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Will Offshore Tax Zones Survive FATCA?

Article Summary:

Analysts predict that many small offshore tax zones are likely to suffer and eventually close up shop because of the U.S. Foreign Account Tax Compliance Act, as its regulations put unnecessary costs and demands on small foreign financial institutions and companies worldwide.

Photo Credit: Investement Europe

Original Article Text From Emerging Markets:

Pressure on Offshore Tax Zones Rises

US efforts to clamp down on tax evaders will significantly add to the cost of doing business in offshore zones as they create requirements that some offshore financial centres might find hard to meet, officials said on Thursday.

The implementation of the new US Foreign Account Tax Compliance Act (FATCA), “is a transformational step”, raising costs and demands on foreign financial institutions (FFIs) and companies worldwide, Isle of Man Minister for Treasury Eddie Teare told Emerging Markets.

FACTA will require FFIs to report details of accounts held by US taxpayers or the foreign entities they may own to the Internal Revenue Service (IRS).

This will require a heavy investment in information technology and manpower, to comply with legislation that, Teare said in an interview, “will increase the cost of doing business to the extent that some financial centres may even decide the burden is too much to continue”.

A UK Treasury study has calculated the cost of FACTA compliance alone could add £5-8 billion a year to corporate costs.

UK dependency Isle of Man is among FFIs working to enter “special agreements” with the IRS by 30 June 2013; FACTA will then come into full force a year later. Switzerland and, most recently, the UK have already signed.

Unusually, Isle of Man is negotiating alongside Jersey and Guernsey to coordinate their response on “matters of common interest”.

“We’ve had these challenges before and we’re nimble,” Teare said. “We’ve never built our financial service industry on tax avoidance”.

Isle of Man worked to draft more transparent tax agreements with the OECD, and “in a perfect world it would be nice to get credit for what we done.”

But some more controversial FFIs – such as British Virgin Islands, whose registry is favoured by resources companies active in Africa – are not members of the World Bank and Commonwealth-convened Small Countries Forum, which meets in Tokyo on Saturday. Those more opaque jurisdictions’ response to FACTA is unclear.

Advocates of more transparent registries want a level-playing field. Falkland Islands Legislative Assembly member Roger Edwards observes that shipping flags of convenience may be changed regularly, depending on the demands made of ship-owners. The same will apply to offshore financial centres if everyone doesn’t comply.

The Isle of Man – supported Small Countries Financial Management Centre is helping poorer countries who are developing financial centres to meet the challenge and to get poorer countries to get off blacklists and to comply with anti-money laundering measures.

More resources are needed to promote these aims, SCFMC executive director Tim Cullen, said. “There is government enthusiasm” for moves to strengthen small states, and the World Bank is setting up a multi-donor trust fund to help strengthen these jurisdictions. But small countries may need more.

“There is a limit to how much of the [legislative] burden we can shoulder on our own,” Teare said.

Link to Original Article:

From Emerging Markets

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