In years gone by many offshore tax structures relied upon the fact that a person’s local tax authority didn’t know that they held cash or other income producing assets in an offshore jurisdiction. The income was not disclosed upon a domestic tax return and life went on – the local tax authority was none the wiser.

Then came 9/11 and the global economic crisis in 2008. Suddenly for a variety of reasons governments wanted to know where amounts of cash and assets were held by their nationals in offshore bank accounts. They wanted to see flows of potentially dirty money and they wanted to tax offshore tax avoiders to bolster the dwindling coffers.

In 1998 the OECD (see earlier blogs) started off a process of examining tax havens and the negative impact they have on world trade. They identified a number of jurisdictions which had tax regimes which exhibited worrying hallmarks such as lack of transparency, low or non existent income tax rates, and also limited banking regulation. These jurisdictions were listed on ‘black’, ‘grey’ and ‘white’ lists. Those on the black list had to meet various criteria to lose the badge of ‘tax haven’. Those on the grey list had promised to do some good things to get on to the white list but hadn’t quite got there.     The main way of getting off the black and grey lists was to enter into a certain number of tax information exchange agreements or TIEAs. We will return to the politics of the TIEA shortly.

A normal full double tax treaty includes an article covering the exchange of information. It is an implicit part of an agreement between treaty partners that they will share information with each other to allow the better collection of taxation and the better enforcement of tax laws.

The TIEA is an agreement that is reached between two jurisdictions to share information in the absence of a wider double tax treaty. There are a number of ways in which the information is shared. The first is by information upon request. This means that one jurisdiction has to ask the other for specific forms of information or about information on a specific person. In some TIEAs information is exchanged only upon request, and that request is only accepted where the requesting jurisdiction can provide specific details to demonstrate the need for the information. The second manner of exchange is spontaneous information exchange – this is where the one authority deems information to be of use to the other jurisdiction and shares it without any request. The final mechanism is the automatic exchange – this is similar to spontaneous, but it is more mechanistic in its approach. The type of information exchange will be pre-agreed and will be exchanged as a matter of course.

The jurisdictions seeking to lose tax haven status sought out some interesting partners to sign TIEAs with – Greenland was the most interesting, and has led to some commentators ridiculing the OECD Harmful Tax Practices project as meaningless. When a tax haven can lose its status by signing TIEAs with a minnow like Greenland, one finds it hard to reach a different conclusion. As we stand today there are no jurisdictions on the black list and very few on the grey list and in reality there are still a number of tax havens that need some attention.

The TIEAs aren’t the only source of information. Pressure is being placed on the banks, on the Swiss government and on other jurisdictions to open up their information flows to treaty partners. The EU has introduced mutual assistance directives amongst its membership. The UK has signed up to a number of TIEAs of late, including the Isle of Man, Jersey, Guernsey and the British Virgin Islands. Whether or not the TIEAs are doing the job perfectly or not, there is more information flowing and HMRC is getting its hands on it.

So once HMRC has all this information what is it doing with it? Well they are working through it slowly and steadily. Personal tax enquiries are now routinely opened where individuals forget to declare a bank account. This information is provided by the banks and HMRC work to cross reference the account with a tax return. Similarly you have VAT information being shared by other EU states with the UK. Where a sales list doesn’t tally up with the VAT return of the UK member of the supply chain a phone call is made to find out why. You can expect more of the same – targeted tax audit activity.

Information exchange will get better, more efficient and effective, and the OECD and G20 will no doubt begin to set higher standards for TIEAs and encourage jurisdictions to continue to sign up to more and more TIEAs if not full double tax treaties. Information exchange will be encouraged to be performed spontaneously rather than on request. The world is definitely changing, and if your offshore tax strategy relies upon the UK tax authorities not finding out about your secret stash of cash in the Caribbean, then you need to begin to think again....