UK
11 March 2015
With countries following in FATCA’s footsteps, how much tax transparency regulation can asset managers take before things go topsy-turvy?
Image: Shutterstock
With a general election on the horizon and a post-crisis economy recovering all too slowly, tax avoidance is an emotive topic in the UK.
Global chains, banking giants and even comedians have been accused on the front pages of newspapers, while politicians have pledged stricter rules and hurried new legislation. But, aside from appeasing the masses, is greater tax transparency a good thing for the UK, and for its asset management industry?
The major industry focus has been America’s Foreign Account Transparency Compliance Act (FATCA), which dictates reporting of any financial account held by a US taxpayer. It puts the onus on offshore managers to disclose this information, meaning implementing new systems, structures and identifiers.
It seems clear that other tax authorities are going to follow suit, and the worry is that UK managers will end up reporting, what is essentially the same information, over and over again.
Mark Davies, general manager of legal entity data provider Avox, says: “There’s going to be a lot of activity in this space, and it’s starting to mirror what we saw with derivative reporting rules. There was a single global mandate agreed by the G20 which resulted in lots of different flavours of the same thing.”
“Clearly, it would be great if there’s consistency between different tax authorities and national requirements, but there’s certainly an expectation that there will be some significant differences.”
There is evidence of the global community pulling together to address this. The UK has already signed up to the Global Account Tax Compliance Act (GATCA), a FATCA-style system for sharing tax information.
GATCA doesn’t provide a single system for tax reporting, but offers a connected network of various currencies and regions, simply allowing information sharing across tax authorities.
“Under GATCA, you’re looking at a process that supports all the international requirements and removes the need for bilateral agreements and transfers,” says Davies.
It’s a simplified landscape, not just for the UK but on a global scale. According to Rob Bridson, financial services tax partner at PricewaterhouseCoopers (PwC), the asset management industry is focused on meeting all manner of tax transparency regulations, including country-by-country reporting, the Capital Requirements Directive IV and Common Reporting Standard agreements, as well as FATCA.
“These represent a significant shift in the information to be collected about the tax paid in various jurisdictions, as well as about individual investors and the reporting required to tax authorities around the world,” he says.
Elizabeth Stone, a partner at PwC, adds to this, pointing out that actually, this is a new challenge for asset managers altogether.
“Historically, the majority of asset managers have refrained from advising their clients on tax matters, but they now have to consider their internal risk and compliance policies in this regard, allocate resource to this area and provide a greater level of support to client facing teams,” she says.
Reporting all the correct information also incurs significant costs for asset managers, not least just to collate all the legal entity data for each requirement. This is where global legal entity identifiers (LEIs) come in to the equation, individual data standards to identify parties in any financial transaction.
The timing of global LEIs has been imperfect—they are pre-dated by FATCA, and have been developed alongside various other transparency regulations. But Davies stresses that in a climate of increased tax regulation, sticking to one LEI is paramount.
He says: “The more identifiers used, the greater the burden, and the greater the overhead for firms in maintaining accurate content. The hope and expectation has to be that global LEIs can be used for tax rules going forward.”
A universal system would also allow firms to make better use of their information.
“Firms have already invested heavily to make sure they’re getting the right information. If the codes can be leveraged, then the effort involved in sourcing the codes, managing the content and maintaining it, will be worth the investment.”
According to Bridson, however, the main concern in the UK doesn’t lie in costs or practicality, but in the irony that the transparency requirements are actually causing a breakdown in client communications.
He said: “In many cases investors are confused by the nature of the new information requests.”
“Investors are asked technical questions about their status under the relevant regulations, in spite of the fact that they are not directly impacted by them.”
Of course, these complications are not exclusive to the UK, asset managers all over the world are grappling with the same complexities. The question is, with a general election coming up in May, what is the UK government doing about it?
Stone explains that the UK actually has the lowest corporate tax rate of the G7 countries and a fairly generous interest deductibility regime, but the last few years have also seen the implementation of stricter tax transparency laws, such as the General Anti-Abuse Rule.
The UK has also signed up to the Organisation for Economic Co-Operation and Development base erosion and project shifting (BEPS) project, another move towards a cohesive international tax system.
Stone maintains, though, that the government should be mindful not to over-regulate and chase asset managers away from the UK.
“While business is supportive of the broad principles of the BEPS agenda, to reduce the opportunity for tax avoidance through exploitation of differences between tax regimes, it will be critical for the government to consult widely to ensure that the UK’s ‘open for business’ agenda is not damaged, and that the proposals do not have a disproportionate impact on the asset management sector.”
Bridson remains confident in the UK’s position with regards to tax compliance, but other jurisdictions are catching up. He says: “In the longer term, it will be a fairly level playing field, but in the short term, compliance in the UK is ahead of many non-EU jurisdictions.”
Meanwhile, Stone believes that even if it’s coping now, the UK still has a way to go before it can be completely comfortable in the international tax landscape.
