With openness around tax all the rage, how can one continue to prosper as compliance and disclosure burdens mount?

Long before the Panama Papers saga erupted, tax transparency was a buzzword with which the wealth management industry were familiar. In this article, Clive Shelton, group compliance director, of International Financial Data Services, examines the issues from his firm’s particular viewpoint. The views expressed are not necessarily shared by this news service but we are delighted to share these opinions for debate.

Public outcry about offshore tax havens following the recent leak of the Panama Papers from the offices of Mossack Fonseca has put immense pressure on legislators regarding tax transparency. While public anger about tax issues is not new - look at Google’s recent experience following it tax settlement with HMRC - the scale revealed by the Panama Papers has raised concerns to an unprecedented level globally. The revelations have already led to the resignation of Iceland’s prime minister and made the personal finances of the UK’s top politicians a matter of public record and debate. Now we are beginning to see how it will lead to a new era of international cooperation between governments on tax. 

As this attention translates into government intervention, financial services firms, even those which are used to going below the radar, will have to pay more than just lip service to the matter. The US Congress estimates that the US economy loses $100 billion a year from tax avoidance and evasion. As such, legislators have turned their focus to ensuring financial services firms and their clients pay their way and act reputably in their tax dealings. This is now driving a swathe of regulatory changes in the taxation space.

The growing international acceptance of automatic exchange of information agreements such as the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) has focussed attention on ensuring investors cannot avoid or evade paying the tax they owe.  By collecting and sharing information on tax residency, it is now easier than ever before to track would-be evaders. 

The introduction of the OECD’s Base Erosion and Profit Shifting (BEPS) programme during the course of the next 18 months will crack down on tax arrangements that, whilst legal at the moment, are seen by politicians, the media and the public alike as ethically wrong. The EU has also brought in plans for tax authorities themselves to disclose the tax settlements they make with large corporations operating in their countries.  The hope is that by disclosing this information, it will use the force of public opinion to ensure both tax authorities and firms act ethically when settling tax affairs.

Legislators globally are showing a growing determination to address issues and problems in the international tax landscape. Financial firms will face far more interest from tax authorities in spheres as varied as withholding tax, capital gains tax, treaty benefits and staff remuneration. In this new era of tax compliance, international agreements will expose firms to ever greater regulatory scrutiny and failure to meet these demands risks being very costly both in legal and reputational terms. All this will put increasing pressure on financial data systems to comply with transparency regulations. 
Meeting new regulations

With the requirements to know more about the tax residency of investors, together with a clear trend towards pursuing criminal convictions against tax evaders and those who enable tax evasion, it will become even more important that Know-Your-Customer and Anti-Money-Laundering processes demonstrate high standards, along with the self-certification process for the automatic exchange of information agreements. The collection and safe maintenance of more data and information on clients will be essential.

How this data is used is important for both tax authorities and financial services firms. There is obvious risk in this area: ensuring processes are robust enough to avoid mistakes while adhering to data protection requirements. However, this also presents an opportunity for asset managers to enhance investor service and communications through a tailored approach, including in-depth insight into tax matters and the diversity of tax strategies. 

It remains to be seen whether the BEPS initiative is implemented consistently. If it isn’t, tax legislation will get more complex and further national divergence will appear. Investors may not be eligible for the treaty benefits they have access to now and corporates may need to change their arrangements due to new threshold and Controlled Foreign Company rules. As a result, it may be that asset managers begin to offer products reflecting specific tax profiles. Where currently a fund domiciled in Luxembourg or Ireland may be marketed to investors all over Europe, it is likely that bespoke tax structures will mean that funds domiciled in certain jurisdictions will be designed for investors with tax interests in those countries.

The place of nominee accounts in the investment chain may also change. Are nominee accounts flexible enough to provide firms with both information that satisfies their tax transparency requirements and services requisite to their needs? In the UK, there are already net and gross nominees but this may not be enough in the future as new structures emerge. The number of accounts held directly with the asset manager may increase as a result.
 

Transparency equals technology
In order to process and report all this new data, technology will need to be harnessed. Harnessing technology to retain documentation, ensure controls and quality of an ever growing population of tax and Know-Your-Customer data, as well as being able to report to clients quickly and efficiently will be vital for service providers. With increased interest from tax authorities it is likely that more requests for explanations or data will be needed and administrators who hold this information will need to demonstrate their ability to provide it quickly and accurately.  

It is not just financial firms who are developing new technologies. Tax authorities will develop new systems and data analytics to review and process data. HMRC has begun developing digital accounts in a bid to gain more real-time information on tax matters. It is likely that firms will have to provide more data, more frequently to the tax authorities as a result. In the direct recovery of debt from banks, HMRC is also harnessing technology to recoup tax receipts directly from individual bank accounts.

Is it possible in the future that HMRC will have direct access to a firm’s IT systems?  It would be a radical, but perhaps not unthinkable, development.

As transparency regulations put greater and more complex demands on financial firms, the costs will rise, creating the opportunity for new systems to provide efficiency and savings.  

Outlook: focus on the opportunities
Taxation will continue to grow in importance for financial services firms. With the introduction of BEPS and increased transparency together with more stringent punishments for tax avoidance and evasion, firms need to focus on this area just as legislators, the media and the public are doing. This may also mean greater demands on outsourced service providers such as International Financial Data Services.  

There is likely to be greater focus from clients on the current areas of automatic exchange of information, but asset management firms will also be looking to see who can offer services in new areas that can not only guarantee them efficiency and cost savings, but also security and control. Service providers who can develop technologically savvy services that are robust and efficient will be essential to deal with whatever regulatory demands come along. 

One thing is for sure, the taxman is not going away.