Financial Transparency Coalition

Last week, while showcasing draft EU laws on tax transparency, commissioner Algirdas Semeta told media in Brussels he is building “the most comprehensive information exchange system in the world.” He added: “The EU system will become even broader than the US system.”

It is an astonishing claim.

The wide-reaching impact of the new US regime – the Foreign Account Tax Compliance Act (FATCA), which came into force on 1 January – has been demonstrated by a storm of angry reactions in worldwide financial centres. Some of Semeta’s proposals, notably his amendments to the EU Savings Tax Directive (EUSTD), do broaden the scope of information to be shared inside Europe and do go beyond FATCA. But other elements of the US law are missing from the EU package.

Meanwhile, even if the European Commission now has the legal instruments to create a FATCA-plus system, there is no guarantee they will ever be used.

Semeta’s laws must first be unanimously agreed by EU countries. So long as Austria and Luxembourg, two EU financial centres, are allowed to delay and frustrate the EUSTD amendments, the entire project will remain what it has been for the past five years: a lovely idea on paper, nothing more.

Despite reports to the contrary, the last meeting of EU finance ministers in May did not mark a change of heart in this respect. Austria and Luxembourg did not abandon their old tactic of saying “we will happily join if and when Switzerland joins as well.”

Instead, EU countries agreed to make progress by the end of the year, a deadline which falls after elections in Austria and Germany. Judging from the two countries’ track record on tax transparency, it does not bode well.

In contrast, FATCA is already reality. By directly targeting global financial institutions and by using US market power as leverage, Washington has taken a beautiful shortcut through potentially endless and fruitless diplomatic talks.

The EU also has to shape up on the geographical scope of its system. Back in 2010, it was fashionable in the EU and in the Paris-based economic club, the OECD, to speak of coherence on tax and development policy. But in 2013 developing countries have been left out of the equation on EU automatic information exchange (AIE).

The new EUSTD – if it is ever adopted – does contain interesting extra-territorial clauses (see below). But its reporting obligations and, importantly, the countries which are to benefit from the new information streams, are limited to EU member states and associated jurisdictions. If the new EUSTD comes into force, it will create a system, albeit internally sound, of enriching EU countries’ treasuries at the expense of everybody else, including some of the most vulnerable people on the planet.

At the same time, it will risk undermining the potential for a truly multilateral AIE regime.

It is true that FATCA’s primary aim is also to enrich the US’ Inland Revenue Service. But FATCA is to be applied globally, wherever a financial institution offers significant cross-border bank services. The US, under a series of bilateral treaties, currently offers limited reciprocity. But it has promised additional legislation to expand information sharing.

The OECD is currently drafting a multilateral AIE system based on FATCA. It has the political support of 17 European nations as well as several BRICs (Brazil, Russia, India, China) and could form the nucleus of a regime that would benefit more than just Western exchequers.

Devil in the detail

In terms of technical nitty gritty, the FATCA model is attractive because it obliges banks to follow strict protocols on searching their whole database for reportable accounts. Financial details of all high risk legal entities, including trusts, must be scrutinised for signs of reportable tax residents and bank staff who manage clients’ accounts must be named. If you add Washington’s willingness to prosecute and jail people, no matter where they are, for helping to evade US taxes, FATCA is a peerless deterrent against tax fraud.

There is one glitch, however. On high risk entities, the account holder has to file a form with US authorities. The first draft of the paperwork has been published – if you tick the box saying the entity has no US owners, you get off the hook.

Anybody who is familiar with so called “discretionary legal structures” (typically, trusts and foundations) knows they are both widely used by the super-rich in Anglo-Saxon countries and that, by definition, they do not have identifiable owners. The FATCA loophole might well see the bulk of global wealth – which, at the top holding level, resides in trusts and foundations – escape the net.

In other words, the US, or other FATCA-model adopters, could claim they are being tough on tax, while in fact protecting trust secrecy. This is what happened in the Global Forum, a tax transparency club created 13 years ago, which now has 110 member countries. It is also what happened with the EU’s extant Savings Tax Directive eight years ago.

Semeta’s ace

And so, Mr Semeta has a trump card. The new EUSTD is the first law in history to pierce this secrecy. Under the new EU system, people who run trusts, discretionary foundations or shell companies must declare the identities of settlors (individuals who donate money to create them) and beneficiaries even if the ultimate owner stays hidden. This is “even broader” than FATCA, which targets a wide range of financial intermediaries, but not shell firms or trustees.

Before we get too excited, it is difficult to imagine how Semeta’s reporting obligation can be enforced in current conditions, however. In order to make it work, EU countries and their protectorates must also create reliable registries of all parties of discretionary structures. The move is envisaged under a separate EU bill, its fourth revision of the EU anti-money-laundering directive.

But in order to make a global impact, EU leaders must seize the opportunity provided by Monday’s (17 June) G8 summit in Lough Erne, Northern Ireland.

For his part, British Prime Minister David Cameron is making the right noises. He told The Guardian newspaper on Saturday that: “The way to sweep away the secrecy and get to the bottom of tax avoidance and tax evasion and cracking down on corruption is to have a register of beneficial ownerships so the tax authorities can see who owns beneficially every company.”

EU as tax haven

Semeta’s role should be to unlock his new regime for adoption by non-EU nations. If his new savings tax law stays limited to the EU27 jurisdictions, it might, effectively, turn Europe into a tax haven for the rest of the world. It might harm the momentum for a single multilateral platform for automatic information exchange.

Semeta should also demand that Germany leans on Austria and Luxembourg to sign the amended EUSTD way before December.

At the least, he must make sure that EU countries create central and public registries.

If he delivers, then he can declare in Brussels the EU is leading the world in the multi-trillion-dollar war on tax crime.

Reposted from the EUobserver Blog, with kind permission.