STEP Symposium Transparency and Tax Neutrality

5. The media view of International Financial Centres Vanessa Houlder, FT

6. Why the IFCs hit the headlines Germany to �tighten the screws� on Europe�s tax havens Peer Steinbr�ck February 2008 �The era of banking secrecy is over� G20 April 2009 �All too easy for a...small number of individuals and companies to abuse overseas tax havens, to avoid paying any taxes at all," Barack Obama May 2009 OECD peer review process is underway; I can�t get stories into the pressOECD peer review process is underway; I can�t get stories into the press

7. The heat is off � for the moment� Today: OECD peer review underway Belgian EU Presidency wants "political agreement" to strengthen administrative cooperation on tax 2011: Sarkozy to lead the G20 with "action and ambition� 2013: Foreign Account Tax Compliance Act (FATCA). Future: More leaks and prosecutions?

8. Why tax-raising politicians mind about low tax countries

9. Defining the problem: zero tax �In the same way as we are having to wean the farmers of Afghanistan off the poppy and the farmers of Colombia off coca, we have to wean offshore financial centres off tax if that is the only source of competitive advantage that they offer�. Lord Myners March 2009 UK government signals Crown Dependencies� tax regimes unacceptable to EU, October 2009 Overseas territories and Crown Dependencies differentiate themselves from the �international consensus� through the absence or near absence of certain forms of taxation. Deloitte, October 2009 Pressure for more coordination on tax policy in Europe. Mario Monti�s �grand bargain�, CCCTB, Saving the Euro. But widespread resistance to US-style central fiscal authority, especially in Germany

10. Defining the problem: IFCs� role in financial crisis �How much safer would everybody's savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens� Gordon Brown, March 2009 �I note with consternation Europeans� obsession with regulating hedge funds and tax havens. Did they cause this crisis? No.� Martin Wolf, FT February 2009 �It is important to recognise the role of offshore financial centres was not central to the origins of the current crisis.� Turner Review March 2009 �The �fairness� case for IFC participation in the global economy has declined�. Richard Hay, Stikeman Elliot May 2010, quoting Mervyn King of Bank of England: � Banks are global in life, but national in death�

11. Defining the problem: lack of transparency Anecdotal reports suggest revenue authorities frustrated over ban on fishing trips Foot Review shared �concerns about the extent to which international standards still permit a lack of transparency in the ownership of corporate vehicles�. But also arise to a greater or lesser extent in most major jurisdictions Jason Sharman: �How hard would it be for the OECD to decree that automatic exchange is the new �international standard�, and that those who oppose this new standard are �non-co-operative jurisdictions?� Privacy concerns, resistance from Switzerland: Le secret bancaire est mort, vive l��vasion fiscale, Myret Zaki

12. What the NGOs think �It is secrecy that underpins everything they do � whether tax avoidance, tax evasion or regulatory abuse� That is why we call them secrecy jurisdictions, not tax havens� Richard Murphy, Tax Research UK �FATF�s members � which include the states that are home to the world�s major economies also need to get their own houses in order before they lecture the small island tax havens who have frequently been FATF�s targets.� Global Witness, Undue Diligence, March 2009 �In popular imagination, tax havens are palm fringed island idylls with luxury yachts, shady law firms and expensive offices festooned with the brass name plates of anonymous shell companies�. The main global suppliers of financial secrecy are in fact rich nations operating specialised enclaves like Delaware, often with links to smaller �satellite� jurisdictions that are conduits for illicit financial flows into the mainstream capital markets� Tax Justice Network, financial secrecy index

13. Do IFCs undermine development? �Tax dodgers in developed and developing countries deprive governments of revenues. Many take advantage of the lack of transparency in tax havens. Developing countries are estimated to lose to tax havens almost three times what they get from developed countries in aid.� Angel Gurria, OECD secretary general November 2008 �The situation is stark and urgent. We predict that illegal, trade-related tax evasion alone will be responsible for some 5.6 million deaths of young children in the developing world between 2000 and 2015. That is almost 1,000 a day.� Christian Aid Why such a potent issue: Globalisation; resource curse; defuse charge of neo-imperialism �Some of the existing estimates of tax revenue losses due to tax avoidance and evasion by firms systematically overestimate the losses� report for Department for International Development by Oxford University, June 2009

14. Or foster development? Offshore centres are �a key factor that has previously been ignored� in how China and India have managed to lift hundreds of millions of people out of poverty �Though undoubtedly some money sent from developing countries to offshore centres does represent the proceeds of corruption, tax evasion, or tax arbitrage, a substantial share of the 30 percent of the world�s foreign direct investment that passes through offshore centres may in fact represent an attempt to reduce transaction costs by accessing efficient institutions unavailable at home.� Sharman 2010 International Finance Corporation: Blocking use of offshore centres would harm development because investors from different countries need �tax neutral� structures. Many projects �would not be economically viable or sufficiently so to attract the necessary capital investment without the use of offshore financial centres in the structure�.