She says: “In a number of areas, BEPS is expected to significantly alter the international tax environment, so the holy grail of certainty, which business craves, is still a long way off.”
Global chains, banking giants and even comedians have been accused on the front pages of newspapers, while politicians have pledged stricter rules and hurried new legislation. But, aside from appeasing the masses, is greater tax transparency a good thing for the UK, and for its asset management industry?
The major industry focus has been America’s Foreign Account Transparency Compliance Act (FATCA), which dictates reporting of any financial account held by a US taxpayer. It puts the onus on offshore managers to disclose this information, meaning implementing new systems, structures and identifiers.
It seems clear that other tax authorities are going to follow suit, and the worry is that UK managers will end up reporting, what is essentially the same information, over and over again.
Mark Davies, general manager of legal entity data provider Avox, says: “There’s going to be a lot of activity in this space, and it’s starting to mirror what we saw with derivative reporting rules. There was a single global mandate agreed by the G20 which resulted in lots of different flavours of the same thing.”
“Clearly, it would be great if there’s consistency between different tax authorities and national requirements, but there’s certainly an expectation that there will be some significant differences.”
There is evidence of the global community pulling together to address this. The UK has already signed up to the Global Account Tax Compliance Act (GATCA), a FATCA-style system for sharing tax information.
GATCA doesn’t provide a single system for tax reporting, but offers a connected network of various currencies and regions, simply allowing information sharing across tax authorities.
“Under GATCA, you’re looking at a process that supports all the international requirements and removes the need for bilateral agreements and transfers,” says Davies.
It’s a simplified landscape, not just for the UK but on a global scale. According to Rob Bridson, financial services tax partner at PricewaterhouseCoopers (PwC), the asset management industry is focused on meeting all manner of tax transparency regulations, including country-by-country reporting, the Capital Requirements Directive IV and Common Reporting Standard agreements, as well as FATCA.
“These represent a significant shift in the information to be collected about the tax paid in various jurisdictions, as well as about individual investors and the reporting required to tax authorities around the world,” he says.
Elizabeth Stone, a partner at PwC, adds to this, pointing out that actually, this is a new challenge for asset managers altogether.
“Historically, the majority of asset managers have refrained from advising their clients on tax matters, but they now have to consider their internal risk and compliance policies in this regard, allocate resource to this area and provide a greater level of support to client facing teams,” she says.
Reporting all the correct information also incurs significant costs for asset managers, not least just to collate all the legal entity data for each requirement. This is where global legal entity identifiers (LEIs) come in to the equation, individual data standards to identify parties in any financial transaction.
The timing of global LEIs has been imperfect—they are pre-dated by FATCA, and have been developed alongside various other transparency regulations. But Davies stresses that in a climate of increased tax regulation, sticking to one LEI is paramount.
He says: “The more identifiers used, the greater the burden, and the greater the overhead for firms in maintaining accurate content. The hope and expectation has to be that global LEIs can be used for tax rules going forward.”
A universal system would also allow firms to make better use of their information.
“Firms have already invested heavily to make sure they’re getting the right information. If the codes can be leveraged, then the effort involved in sourcing the codes, managing the content and maintaining it, will be worth the investment.”
According to Bridson, however, the main concern in the UK doesn’t lie in costs or practicality, but in the irony that the transparency requirements are actually causing a breakdown in client communications.
He said: “In many cases investors are confused by the nature of the new information requests.”
“Investors are asked technical questions about their status under the relevant regulations, in spite of the fact that they are not directly impacted by them.”
Of course, these complications are not exclusive to the UK, asset managers all over the world are grappling with the same complexities. The question is, with a general election coming up in May, what is the UK government doing about it?
Stone explains that the UK actually has the lowest corporate tax rate of the G7 countries and a fairly generous interest deductibility regime, but the last few years have also seen the implementation of stricter tax transparency laws, such as the General Anti-Abuse Rule.
The UK has also signed up to the Organisation for Economic Co-Operation and Development base erosion and project shifting (BEPS) project, another move towards a cohesive international tax system.
Stone maintains, though, that the government should be mindful not to over-regulate and chase asset managers away from the UK.
“While business is supportive of the broad principles of the BEPS agenda, to reduce the opportunity for tax avoidance through exploitation of differences between tax regimes, it will be critical for the government to consult widely to ensure that the UK’s ‘open for business’ agenda is not damaged, and that the proposals do not have a disproportionate impact on the asset management sector.”
Bridson remains confident in the UK’s position with regards to tax compliance, but other jurisdictions are catching up. He says: “In the longer term, it will be a fairly level playing field, but in the short term, compliance in the UK is ahead of many non-EU jurisdictions.”
Meanwhile, Stone believes that even if it’s coping now, the UK still has a way to go before it can be completely comfortable in the international tax landscape.
She says: “In a number of areas, BEPS is expected to significantly alter the international tax environment, so the holy grail of certainty, which business craves, is still a long way off.”
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