FATCA and tax evasion

The United States have set the deadline for Trinidad and Tobago pass the Foreign Account Tax Compliance ACT (FATCA), which they say will help them catch people who hide hundreds of millions of US dollars in offshore accounts annually in an effort to avoid paying taxes.

FATCA is a controversial law, passed by Congress in 2010, motivated by a 2009 scandal in which Swiss bank UBS was fined $780m for helping Americans hide taxable money. While every nation wants to catch tax dodgers, the means employed by FATCA are considered extreme by many experts.

The core of the act is its requirement that foreign financial firms disclose the details of any account worth more than $50,000 that is held by a US citizen. Firms that fail to comply will be labelled “disobedient” and a 30% withholding tax slapped on all their income and asset disposal proceeds from the US.

This would be enough to bar any uncooperative financial firm from capital markets in the US – a very harsh punishment indeed.

Some experts view the act as an attempt to turn the world’s financial institutions into US tax agents. The law not only affects banks but also brokers, dealers, hedge funds, asset managers and insurance firms.

Tax fraud and tax evasion represents a huge problem and affects each and every country and citizen. Many countries have developed schemes to tackle it.

Starting this month in the UK, HM Revenue and Customs (HMRC) will start to receive an unprecedented amount of data on those with offshore accounts in the Crown Dependencies and Overseas Territories – one year ahead of even more data coming in from across the globe, when the Common Reporting Standard comes into force. The HMRC has also opened its Worldwide Disclosure Facility (WDF).

WDF is an online disclosure facility that grants offshore evaders a last chance to settle tax on their wealth in undeclared offshore money or assets in offshore accounts.

There’s no easy deal with WDF as it doesn’t offer any special terms to those that come forward.

Those who do come forward will pay the tax in full, with interest on top, with a minimum penalty of 30% of the tax due for evaders.

Furthermore, they could still face criminal prosecution. Whilst the quality of the information disclosed will be taken into consideration, it is advisable to come forward as soon as possible.

Tax evasion is perceived as money laundering. Money laundering is a crime that takes place in every corner of the globe.

Taking payment in cash is the easiest way to avoid paying tax for a large swath of workers, including builders, handymen, nannies, tutors and gardeners. In a dematerialised monetary system (cashless payments), tax collection would become far easier.

Finance professionals must use their experiences, in addition to talking to law enforcement agencies to make the connection between the act of money laundering and the source of the income.

There are three aspects to money laundering, known as placement, layering and integration.

‘Placement’ is the transfer of the actual criminal proceeds into the financial system. That could be through the purchase of a single premium life policy or a work of art.

‘Layering’ is where a smokescreen is created to distance the illicit funds from their source through layers of real or imagined transactions and/or organisations which is designed to hide the trail and provide anonymity.

‘Integration’ is where the funds come back into the financial system as if from normal business transactions or as investment funds to purchase legitimate assets, e.g. the work of art is sold and the proceeds reinvested in a business, which may or may not be legitimate.

Meanwhile, technology is making it more convenient to pay with cards or over the internet for even small transactions.

An increasing number of debit cards can now be used simply by the user waving them over a contactless reader.

A major consequence of tax evasion and tax avoidance schemes is that governments collect less tax revenue than expected leading to a shortfall in tax revenue.

The money is used to fund many public services and to implement their economic and social policies.

Less tax revenue could mean cuts in public services and a slower economy.

Ultimately, tax fraud and tax evasion are simply unfair. But as the problem knows no borders so a solution will need to be in the form of a concerted, joint effort if it is to be effective.