15. Country by country reporting International Accounting Standards Board considering new disclosure standard for extractive industries Earlier this year, Hong Kong stock exchange revised listing requirements for mineral extraction companies July�s Dodd-Frank Wall Street Reform and Consumer Protection Act requires energy and mining companies to disclose payments to governments in reports filed with the SEC European Commission: undertaking research into country by country reporting. Voluntary disclosure: Extractive Industries Transparency Initiative

16. How the media view IFCs Nothing beats a picture of a sandy beach or palm tree Media will not stop using the phrase �tax haven� despite jurisdictions� sensitivity. Mapeley; Dispatches Occasionally it looks beyond stereotype...FT Special Reports, �Welcome to tax-dodge city, USA: Delaware is under fire for light-touch regulation that rivals offshore havens� Guardian April 2009 Difficult issue to analyse; limited research, IMF $18 trillion Reputation matters but does media coverage matter?

20. Zero Ten and The Code of Conduct STEP Conference, London 19 October 2010 Richard HaySTIKEMAN ELLIOTT LLP email: rhay@stikeman.com Tel: +44 207 367 1190

21. Global Context the financial crisis : �everything has changed� alarm over public finances has moved from OECD to heads of state the public mood is aggressive throughout Europe structural deficits mean tax pressures will endure �an equitable fiscal adjustment will require a more energetic fight against tax evasion and erosion, both nationally and internationally� (IMF, Sep 2010) tax competition: the next battleground? (Was it always the battleground?)

22. Consultation Responses To Corporate Tax Reviews new business is impacted due to uncertainty no agreed international standards on minimum corporate tax rates tax neutrality is vital for the CDs� financial services industry any positive rate of corporate tax will result in business attrition is a DTA network likely if general corporate taxation is imposed? if change is required, territorial tax enjoys some support

23. Issues is there an emerging global (or EU) standard for a �normal� tax system? are self-financing states free to set their own tax systems and rates? If not, who underwrites their public finances? can the CDs accommodate EU tax policy demands and remain viable IFCs? can the CDs survive as IFCs if they adopt general taxation with targeted exceptions? will corporate taxation increase tax collections? should the CDs join Europe?

27. Tennyson on the Code of Conduct Cannon to right of them,Cannon to left of them,Cannon in front of themVolley'd and thunder'd;Storm'd at with shot and shell,Boldly they rode and well,Into the jaws of Death,Into the mouth of HellRode the six hundred.

29. Non-Conventional Tactics The philosophy of the SAS was to throw out standard military tactics � in one sense, the regiment had no formal tactics and improvisation was at the heart of their success.

31. Contact Malcolm Couch Assessor of Income Tax Isle of Man Government malcolm.couch@gov.im +44 (1624) 685355

40. HIRE ACT 2010 (FATCA) The implications for non US trustees

41. Session Objectives To build awareness of FATCA: What is FATCA about? Its global reach; Process and timelines; Its impact on foreign trustees; The need and the time for taking action What as a minimum you need do as trustee; What you might do directly or via industry and professional bodies such as STEP to help shape the way FATCA is implemented.

42. Introduction Many major IFC�s have long called for a �level playing field� treatment of them by the major onshore governments and quasi governmental institutions. With FATCA treating all foreign institutions alike regardless of where they are based the USA appear to have granted the request but in reality isn�t FATCA so dramatically different that in effect the USA have �moved the goal posts� on the field of international private banking! The world is getting smaller all the time and tax evaders will soon have nowhere left to hide but what of the genuine honest global citizen simply looking to keep his affairs private? How do he and his trustees play the game when one side appear to be able to make up the rules as they go along!

43. IFC Response IFCs are taking the line that they have done a lot already to demonstrate that they do not support tax evasion: Well regulated financial services industries (including trust business) driving the quality of their professionals and the business they carry out AML legislation that requires them to report to local police authorities where they know or suspect a client or prospective client of tax evasion activity and effectively prevents them from dealing with such clients Information exchange agreements that allow foreign tax authorities, including the US, to gain access to information where there is a clear and valid case to answer Useful but in itself unlikely to be enough: The highly publicised Swiss/UBS controversy added much political weight to this approach in the US and only serve to encourage them to look for more.

44. History Stop Tax Haven Abuse Act Introduced in February 2007 Promoted by Senators Levin, Coleman and Obama. Foreign Account Tax Compliance Draft only March 2009 Promoted by Senator Max Baucus �Hiring Incentives to Restore Employment Act of 2010� (HIRE Act)� March 2010 Contains FATCA as offsetting provisions Comes into force on January 1, 2013

45. US Objectives US government is actively seeking to identify US persons that are evading US tax through holding assets in foreign accounts and offshore structures including trusts and companies FATC proposals aim at engaging Foreign Financial Institutions (�FFIs�) to assist or face significant withholding taxes The US anticipate that the majority of FFIs will enter into �FFI Agreements� with the IRS requiring the FFI to identify and report US persons with interests in foreign accounts held with them

46. FATCA Provisions Effective for payments on or after January 1, 2013 a new 30% US withholding tax will apply to US source income and sale proceeds paid to � FFIs that don�t enter into �FFI Agreements� with the IRS; and �Non-Financial Foreign Entities� (�NFFEs�) unless they � Certify that there are no US owners, OR (If there are) Provide information on those US owners

