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Dan Neidle @DanNeidle
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How reliable is the @TaxJusticeNet's Financial Secrecy Index? I've been through the UK entry and the answer is: not very. Here's why.
There's a large number of factual mistakes, generally down to mis-reading of sources or use of inappropriate or out-of-date sources.
A more serious problem is the criteria, which push policy preferences that have little or nothing to do with financial secrecy.
I pointed out three mistakes to TJN a couple of months ago. They fixed two - weird reference to the "Anglo Saxon" legal system and a database error re. accountant employees. The third (a weird howler re. company types) was not fixed.
The source document is here:…. Note that only items with a * contribute to the scoring.
My list follows - and be warned, it's quite long...
Out of date source. A 1982 blacklist is beyond irrelevant.
Error: UK personal income tax summarised as "No, personal income tax is only levied on a territorial or remittance basis.". As the notes point out, only true for non-doms.
It seems this is on the basis that they look to the "weakest link". But lots of jurisdictions have tax concessions for foreigners entering the jurisdiction. The FSI assessments for France, Spain etc don't downgrade because of this. Why is the UK different?
More fundamentally, what has the scope of personal income tax got to do with financial secrecy? This is just a policy preference.
Error: treatment of dividends etc received by UK natural persons refers solely to treatment of non-doms. And why is this relevant?
There are then a succession of errors in the narrative treatment of the tax system. Not relevant to the scoring, but relevant to the degree of rigour and fact-checking of this report.
Error: it's said to be a myth that double taxation treaties are needed to avoid double taxation. Nonsense. I spend much of my life advising on double tazaxtion treaties - it's news to me. And what's the relevance?
Error: "In practice, any UK company which has its 'place of Effective Management' outside the UK will be non-resident for UK tax purposes". This is so incomplete as to be misleading.
Place of effective management can only be moved to countries where the UK has a double tax treaty. Hence you can have a UK incorporated/German resident company, but not a UK incorporated/Jersey resident company. Won't avoid tax. Wrong - and also irrelevant.
Error: "Furthermore, there are special rules governing the taxation of partnerships that may result in tax exemption." is nonsense.
A foreign person investing in the UK who is not trading is not taxed on non-UK source income. If they invest through a partnership then that result naturally does not change. That is not an exemption - it simply reflects what a partnership is. There are no special rules.
And why is this relevant?
Error. "In addition, there are indications that UK companies can be used for trade reinvoicing through Agency Trading Companies benefitting from using a UK entity as a nominee ". No clue what this is talking about.
The author clearly thinks an "Agency Trading Company" is a type of entity when it isn't (see below). Whatever is going on sounds like fraud.
Error: the modified debt cap means multinational groups won't get a deduction for intra-group debt unless it is backed by external debt. So the structure here either doesn't work (deduction denied) or isn't avoidance (because it's just an on-lending of external debt)
Error: Someone has missed the recent caselaw on film partnerships. Someone doesn't understand how REITs are taxed.
So, all in all, a trot through the UK tax system that has little/no relevance to financial secrecy, and is riddled with errors. Now back to the scored items:
Relevance: various taxpayer reporting scheme stuff. Unclear connection to financial secrecy. Again, a policy preference.
Likely error. CRS refusal/conditions. A number of items are listed as unknowns. I have no reason to believe the UK has e.g. refused to engage in automatic exchange, but the "unknown" gives the UK a negative mark. Odd.
Error. Are tax rulings/APAs published? Obviously not, but this is listed as unknown. The only error in the UK's favour.
Error. Full text of all tax judgments is published. This wasn't always the case before 2003, so an out of date source is likely being used here.
Second item is: inappropriate criteria. Full texts of crimimal court judgments aren't published because there are too many, and a jury decision is not a "judgment".
Strange "largely" here, with a hard-to-track-down reference to an old source.
Error. All legal entities need an LEI to trade on any UK financial market or receive investment services. This is a result of MiFID and was enacted several years ago - it applies across the EU from 2018.
Error in criteria. This takes one CRS option and randomly makes it mandatory. The CRS guidance actually says: "Examples of identifying numbers include a TIN, business/company registration code/number, LEI or GIIN".
Error/out of date sourcing UK PEPs are now included… . And the score relates to a 2007 report, so out of date.
Error/out of date sourcing. Banking information on request. The "problems" here relate to exchange of information (so not really in point) in an out-of-date report.
Error/out of date sourcing - see HMRC's Connect system
Likely error/out of date sourcing. The "partially" here relies on the very out-of-date 2007 FATF report. I don't think it's correct.
Likely error. 127 claims that there is no reporting obligation on banks etc receiving large cash deposits. Is that right? What about para 4 of the money laundering regs?
Inconsistency/error. Here the UK gets downmarked for having a separate Scottish and Northern Ireland land registry. Very silly. Different systems of land law and devolution means can't be one system. And who cares?
Irrational scoring. The whole UK then gets marked down because the Scottish land registry is expensive for some searches
Error. Lists things that aren't company types at all. Franchises? Property Managment Companies? The notes make clear someone has googled a random page and misread it. This is the one I pointed out two months ago and wasn't fixed. Ooops.
Wrong question. We don't "prohibit" contract and trust clauses in English law. The question is whether they are enforceable. I would question if a flee clause would be enforceable (but I'm not aware of any authority on the point)
it is applicable and the answer is "yes"
Error. As the notes correctly point out, partnerships with taxable partners do have to keep records. A partnership without taxable partners no more has to keep records than any individual carrying on a non-taxable activity.
That's the end of my list. Comments welcome - and I'm conscious I'm not an expert in many of the areas covered. Very possible I've made mistakes.
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