In my current series of Sunday columns on countering money laundering and the risks of terrorist financing and proliferation I have consistently advanced what I consider to be the fundamental view that the financial crime of tax evasion is the primary driver of money laundering. This is true not only for the international level, but more specifically for Guyana and the wider Caribbean. In the wider Caribbean, where there is a proliferation of typical tax havens, this driver is indeed most classically revealed. However, in Guyana the driver functions more or less as an extension of a broader range of organized criminal endeavours. Therefore, by no stretch of the imagination can it be successfully argued that Guyana fits the profile of a typical tax haven.
Additionally it should be noted, this series has consistently stressed that its readers should never underestimate the threats which tax evasion and money laundering together pose to the modern capitalist state. As previously indicated, these threats arise from at least two major, but related directions. The first of these is the relentless strain which tax evasion places on the fiscal capacity (tax raising) of the capitalist state. And the other is the consequential exposure this leads to, of capitalist market economies continuously co-mingling criminal motives with its price incentives and other transactional mechanisms.
There is little doubt that, in recent times, concern about money laundering has been resurgent globally. Thus, as recently as June of this year (2013), the G20 group of countries (the most influential global grouping of world economies) issued a communiqué supportive of the rich countries (G8 grouping) in their global efforts to contain what that grouping had publicly labelled as “the menace of tax evasion” (my emphasis), particularly through the intensive global exchange of tax information. This call has in effect echoed the United States’ enactment in March 2010 of its Foreign Account Tax Compliance Act (FATCA). Due to administrative delays and other considerations, this Act has not yet come into effect. However since my submission of the Memorandum on Countering Money Laundering and the Risks of Terrorist Financing and Proliferation to the Special Select Committee of the National Assembly last October, the United States Treasury has given notice that arrangements are now in place for FATCA to be fully operational by July 1, 2014.
The principal defined target of FATCA is all those United States taxpayers (both citizens and legal residents) who hold foreign financial accounts and are presently non-compliant with US tax law and regulations. The US Internal Revenue Service (IRS) presently collects about US$2 trillion in taxes each year but remains concerned that the taxes which are due remain larger.
The size of this tax gap, as it is termed, is periodically assessed by the US authorities and their most recent estimate (for year 2006) reveals that the tax gap remains roughly the same size as it was in 2001, when this was last estimated. The estimated tax compliance ratio is 83 per cent.
The FATCA focuses on foreign financial institutions (FFIs). By United States law these are now required to report information on 1) All US offshore financial account holders, and 2) To provide information on “foreign entities in which US taxpayers hold a substantial interest.” Further, the law stipulates that US financial institutions should withhold 30 per cent of payments that are made to those FFIs, which do not agree “to report information on the identity and amounts of funds they hold for US account holders.”
As proclaimed on the US Treasury’s website, its explicitly stated goal is quite ambitious, which is to forge through FATCA “a global standard to curb offshore tax evasion.” FFIs (including Guyanese financial institutions) have the options of entering into an agreement directly with the United States IRS or indirectly through an inter-governmental agreement (IGA) between their home government (for example the Government of Guyana) and the United States authorities.
Models 1 and 2
In practice the IGAs are expected take two principal forms. For Model 1, FFIs in a particular jurisdiction would report information on US taxpayers to their governments. These governments will in turn relay that information to the IRS. The IRS will also in turn provide similar information about that country’s account holders in the US.
Model 2 applies to those FFIs which opt to report directly to the IRS (to the extent that the US account holder consents to this or local law permits this to occur). Such information is expected to be supplemented by tax information exchange agreements between governments with respect to non-consenting account holders. This particular IGA is still in draft form but it is expected to be finalized by December 31, 2013.
It should be observed that proposed regulations under FACTA will seek to exempt pre-existing financial accounts held by United States taxpayers, which are less than US$50,000. Further, for those accounts up to US$1 million, the FFIs can rely entirely on account information which is electronically available to them. To date there are 50 plus countries and jurisdictions with which the United States is substantially engaged in negotiations. These include most of the leading industrial nations and several tax havens.
FATCA has not been without its critics both in the United States, the Caribbean and elsewhere. Several areas of concern have been identified and the US authorities have sought to respond to those in two ways: first by addressing the practical ones and secondly through rebutting those which they believe are invalid. These criticisms will be addressed next week, but it should be noted here that they mainly centre on 1) the cost effectiveness of the Act; 2) the implicit penalization of Americans living abroad; 3) US governmental overreach into other jurisdictions; and 4) the loss of US global competitiveness, if the “tax evasion business” goes elsewhere!
As can be gleaned from the above, the implications for Guyana are stunning, to say the least.