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Paradise Lost

Updated: 16 Dec 2017

To many people, sun-kissed beaches lapped by the clear blue waters of the Caribbean form a vision of paradise. Yet for the rich and famous they are more than just a playground, as many of these small islands also provide a safe haven for their riches. The area is susceptible to violent storms, however, although the latest threat comes not from the swirling winds of the Atlantic but rather from international indignation following the release of the Paradise Papers.

Like the Panama Papers before them in 2015, these were leaked to Germany’s largest daily newspaper, Süddeutsche Zeitung, and thence to the International Consortium of Investigative Journalists. No longer is attorney-client privilege deemed sacrosanct it seems, as these 13.4 million confidential electronic documents relating to offshore financial structures are believed to originate from the offshore law firm Appleby (with offices in Bermuda, Hong Kong, Shanghai and elsewhere), along with corporate services  providers Estera (Bermuda) and Asiaciti Trust (Singapore), and business registries in 19 tax jurisdictions. 

Among the more than 120,000 people and companies named are the rich and famous, as well as the politically connected. All seek the same thing, to maximize their holdings by reducing their tax liability to the legal minimum, while at the same time maintaining as much privacy as possible about their financial affairs. Winners of major lotteries can attest to the essential nature of the latter course of action, but in today’s world of political manipulation, whether real or imagined, privacy is increasingly confused with the shadowy world of intrigue.

There will always be a need for tax planning, both to safeguard assets in the present and their inheritance in the future. Today, inheritance tax in the UK, for example, is 40 percent of all sums above the tax threshold.  Those who find it hard to swallow that assets acquired from savings after tax should themselves be subject to additional tax at a later date, can hardly be blamed for seeking a more equitable solution. And unlike humans, financial vehicles do not die. 

In our immediate area, it is no secret that Indonesia has long had a problem with tax compliance. Official figures suggest that only some 35 million out of an adult population in excess of 160 million are registered taxpayers, while of these less than 12 million have actually paid their dues in line with income and assets.  A nine-month tax amnesty that ended in March saw the declaration of around USD 360 billion of previously undeclared assets held in Indonesia or offshore. Yet these assets were declared by under a million taxpayers in total, of which less than 200,000 had never filed a tax return before, prompting Indonesian Finance Minister Sri Muyani Indrawati to suggest that in her opinion ‘too few had joined the tax amnesty program.’ For many who did, it was from fear of being caught by implementation of the Automatic Exchange of Information (AEoI) in 2018.

The AEoI, or better known as the Common Reporting Standard (CRS) has been described as FATCA on steroids. For the uninitiated, the Foreign Account Tax Compliance Act (FATCA) was introduced by the US government in 2010 to tackle its own overseas tax evasion issues. While the CRS has adopted elements of FATCA to create a worldwide framework for automatically sharing financial account information, there are three primary terms that need to be understood:

The Convention on Mutual Administrative Assistance in Tax Matters (The Convention) is a freestanding multilateral agreement designed to promote international co-operation for better operation of national tax laws, while respecting the fundamental rights of taxpayers.  It covers the exchange of information, simultaneous tax examinations, tax examinations abroad, assistance in recovery and measures of conservancy, the service of documents, and joint audit facilities.

The Competent Authority Agreement (CAA) is the inter-governmental agreement version of CRS, based on the FATCA Model 1 IGA, and may be a bilateral or multilateral agreement to conduct the actual AEoI.

The Common Reporting Standard (CRS) is also known formally as the Automatic Exchange of Information (AEoI) or informally as the global version of FATCA (GATCA).  Although similar to FATCA, the CRS is implemented through CAA either between two countries (bilateral CAA or BCAA) or more than two countries (multilateral CAA).

Like many other countries around the world, both Indonesia and Singapore have signed up to CRS implementation. Moreover, Singapore reportedly stands ready to have an AEOI relationship with Indonesia, as soon as Indonesia is ready.  Apparently the readiness refers to putting in place the internationally required confidentiality and data protection safeguards considered necessary before any exchange of information can take place. These are already in place on the Singapore side and it has already signed BCAAs with a whole range of countries from Australia to the UK, which are effective from the beginning of November.      

With some 60 percent of Indonesian offshore assets believed to be managed in Singapore, times look bleak for their beneficial owners, as between data leaks and CRS all hopes of secrecy seem dashed. Yet salvation may be at hand, for the US has shown no inclination to join CRS and has yet to even sign any reciprocity agreements under FATCA.  Already arguably the world’s foremost shell company provider, major corporate tax cuts by Congress could see the US poised to take over as the world’s leading tax haven. Is this all part of a cunning plan to make America great again?  

Joking aside, the adoption of CRS will likely make it more difficult for the ‘bad apples’ that exist in any group of humanity to launder their ill-gotten gains. That and more open explanation of the benefits of legal offshore tax planning may help quell today’s indignation. In reality though, the answer is quite simple, a standard tax rate the whole world over and a more equitable distribution of wealth. But as we all know, that’s never likely to happen, not even in paradise.