Secrecy in private banking under Western siege

By David Sandison, Tax Partner and Leng Harn Szuan, Tax Manager, PwC Services LLP

This article was contributed and first published in The Business Times on 6 January 2012.

If exchange of information pacts are bad, America's Fatca will prove to be quite killing

Tax authorities in many developed countries have been concerned about the erosion of their tax base and have tackled the issue by attacking tax avoidance and evasion through cooperation among themselves.

The main tool for this is the exchange of information (EOI), through their tax treaties or by way of a separate tax information exchange agreement (TIEA). The way it works is to allow the tax authorities to override domestic secrecy or taxpayer confidentiality laws and share information that enables them to build a case against tax offenders.

In March 2009, Singapore announced its commitment to the Organisation for Economic Co-operation and Development standard for the international exchange of information in tax matters. Soon after, Parliament passed a bill to allow, among other things, the exchange of bank and trust information upon due process. This came into operation in February 2010.

So what exactly is an EOI? The OECD model treaty language envisages the sharing of information as is 'foreseeably relevant' to the administration and enforcement of a country's tax laws. Not so long ago, it used to be that tax authorities did not much care about the collection of revenue on behalf of a foreign counterpart.

The doctrine of national sovereignty dictated that a foreign taxman had no business enforcing his tax laws outside of his home turf. This could soon be a thing of the past as the hunt for tax revenue moves up the agenda of many governments. Singapore has always prided itself on the security and integrity of its banking information, and in the eyes of the wealth management industry, banking secrecy remains a top concern.

So will the embracing of the EOI concept detract from Singapore's jealously guarded reputation for banking secrecy? The good news is that there are safeguards to a taxpayer's rights enshrined within the EOI provisions. Treaty partners are not allowed to embark on 'fishing expeditions', ie speculative requests for information that have no apparent link to an investigation.

It also has to be shown that there is sufficient reason to believe that tax is being evaded, and that all other avenues of information retrieval have been exhausted. Nonetheless, the requested country is not allowed to use bank or trust confidentiality rules to hamper the enquiries of their treaty partners.

Singapore has a wide treaty network - there are 31 tax treaties that incorporate the EOI standard as at Nov 30, 2011 - but no comprehensive tax treaty with the US. So does that mean that American citizens intent on avoiding US taxes by parking funds in Singapore are safe from the US Internal Revenue Service?

The answer is a resounding No. The US can still negotiate a standalone TIEA with Singapore and the wording of a standard TIEA is similar to that found in tax treaties. But then, the US already has something more fearsome. US citizens (and in certain cases non-US citizens) should pay attention to the Foreign Account Tax Compliance Act, more commonly known as Fatca.

Essentially, Fatca requires all foreign financial institutions (FFIs) to report to the IRS details of any of their US clients with more than US$50,000 in an account. Disclosure is mandatory unless the FFI wants to suffer a 30 per cent US withholding tax on its and its clients' investment income and gains, and on what are known as 'passthru' (yes, that's how it's spelled) payments which can include income from non-US sources paid to non-US persons.

These withholding tax provisions will take effect from Jan 1, 2014. The alternative is to not hold any US investments and not have any US clients - something that most financial institutions will find commercially crippling, however tempting the thought. Not surprisingly, a number of banks have been lobbying for a change in the rules, while some organisations (eg pension funds, insurers) have been requesting exemption. Their cries have largely fallen on deaf ears. This is exchange of information on steroids. Well, actually, it's not an exchange. It's a one-way street.

Under the rules, FFIs are required to obtain from their US customers, not only their name, rank and inside leg measurement, but also a waiver of the local jurisdiction's banking secrecy laws. From that angle, Fatca appears to be more draconian than an EOI. At the very least, the courts are involved in an EOI request when deciding whether banking information should be given. By asking US customers to grant waivers, Fatca effectively sidesteps the courts and gives the IRS free rein, outside the US.

Terry Campbell, head of Canada's banking association, has reportedly commented that this law is akin to 'conscripting financial institutions around the world to be arms of US tax authorities'. And here is how well it has been received by Jacqueline Bugnion, a director of American Citizens Abroad, speaking to the New York Times: 'The Fatca legislation treats all Americans with overseas bank accounts as criminals, even though most of them are honest, hard-working individuals who happen to be living and working or retired abroad.'

Unfortunately, the story does not seem to end here. China is already licking its lips at the prospect of piggy-backing off the Fatca infrastructure. Even the Swiss attempt at preserving bank secrecy has Fatca overtones, although it has voluntary qualities that Fatca lacks. Its solution is to sign final withholding tax agreements with other countries under which it will levy a withholding tax on income earned on assets belonging to a customer who is a resident of the other country.

It has signed two such treaties so far, with the UK and Germany. Undoubtedly, others will follow. This arrangement allows Switzerland to preserve banking secrecy by forgoing the automatic exchange of information. However, if the withholding tax turns out to be penal, it is not clear whether the customer can volunteer his information as a means of getting off the hook.

Is Singapore likely to sign up to such treaties? Well, unlike most countries, Singapore does not tax income on a worldwide basis. It cares little therefore about what goes on, for instance, in the Swiss bank account of its residents. So the motivation is not there.

It is submitted that the EOI sign-ups were more in response to a stick than a carrot, waved around in the context of treaty benefits (or withdrawal thereof next time round). It is likely that the EOI is as far as it will go. But the reach of Fatca seems inescapable. So the question is whether Singapore is losing its edge in the private banking arena. The answer is that it is comparative. While undoubtedly the EOIs will give rise to some erosion of confidentiality, they certainly do not give carte blanche to other countries to demand random information.

Fatca, well that is something else, but it applies globally, so the erosion, through voluntary disclosure (with a bit of arm twisting), will affect all countries equally. But then, take a look at the alternative havens for your funds . . . What's your verdict?