax rate. Multinationals’
global procurement operations are sometimes based in such locations; Vodafone’s
recently-established centre in Luxembourg is one example.

And, of course, private companies often choose to locate their holding
companies in tax havens. “Most private companies do this legitimately and choose
to do this for privacy rather than secrecy. Even if the holding company is
located in a tax haven, that does not mean that they’re hiding money to avoid
paying taxes,” says Murphy. “These companies have nothing to fear from the new
legislation: if a tax authority requests information on a company’s accounts,
this does not mean that otherwise private information will be made public.”

But for companies that try to hide funds, they will find the agreement gives
tax authorities greater ability to uncover their fraud, he adds.