FOR effective crackdown on tax avoidance by UK resicents parking funds overseas, a group of MPs has suggested that the UK should seek to introduce automatic information sharing arrangements with tax authorities abroad.

The International Development Committee said that rather than entering into bilateral agreements with a range of jurisdictions, the government should instead establish legislation based on the US Foreign Account Tax Compliance Act (FATCA). It should also use its international influence to encourage other countries to replicate the same.

A model agreement on FATCA was published in early August 2012 between US and five European states aiming at preventing tax evasion by US residents using foreign accounts. By introducing reporting requirements for foreign financial institutions, which do not collect and report this information can be subject to a 30% withholding tax on their own US source income and sales proceeds.

However unlike FATCA, which applies to tax authorities outside of the US, the Directive does not apply to tax authorities outside the EU.
The report said that capital flight, or removing assets from a developing country for storage overseas, was a severe problem for those countries; with illicit capital flight for the purposes of tax evasion totaling an estimated $1 trillion a year. Existing understandings for acquiring information from the applicable offshore jurisdictions was complex, concerning the making of a formal request with a consequent administrative burden.

The UK Government claims to support automatic exchange of information in principle but has expressed some concerns about the possible burden on businesses and financial institutions, as well as in respect of taxpayer confidentiality.

The report also recommended that the Government carry out analysis of the likely impact of its new controlled foreign company (CFC) rules "as a matter of urgency". These "anti-tax haven" rules, which the Treasury has said will make it easier for companies to assess whether profits they make from foreign subsidiaries, are liable to be taxed in the UK, have been condemned by charities and NGOs.

The rules are intended to capture companies which synthetically redirect UK profits to low tax territories or other favorable overseas tax regimes to reduce their UK tax liabilities.
The new rules, which are due to take effect in January, will only apply to companies operating in the UK which the Committee said would make it easier for those operating in developing countries to use tax havens.