G-20 Closing Tax Havens

The fallout from the recent tax evasion settlement with UBS is reverberating throughout the G-20 community. As we reported back in October, the French Governments action directing banks to close branches and subsidiaries in non-OEDC compliant jurisdictions will pressure all G-20 participants to adopt a more uniform tax code and enforcement practice. The drive to strengthen the respect of tax treaties and the closure of havens to custody assets beyond the reach of national tax authorities signals a new era in multinational cooperation and the eclipse of radical free market tax practices.
The principal drivers for this unprecedented level of cooperation and standardization is the dire need for national tax authorities to recognize and tax revenue streams to help address the burgeoning budget deficits the global economic crisis has has wrought.

Clearly the crackdown on tax evasion is gaining momentum since the global financial crisis has devastated national treasuries. Enormous expenditures on stimulus programs and dramatically falling tax receipts has created a perfect storm and has created an enormous threat to the fiscal soundness of national treasuries.

Forbes reports that Singapore has become the latest in a flurry of jurisdictions complying with Office of Economic Cooperation and Development standards on transparency and exchange of information for tax purposes. Fifteen jurisdictions have come into compliance since April 2009. In addition to Singapore and the sea change occurring in the Suisse banking industry; other governments that have lost revenue to tax havens are individually taking tough action:

–The U.K. government has informed the Isle of Man that it will reduce revenue transfers of value-added tax receipts to the island by 50 million pounds next year, 9% of the island’s revenue.

–French banks are starting to close down their operations in tax havens.

–In Germany, the hiding of funds in Liechtenstein bank accounts has prompted a backlash against tax havens.

–In the United States, White House advisor Paul Volcker in December is due to report on ways of eliminating revenue losses to tax havens.

This heightened regulation and standardization amongst G-20 tax authorities is quickly closing any regulatory tax arbitrage opportunities for global investors. The closure of preferential tax domiciles will heighten the power and reach of national tax agencies enforcement capabilities and the scope of their examination reach. The IRS is stepping up its enforcement and institutional assets to assure that private equity and hedge fund industries comply with all the anti-money laundering laws and stringent tax codes.

Sum2’s IARP helps investment managers assess and manage the growing threat of audit and tax enforcement risk. Sum2’s CARP helps large and mid-size corporations assess compliance and manage IFI audit risk.

Risk: audit, enforcement, regulatory, tax, reputational, litigation