Even as the ink was drying on the final rules the US Internal Revenue Service issued this month under the US Foreign Account Tax Compliance Act, British Prime Minister David Cameron was making it clear at the annual World Economic Forum in Davos that his country also has its sights trained on enforcing tax compliance.
Cameron’s speech on January 24 attacked tax evasion by major corporations and individuals. Cameron said he would use Britain’s year-long presidency of the Group of 8 nations to “drive a… serious debate” on international corporate tax enforcement. The G-8 is composed of the world’s leading industrial nations.
Great Britain, a principal US ally in the global effort to ferret out tax evaders, is one of the first nations to sign a cooperation agreement with the IRS under FATCA allowing in general for the mutual exchange of information of the bank accounts that their respective citizens maintain at institutions located in the other country. The seven agreements signed so far are a prelude to dozens more the IRS is actively pursuing with nations in many regions.
While drawing a distinction between illegal tax evasion and tax avoidance, which is designed to minimize or eliminate a corporation’s taxes, Cameron said avoidance schemes often raise “ethical issues” and “call for more responsibility and for governments to act accordingly.” He had sharp words for companies that “ think… they can keep on selling to the UK and setting up ever more complex tax arrangements abroad.”
“They need to wake up and smell the coffee because the public who buy from them have had enough,” the Prime Minister added.
Cameron said that Britain’s annual chairmanship of the G-8 will focus on “trade, tax and transparency” and that the UK will call for greater intergovernmental cooperation in auditing and tax enforcement.
UK also carrying out tax evasion, avoidance crackdown
As Cameron pushes his corporate tax evasion and enforcement agenda, his government and its parliamentary allies are battling tax evasion and avoidance on the home front. Last month, a parliamentary committee announced an emergency $122 million appropriation to Her Majesty’s Revenue and Customs (HMRC). The funds are earmarked for expanded tax evasion and avoidance efforts and to hire 100 new investigators in the “affluence unit,” which targets wealthy tax evaders.
This followed hearings last summer by the Parliament’s Public Accounts Committee on corporate tax evasion. The hearings revealed that more than half of the 770 largest corporations in Britain had tax avoidance arrangements that involved sending profits offshore. The hearings also reported that several giants like Facebook, Google and Starbucks paid little in UK taxes. In the past 14 years of business in the UK, Starbucks is said to have paid $13.5 million in taxes on $4.7 billion in profits, and none in the last three years.
Britain has also pursued tax evaders with offshore accounts, which is the primary focus of FATCA. In December 2012, the UK signed a tax treaty with Switzerland requiring Swiss financial institutions, for the first time, to report the accounts of UK customers.
The pact was controversial in some quarters because of its anonymity provisions allowing UK persons with Swiss accounts to be taxed without being named. According to HMRC, the treaty is expected to raise more than $5.34 billion in new tax revenues by 2014.
FATF puts spotlight on tax crimes for first time
As part of its multi-pronged tax crackdown, the British government has thrown its support behind FATCA. The British intergovernmental agreement with the IRS implementing FATCA was ratified by Parliament in late 2012. The UK-US agreement closely follows the “Model 1” template the US Treasury Department issued last year. It allows UK financial institutions to report required information to their tax agency rather than directly to the IRS.
Britain’s tax push at the G-8 may presage wider global coordination on tax enforcement and compliance. In the past, the G-8 has introduced policies and initiatives that have had lasting impact on financial crime worldwide. In 1989, the predecessor G-7 created the Financial Action Task Force (FATF) in Paris. The FATF, along with other international organizations, including the OECD, International Monetary Fund, and World Bank, translate policies enunciated by the G-8 into guidance or recommended best practices.
The FATF is presently developing a methodology to assess countries on their compliance with the new FATF 40 Recommendations, which now include making tax crimes a predicate offense for money laundering prosecutions, strengthening corporate transparency and customer due diligence.
Under pressure from FATCA and NGOs, tax enforcement spreads globally
Countries are acting. Last summer, Brazil adopted regulations to make gatekeepers responsible for enhanced CDD and identifying and reporting suspicious activities, including potential tax evasion. On January 14, the Cayman Islands Monetary Authority (CIMA) issued a consultation paper detailing regulatory changes in its financial services industry.
As nations take their own measures to expand and tighten the net on tax evaders, FATCA is spreading globally. The US Treasury is currently negotiating with 50 nations on bilateral FATCA agreements. Ultimately, it envisions a worldwide tax reporting and enforcement network.
* (Bruce Zagaris, a partner at Berliner, Corcoran and Rowe, in Washington, DC, is a member of the ACFCS Advisory Board and a highly-regarded expert on international tax matters, including treaties and enforcement.)