The so called “Paradise Papers” have once again brought the issue of taxation into the headlines.
The Paradise Papers describes 13.4 million stolen confidential electronic documents relating to offshore structures. These stolen documents were leaked to a German newspaper who proceeded to share them with the International Consortium of Investigative Journalists. It is believed that these documents originate from the offshore law firm Appleby (with offices in Hong Kong and Shanghai), the corporate services providers Estera (Bermuda) and Asiaciti Trust (Singapore), and business registries in 19 tax jurisdictions. Over 120,000 people and companies are named.
Offshore financial structures are typically used for two reasons –
1. Privacy and
2. Tax planning.
We believe that there will always be opportunities for legal tax planning using offshore structures.
When it comes to privacy however – many believe that privacy is dead.
Firstly, let’s talk about tax planning. Taxation has long been a sensitive topic in Indonesia. Indonesia has a long-standing problem with tax compliance. In a country of 260 million people, only about 16 million are registered taxpayers who are required to submit returns this year. According to official figures, of these 16 million, only 11.3 million have actually paid their dues.
The Head of Compliance and Revenue at the Tax Director-General’s office, explained that as of September 30, they had collected 60 percent, or 876 trillion rupiah, of the 2017 target. As a result, the Tax Directorate-General’s office is stepping up its collection efforts. They have reported that in the first 10 months of this year, over 50 people were temporarily jailed for failing to pay arrears.
In March this year, the nine-month tax amnesty ended but only after celebrating the $360 billion dollars in previously undisclosed assets held in Indonesia and abroad. The amnesty was actually meant to be the first step in a wider reform process aimed at increasing the number of taxpayers and improving compliance.
Now, let’s talk about privacy.
For high net worth individuals in Indonesia, Singapore has always been a jurisdiction of choice. But today, those that value privacy not only have to contend with the risk of data leaks but also something called CRS. It was recently reported that Indonesia and Singapore will soon sign a bilateral competent authority agreement (BCAA) to implement CRS. Why is this BCAA so important? It is because 60% of the estimated one quadrillion rupiah (S$103.3 billion) worth of assets kept abroad by Indonesians is believed to be managed in Singapore.
What exactly is CRS? Simply put, it’s FATCA on steroids. After witnessing the success of America’s Foreign Account Tax Compliance Act (FATCA) in tackling the USA’s overseas tax evasion issues, everyone now wants to get on board. In short, the Common Reporting Standard (CRS), which is a global version of FATCA, has emerged.
The Common Reporting Standard (CRS) adopted elements of the Foreign Account Tax Compliance Act (FATCA) to create a worldwide framework for automatically sharing financial account information. Now all the major economies are determined to introduce FATCA-like intergovernmental agreements (IGAs).
There are three primary terms surrounding the Automatic Exchange of Information that need to be understood –
1. The Convention on Mutual Administrative Assistance in Tax Matters (The Convention). This 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.
2. The Competent Authority Agreement (CAA). This is the IGA version of CRS, based on the FATCA Model 1 IGA. It is a bilateral or multilateral agreement to conduct the actual Automatic Exchange of Information (AEoI).
3. 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). This is similar to FATCA but while FATCA is implemented through IGAs, the CRS is implemented through CAA either between two countries (bilateral CAA or BCAA) or more than two countries (multilateral CAA).
Are the news reports that Singapore will sign a bilateral competent authority agreement (BCAA) with Indonesia true? Singapore’s Senior Minister of State for Finance and Law has been quoted as saying that Singapore stands ready to have an Automatic Exchange of Financial Account Information (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. Safeguards considering necessary before any exchange of information can take place.
Singapore’s Senior Minister of State for Finance and Law has told the press that on Singapore's side, these safeguards are in place. Effective the beginning of November, Singapore had already signed BCAAs with Australia, Belgium, Canada, Denmark, Estonia, Finland, France, Guernsey, Iceland, Ireland, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, South Africa, Spain, Switzerland and the UK.
For those that value privacy, the message is bleak. Between data leaks and CRS, privacy is under threat.
Some even say it’s dead. There’s nothing we can do about data leaks / data theft, but the internet is full of advisers who claim they know all the loop holes to avoid CRS reporting. For individuals without US passports or green cards, using US entities within a structure may be effective. The US, which shows no signs of participating in CRS, provides the perfect union of a stable, independent legal system and complete anonymity. While traditional offshore havens from the United Kingdom to the Cayman Islands are marching, however unwillingly, toward greater transparency and financial oversight, the U.S. is arguably the foremost shell-company provider globally. And if proposals for reducing corporate tax are passed by Congress? The US may definitely become the world’s biggest tax haven.