With the UK recently announcing an arrangement with the crown dependencies, there are fears that the move to automatic tax information-sharing agreements will have unhappy consequences

Top of David Cameron's stated agenda for the G8 summit on 17-18 June was a move towards tax openness and transparency – part of a political campaign that came into the media spotlight last year when it was discovered that large multinationals such as Google and Starbucks had avoided paying large sums of tax in the UK. But lawyers in offshore jurisdictions are divided as to whether the UK's calls for automatic tax information exchange, hot on the heels of the US Foreign Account Tax Compliance Act (FATCA), will have a positive or negative impact either on or offshore.

What is clear is that this move towards global tax information exchange is well underway, with more governments signing up all the time – with the exception of China, which has sufficient economic clout not to feel pressured to fall in line with what the US or any other jurisdiction might demand. 

"Either you surf the wave, or the wave crashes over you," says Andrew Corlett, a partner at Cains in the Isle of Man. He believes the creation of "architecture to support growing globalisation" is largely a good thing. "There's a growing sense that taxation has to be fair, and it has to be collectible. I think the issue is not the concept, but cost or proportionality," he says, pointing out that businesses need one global model, a system they can populate for various jurisdictions. On this point, most agree.

Hazy details

What is less clear is the impact on the UK treasury of the UK version of FATCA, of which much of the detail is yet to emerge. On this issue, many are sceptical. "I don't think it will raise anything like the sums that people are suggesting," says Peter Tarn, a partner at Harneys who divides his time between the Caribbean and London. 

"The assumption that there are billions sitting in bank accounts in the British Virgin Islands is just wrong. It's not a banking centre. For those sums to be reached, half of it would have to be UK taxpayer money that's the result of tax evasion. Most of it is not UK, nor even European, in source. A tiny percentage of it is UK-sourced, let alone not legitimate." 

Tarn also has concerns that the cost of compliance will outweigh any revenue gain. And he points to the risks inherent in large-scale data collection and the potential for cyber criminals to access private information. 

Ed Stone of Collas Crill, who is based in Jersey, points out that, for some Latin American clients, there is a very real kidnap risk if it becomes widely known who has large amounts of wealth. "It depends what's going to be disclosed. If it's disclosing the ultimate beneficial owners then people will be concerned," he says. "For some clients it's about shielding identity, not tax." 

Getting political

Many offshore lawyers stress that the agenda is very much political – with people busily pointing fingers at offshore jurisdictions, rather than examining their own affairs. According to David Cooke, head of Conyers Dill & Pearman's Bermuda office, the onshore jurisdictions have "got the thin edge in and now they are trying to blow the door open. They are saying all of a sudden 'we want disclosure of ultimate beneficial ownership' – stuff that the UK and the US don't do themselves."

Cooke's concern is that, if something is imposed on some jurisdictions but not uniformly taken up, this will fuel a drift of capital. "Perhaps – picking randomly – places like Singapore [will benefit]," he says. "But those under the crown rule, the British dependencies, will suffer."

He adds: "It seems to be a political exercise. In Bermuda we've never had corporate tax or income tax; we finance ourselves differently. They want to do away with competition. But there are many free market thinkers onshore who think these places are good for the world because they introduce competition." 

Cooke suspects that this general movement towards greater transparency in tax affairs will benefit two ends of the spectrum – those jurisdictions that are well regulated, and those that choose not to comply. Those that lie somewhere in between these two camps will stand to lose, he says. 

Tarn agrees that it can be hard to "get traction" with a story about how offshore centres add value. "The problem, in terms of public perception, is that the gap between tax evasion and tax avoidance is being narrowed daily. It is not legitimate to say in the UK 'I've paid taxes according to the law'. That is the environment now." 

Tom Maher, a director at Dougherty Quinn on the Isle of Man, is more positive about the impact, believing that such agreements will help tax authorities uncover more revenue by capturing what he describes as "legacy business from the 70s and 80s". But he's also quick to point out that in the Isle of Man "there won't be much to find. I think it will hit the big multinationals more than the offshore islands," he says. 

Off balance

For others, the main concern is whether or not the playing field for financial centres across the globe will end up less level than it was before. According to Edward Devenport, a partner at Mourant Ozannes, based in Jersey, this is the biggest worry. "Maybe there will be similar financial centres where the burden won't apply," he says. "I'm mostly talking about what would loosely be called offshore centres: Luxembourg, Singapore, Delaware." 

He also notes that it is not in the interests of the UK treasury if business is driven away from its crown dependencies or overseas territories. "The impact may be broadly negative," he warns. "And the sort of business that might move as a result of there not being a level playing field is not necessarily illegitimate." 

Ogier's group CEO Nick Kershaw says the UK and US FATCAs are no great threat towards his business or the jurisdictions in which it operates – Jersey, Guernsey, Cayman, the British Virgin Islands and Luxembourg. But he believes that there is a gulf between the perception of what happens in offshore jurisdictions and the reality. 

"There's a misconception that there's a whole world out there that operates in a veil of secrecy. Maybe that was the case 20 years ago but it doesn't exist now," he says, stating confidence that the developments will lead to more business in the more highly regulated jurisdictions that do not come with associated reputational risks. 

Financial X-rays

But not everyone is in agreement on this point. Richard Hay, international tax partner at Stikeman Elliott, shares many of the concerns about competitiveness, cost and privacy. He also points out that what is being termed at the moment UK FATCA (it doesn't yet have a formal name) provides "a net worth snapshot of the entire value of assets", which he describes as an "X-ray of financial affairs, including dividends and interests".

"This is unusual. My reticence is that the UK does not tax net worth, only on death. It's quite revealing information, so it may degrade the appeal of the UK," he says, describing US FATCA as "draconian in design". What the UK has done is apply the same quite obtrusive system to its dependencies and it seeks to do that at G8 level, he says. Hay joins in the chorus of concerns about the creation of a playing field that is effectively less level than before, adding: "The US lags corporate transparency standards by nearly a decade."

Most voters see this as an attack on havens that shelter the multinationals and the rich when the reality is much more prosaic. And all agree that these agreements will lead to a significant extra cost of doing business.

"Flows of funds are plummeting around the world. If those flows are loaded with extra cost or effort, if there's extra friction, it will cause a migration of clients off the UK platforms, off the offshore territories and crown dependencies," warns Hay, whose summary of the situation is quite chilling for UK plc. "These moves are widely marketed as a means of closing the budget gap. There's no way that these enhanced budget collections will close that gap. But it would be political suicide to focus on expenditure." 

Yet, as things stand, the outcome remains to be seen. According to Nigel Weston, a partner at Walkers in Jersey, we'll really only be able to tell the impact in three or four years' time, once a couple of tax years have passed. He and his colleagues say timing will be key – if it takes some jurisdictions, for instance, 10 years to sign up. "It is progress from the perspective of those trying to achieve these changes, but I think there will be a limited return," he concludes.