13 June 2018
Since the revelations on government surveillance and data capture by Edward Snowden, journalists have rightfully raised concerns about governments' insatiable appetite for data collection and the resulting encroachment on citizens' civil liberties. In the EU an individual's right to privacy is regarded as a human right in accordance with Art. 8 of the European Convention on Human Rights, and this has recently led to the European Court of Justice (ECJ) striking out the data transfer deal between the EU and the US.
As the ECJ was busy shooting down the privacy pact between the EU and the US, the Organisation for Economic Co-operation and Development (OECD) has continued its work to spread a new international standard for the automatic exchange of information in tax matters under the Common Reporting Standard. This standard borrows heavily from a piece of legislation introduced in the US ('FATCA') following the UBS and LGT scandals to ensure that US taxpayers could no longer hide behind banking secrecy.
However, FATCA pales in comparison with the OECD's Common Reporting Standard, because it only requires information exchange where there is tax at stake, whereas the OECD's plan would require indiscriminate data collection and exchange of information regardless of any tax liability, at least in the context of trusts and foundations. This is achieved through the introduction of a novel concept of 'controlling persons', which was developed in the context of the fight against money laundering.
In the past, the OECD only required information exchange 'as is foreseeably relevant for (…) the administration or enforcement of the domestic laws concerning taxes' (see Art. 26 of the OECD Model Double Taxation Convention: www.oecd.org/ctp/treaties/2014-model-tax-convention-articles.pdf)
The excesses of banking secrecy justify a strong response by democratic governments. However, the excesses of the OECD's response do not seem to have been appreciated. By consigning the link between tax and information to the landfill, the OECD seems to be at odds with the principle of proportionality enshrined in Art. 8 of the European Convention on Human Rights ('There shall be no interference [with the right to privacy] by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others').
The need for a balanced approach in this area became manifest in the run up to the adoption of the 4th EU Anti-Money Laundering Directive. The draft regulation approved by the MEPs on 11 March 2014 required the indiscriminate publication of the identity of beneficiaries of private holding structures (such as trusts) in national registers. After intense lobbying by the UK government and professional bodies (in which Withers played an active part), the final version of the 4th Money Laundering Directive only requires a disclosure of the parties to a trust 'when the trust generates tax consequences'.
Over 1 million Britons live in the EU, and many more have assets in the EU. A number of EU Regulations (such as the Brussels I Regulation on the jurisdiction and enforcement of judgments, or the Brussels IV Regulation on successions) make express reference to trusts so that, according to these regulations, Britons may subject their EU property to English law (which makes wide use of trusts).
As a major trust law jurisdiction and a full EU Member State, the UK has a strong interest in ensuring that trusts are respected throughout Europe. However, a reading of the new rules and the underlying policy statements show that a number of continental European jurisdictions and EU Member States have effectively declared war on trusts as an expression of an hostile legal tradition. CRS is like a Trojan horse in this respect, in that trust law jurisdiction will volunteer information that partner states will use to shoot down trusts.
Regardless of these developments, the OECD appears unrepentant in its quest to enforce what many practitioners believe to be an excessively wide standard of automatic exchange of information.
Our firm remains committed to creating a fair balance between the legitimate interests of governments to levy tax, and the legitimate interests of individuals to privately maintain their personal affairs and we will continue our lobbying activity in this area.