The Tribune

By NEIL HARTNELL

Tribune Business Editor

THE continued G-20/OECD push towards the automatic exchange of tax information poses "a serious threat" to the Bahamian financial services industry, a senior attorney urging this nation to "get ahead of the curve" in responding to their demands.

Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business that the Bahamas would continually face "a moving target" when it came to tax information exchange standards, this in itself making it impossible for financial institutions to plan their business models.

Although unlikely to happen in the short-term, Mr Moree said a shift towards the automatic exchange of tax information - a direction the G-20 is clearly heading in - threatened to undermine the private wealth management sector, the Bahamas' core financial services business, by eroding clients' legitimate right to privacy.

He added that the issue was similar to both the US FATCA legislation, which was effectively requiring the automatic provision of information on US taxpayer clients, and increasing demands by foreign regulators for information on their nationals without supplying evidence of any offences having been committed.

Mr Moree was speaking in the wake of the G-20's June 18-19, 2012, meeting in Los Cabos, Mexico. In their post-summit declaration, the world's most economically powerful nations made clear their determination to push for the automatic exchange of tax information, referencing a report helpfully published in time for the conference by the Bahamas' old nemesis, the Paris-based Organisation for Economic Co-Operation and Development (OECD).

Reiterating its commitment to transparency and "comprehensive exchange of information", the G-20 stated in item 48 of its declaration: "We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate....."

The statement is thus crystal clear on the G-20's intention to push towards the automatic exchange of tax information. This is vastly different from the current global standard, adhered to by the Bahamas, which is to supply tax information upon request - usually under the framework of this nation's close to-30 Tax Information Exchange Agreements (TIEAs).

Designed to prevent so-called 'fishing expeditions' by the requesting country, these TIEAs require that they instead supply specific details, including the name of the person(s) under investigation and their Bahamas-based account information, plus details on the alleged offence committed.

Automatic information exchange, on the other hand, does not require provision of such specific details. Instead, as the OECD's report to the G-20 states, it involves the immediate dispatch of 'bulk' data to the requesting state on all their citizens.

"The automatic exchange of information is understood to involve the systematic and periodic transmission of 'bulk' taxpayer information by the source country (such as the Bahamas) to the residence country concerning various categories of income (eg, dividends, interest, royalties, salaries, pensions)," the OECD report says.

The Paris-based organisation, which is clearly being used by the G-20 to spearhead its tax-related initiatives, attempted to 'hedge' the implications of its report. It included a caveat saying the document "does not suggest a change in the current international standard, which is information exchange upon request". The key word there is likely to be 'current'.

Acknowledging that the document indicated "the goalposts seem to be moving", Mr Moree told Tribune Business: "It appears that the G-20 countries seem to be moving towards a more liberalised regime for exchange of tax information, and in this regard they are specifically encouraging, albeit currently on a voluntary basis, the adoption of a regime based on the automatic disclosure of information.

"While the G-20 countries stopped short of stating that this is the objective in the short-term, it's clear that this subject of automatic exchange of information is a subject that will continue to be pressed in the upcoming months and years."

Assessing the implications for the Bahamas, Mr Moree said: "This is a disturbing trend for a country such as the Bahamas, and this challenge, together with the impact of FATCA in the US, are serious threats to our financial services business.

"While it is readily accepted that there has been a major paradigm shift in cross-border co-operation through the exchange of information, it's quite a different matter to move to a system which would require the automatic exchange of information across the board.

"Both from the point of view of the customer and of the financial institution, the proposal of automatic exchange of tax information is very disturbing and threatening to the current level of business within the jurisdiction."

And tax was not the only issue where such trends were emerging, as similar demands were being made in the general area of regulatory co-operation.

"A related issue, which appears to be attracting the attention of the G-20 countries, is the breadth and scope of requests for information under the current regime," Mr Moree said, "where in certain places or fora, it is now being suggested that information can be requested based on nationality or residence, without providing specific names, account numbers or any other supporting information, including any evidence or offences of wrongdoing being committed."

Asked how the Bahamas and other international financial centres should respond, Mr Moree told Tribune Business it was obvious they would continually be faced with "a moving target" by the G-20 nations when it came to tax information exchange. This inevitably meant that time and regulatory compliance costs would only increase.

"This makes it very difficult for institutions to develop their business models when the rules keep changing," the senior QC said. "The net effect is to marginalise the financial services industry, which is the undoubted intent of the major industrialised countries.

"I think we in the Bahamas must try to get ahead of this curve in an attempt to address the issue rather than being content to simply react to the demands of the G-20 countries and OECD......

"This will undoubtedly affect the private banking sector of the financial services industry, and what is our core product, wealth management."

Looking at the situation from the perspective of Bahamas-based bank and trust companies, Mr Moree told Tribune Business: "It is becoming incredibly costly and difficult for the financial institution to develop the system and technology platform to be able to monitor, and pull together, all this information in order to provide it to foreign governments.

"It's a very bureaucratic exercise, and the wider the scope of information exchange becomes, the higher the volume of work that is required to handle the information and capture it for the purposes of meeting reporting requirements."

And Mr Moree added: "From the point of view of business, clients and potential clients, this [automatic exchange of tax information] further erodes any privacy rights which persons in business are accustomed to expect.

"While the international community has moved to accept the removal of any confidentiality protection where criminal, penal or revenue offences are alleged, it's quite another thing for law abiding business persons to have their names and particulars of their business being exchanged with different countries in the absence of any wrongdoing on their behalf."