International Financial Centres : The New Age of Transparency
By Labuan IBFC Incorporation Sdn Bhd
FINANCE
Transparency is THE word used these days , especially since access to information , facilitated by technology , has never been easier . After all one needs to be able to access information in order to “ see ”, thereby creating a transparent situation . In the world of tax , the authorities have to agree to a set protocol on information sharing , and when facilitated by technology , transparency is then easily established .
Someone once said , this new exchange of information protocols amongst nations ( for example , the Common Reporting Standard or CRS ), is almost like a Facebook for competent authorities ! When considered in their abstract form , one can see their resemblance .
All this transparency has led to more questions on the levels of activity , be they operations or management being carried out in jurisdictions where entities have set up their legal presence . In effect , transparency in the tax affairs of a legal entity has naturally brought about questions on the operational / management activities of the jurisdiction where the tax is paid .
It is after all a logical line of enquiry . “ What are your operations in the countries / jurisdictions your entities are set up ?” Except of course , historically there has not been much economic or operational activity conducted in the jurisdictions these entities call home .
Welcome to the concept of economic substance ! The scenario above describes in a simplistic manner the background that has led to some quarters decreeing the death of International Financial Centres ( IFCs ). However , we believe that this new “ operating model ” which is now being accepted globally , only enhances the credibility of IFCs and in no way brings their demise .
IFCs have long been a focus of concerted measures proposed by international and supranational organisations to combat tax avoidance and evasion , with the collection and sharing of tax information on investors in these jurisdictions being a key element . The push for greater transparency has come from several fronts . The United States passed the Foreign Account Tax Compliance Act ( FATCA ) in 2010 , a unilateral regime aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the Internal Revenue Service . Financial institutions that do not report information on accounts with American connections face a substantial 30 % withholding tax .
Meanwhile , the OECD and G20 driven initiative on base erosion and profit shifting ( BEPS ), which started in 2013 , has continued to shine a spotlight on the weaknesses in the international tax regime , with many of the recommendations highlighting BEPS opportunities popularly associated with low-tax ( or zero-tax ) regimes . And although BEPS
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