The old adage that "money makes the world go round" might soon be replaced with another concept: information. More specifically, tax and financial information. Details regarding the financial affairs of individuals are now readily transferable across countries and institutions. This has inevitably captured the attention of taxation authorities.

Over the course of a decade, what began as a gentle discursive foray into transparency and voluntary information exchange has steadily spiralled into an onslaught of automatic information exchange agreements between various taxation authorities. Across Europe, the United States and an increasing number of developing countries, governments are putting in place new initiatives to try to combat non-compliance with tax laws and the non-disclosure of assets by their citizens.

There are a number of ways in which these developments are affecting international financial centres (IFCs), one of which is the US Foreign Account Tax Compliance Act (FATCA), possibly the most ambitious tax compliance programme attempted to date.

International Financial Centres

IFCs are jurisdictions with low tax rates and features that make them attractive investment locations. They improve the international movement of capital and provide an efficient base for some of the world’s largest investors and banking institutions.

In recent years, IFCs have increasingly been put under the microscope and pressured to change their laws, disclose greater quantities of information or work with international taxation authorities. For instance, in the United States, the Stop Tax Haven Abuse Act (HR 1554) was introduced in April 2013 to implement various measures intended to reduce tax evasion through offshore tax havens.

The UK Government has already entered into agreements for information exchange with various countries including Aruba, the Bahamas, the British Virgin Islands, Grenada and Liberia, and this list is growing by the day. A number of initiatives have been introduced to bring in resistant UK taxpayers, thereby reducing the country’s budget deficit. For instance, the Liechtenstein Disclosure Facility, which allows UK taxpayers with unpaid tax linked to investments or assets in Liechtenstein to settle their tax liability, is expected to yield £3 billion.

In addition, through the EU Savings Directive, the EU Member States have agreed to automatically exchange information with each other about customers who earn savings income in one Member State but reside in another. There is speculation that the Savings Directive could be extended to catch wider classes of income and ownership structures, including trusts and offshore companies.

An EU initiative to broaden the automatic exchange of tax information (modelled on FATCA) was signed on 9 April 2013 by France, Germany, Italy, Spain and the United Kingdom. Within days of signing, Belgium, the Czech Republic, the Netherlands, Poland and Romania also announced their intention to take part in the programme. One innovation in this latest push is a proposal to include information on assets held in trusts and foundations, as well as in savings accounts. This multilateral European system will bring further credence to one global standard of information exchange.


Nowhere is the advancement of systematic information exchange more evident than FATCA. The objective of FATCA is to combat the non-reporting of information and consequent tax evasion by US persons by enabling the Internal Revenue Service (IRS) to extend its authority overseas.

FATCA imposes an obligation on non- US financial institutions to report certain information on US account holders to the IRS. To ensure compliance, FATCA comes armed with a big stick: if a non-US financial institution does not comply with the reporting requirements, a 30 per cent US withholding tax will be imposed on all US payments to that institution.

Non-compliance with FATCA is not really a viable option as it is almost impossible for businesses to avoid some financial connection with the United States. This is particularly true for financial institutions that are based in small IFCs for whom international regulatory compliance can be a good way to counteract negative views of institutions that operate out of such jurisdictions.

Governments from all over the world have entered into negotiations with the US Government to try to find an approach that would satisfy the objectives of FATCA without breaching national law on issues such as data protection.

Following discussions between the United States and a group of European countries (France, Germany, Italy, Spain and the United Kingdom), two forms of intergovernmental agreements have now been prepared: Model I and Model II. Under Model I, financial institutions situated in the relevant jurisdiction will report certain information to their local taxing authority, which will in turn report that information to the IRS. This ensures compliance with any relevant local law and, in theory, makes it easier for the financial institution to comply with FATCA as reporting to a local body is generally easier than reporting to the IRS. Under Model II, financial institutions report directly to the IRS; the foreign government only becomes involved if there is an exchange of information request from the IRS.

The intergovernmental agreements also provide for automatic reciprocal information exchange, which means that both the United States and the country with which it is contracting could potentially benefit from entering into the agreement.

There are now more than 50 different countries in negotiations with the United States to put these agreements in place before the reporting requirements of FATCA come into force. Interestingly, Guernsey, the Isle of Man and Jersey chose to act together during their negotiations with the United States, which is likely to give them more negotiating strength. By taking the same approach as each other, they also guaranteed their continued competitiveness. As these IFCs are closely connected geographically, it can often be easy for clients to switch jurisdictions if any one jurisdiction becomes uncompetitive. By working together to ensure relative similarity, each of the jurisdictions can benefit financially.

FATCA is still evolving and the introduction of new intergovernmental agreements ensures that, from an international perspective, it will continue to evolve. Small IFCs would be well advised to act together when approaching the United States to try to enter into intergovernmental agreements. This level of cooperation will show their commitment to the international goal of tackling tax evasion and aid any financial institutions situated within their borders in complying with FATCA.

Unless a financial institution has no connection whatsoever to the United States, a certain amount of diligence will need to be done if only to ensure that FATCA itself, or one of the intergovernmental agreements, does not apply. The provisions of the regime are broadly drafted to catch entities and individuals who would not think they were necessarily a financial institution or a US person. For this reason, until FATCA compliance has been considered and dismissed, it should not be ignored.

The Future

Although tax laws will always differ across jurisdictions, the means by which taxation authorities can enforce their laws will increasingly conflate and become dependent on international cooperation between taxation authorities.

The use of intergovernmental agreements for the enforcement of FATCA shows that governments can, and will, find a way to overcome any domestic legal obstacles to tax information exchange. The practical financial incentive for global information exchange cannot be overstated, particularly during a time of financial austerity and crippling national debts.