Over the last two decades, places like Cayman and the Channel Islands have built world-class financial centers by playing host to multinational corporations and partnership vehicles. And because politicians would much rather cast a net on tax revenue lost abroad than raise new taxes at home, the post-crisis era has seen big countries really ratchet up their scrutiny of offshore financial centers.
In our special report on fund domiciles this month, we report that mainland governments have limited options when it comes to clamping down on offshore activity, at least when it comes to the private funds business. But given the unprecedented level of coordination taking place in the international community now around tax policy, the industry was never going to be entirely immune.
Earlier this year the Organization for Economic Co-operation and Development (OECD), a rich country think tank, introduced a global tax information exchange that makes it much easier for tax authorities to share information on foreign account holders. Under the framework, GPs will report information on foreign LPs to their local tax agency, who will in turn share the information with those investors’ home tax authorities. Impressively, this 'Common Reporting Standard' has already received the support of 45 countries.
It all sounds very familiar – because it’s the exact same concept as that behind the US Foreign Account Tax Compliance Act (FATCA). No wonder, then, some commentators have dubbed the project ‘GATCA’ (to reflect its Global remit).
Like FATCA, the CRS represents a major compliance headache. Lawyers, accountants and other service providers will need to be hired to figure out if feeder funds, co-investment vehicles, offshore holding companies and various other entities that sit in any given fund structure are captured by the reporting rules. To be fair, the OECD recently released some follow-up guidance here, but from what we’ve gathered, not many GPs are aware of it (nor may like the fact it comes at a price).
To be sure, offshore domiciles are already planning their responses to the OECD project. And some, like Cayman, have gone so far as to update their local laws to add GATCA compliance to their FATCA reporting frameworks. But GATCA is by no means as fleshed out as it needs to be for GPs to comfortably meet its aggressive implementation timeline: firms have to start collecting information in 2016 for a 2017 reporting deadline.
It’s also worth mentioning that some doubt just how effective OECD efforts can be without some sort of enforcement mechanism. Already the group’s Base Erosion and Profit Shifting (BEPS) project is being questioned by those who never put much stock in international agreements (that tend to fail by countries putting their own interests over the collective good). And it’s not entirely clear what non-compliance with the CSR reporting system means.
Still, there's no doubting the resolve of OECD countries to try and recoup lost tax revenue. And now that the US, with FATCA, has proven the model could (theoretically) work, expect these global initiatives to gain added momentum.