47. FATCA Provisions Foreign Financial Institution (�FFI�) includes any non US entity that � Accepts deposits in the ordinary course of business i.e banking As a substantial portion of its business, holds financial assets for the account of others � i.e. custodians, brokers, insurance and trust companies Is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest therein (including a futures or forward contract or option) � e.g., mutual funds, hedge funds, private equity funds

48. FATCA Provisions FFI Agreement requires the FFI to: Identify United States Accounts Comply with verification (i.e., some form of external review of compliance) and due diligence requirements Report annually to the IRS information for US Accounts Withhold on US source payments to �Recalcitrant account holders� Comply with IRS requests for further information related to US Accounts Obtain waivers for United States Accounts if foreign law would prevent reporting, or close the account if waiver not obtained

49. FATCA Provisions A Recalcitrant Account Holder is any account holder that fails within a reasonable period to � Comply with reasonable requests for information from FFIs to determine which accounts are US Accounts, or the relevant reporting details Provide a waiver or consent to permit the FFI to report information to the IRS where otherwise it would be prevented by foreign law from doing so US Source income and proceeds to a recalcitrant account holder subject to 30% withholding

50. FATCA Provisions An FFI that enters into an FFI Agreement is known as a Participating Foreign Financial Institution (�PFFI�) FFI Agreement applies to all �Financial Accounts� maintained with the FFI FFIs that are members of the same corporate group even if they don�t themselves enter into their own FFI agreements FFI will be subject to IRS Audit

51. FATCA Provisions US Account means any �Financial Account� held for � A Specified US person as defined for US tax purposes; and An NFFE with one or more substantial US owners Financial Account includes any � Deposit account; Custody Account; Equity or debt interest in the FFI (other than interests which are regularly traded on an established securities market)

52. FATCA Provisions Specified US person means: In the case of individuals � US citizens (generally includes US born individuals) US green card holders US residents Individuals that satisfy the US �substantial presence test� by being present in the US a certain number of days over a three-year period In the case of incorporated entities, generally any entity established in the US subject to a few exceptions

53. FATCA Provisions �Substantial US Owners� of an NFFE means: For a company other than a collective investment vehicle (CIV), any specified US persons that own, directly or indirectly, more than 10% of the equity For a partnership other than a CIV, any specified US persons that own, directly or indirectly, more than 10% of the profits or capital interests of the partnership For a trust, other than a CIV: any specified United States persons treated as an owner of any portion of the trust under the US grantor trust rules; in any other case, any specified United States person who holds, directly or indirectly, more than 10% of the beneficial interests of the trust For a company, partnership or trust that is a CIV, any specified person with an interest in the entity

54. FATCA Provisions Annual Reporting For each US Account report annually to the IRS � Name, address and TIN of US account holder, and in the case of a United States owned foreign entity, name, address and TIN for each substantial US owner Account number Account balance or value Gross receipts and gross withdrawals or payments from account

55. FATCA Provisions FATCA Provisions and QI Agreements Many FFIs holding US securities on behalf of clients have entered into QI Agreements with the IRS in order to receive US-source income at reduced rates of withholding FFIs must enter into FFI Agreements to be able to continue to act as QIs FATCA proposals are in addition to QI requirements Increased information gathering, reporting and withholding also apply to existing QIs FATCA applies to wider FFI group, covers wider range of foreign holdings and whilst withholding is only on US income & sales proceeds reporting is on all foreign assets held in the �US Account�

56. Issues for Trustees Evaluating beneficiaries� interests Beneficiaries use of trust assets Gathering necessary documentation Which beneficiaries? Meeting its reporting obligations Conflict between PFFI obligations and Fiduciary Duties Disclosure of Beneficiary details Closing �recalcitrant accounts� Withholding taxes �recalcitrant accounts� Consideration of whether to dispose of US assets before 2013 Deciding whether to enter into FFI Agreement or not What is the alternative?

57. Timelines & Process HIRE Act enacted March 18, 2010 FATCA provisions effective January 1, 2013 Regulations and guidelines have not yet been determined IRS in consultation process and issued Notice 2010-60 Provides preliminary guidance regarding certain priority issues related to implementation of the Foreign Account Tax Compliance Act (FATCA) (Grandfathered obligations, definition of FFI, identification & reporting of US accounts Many significant issues not yet addressed US Secretary does have discretions available including Verification & due diligence Exemption for categories of US Accounts representing low risk of tax evasion Nature of reporting Impact of aggregation provisions Extent of beneficiaries� interests An opportunity to influence the outcome but little time to get it all done in time!

58. Timelines & Process Considerations Priorities � Identify entities and accounts impacted Assess cost / benefit of entering into an FFI Agreement Opportunity to provide input directly or through industry associations Gather additional information to identify US accounts Consider AML, Privacy, Account Agreements and Account opening procedures Need for systems changes to store additional data, report on US accounts and withhold on �recalcitrant account holders� Identify possible legal impediments � privacy, secrecy, closing accounts Client / employee communications Resources

59. Thank you. Any questions?