How to end offshore secrecy – a new proposal

Offshore secrecy is a problem. Tax avoidance, tax evasion, sanctions evasion, drug cartels, corruption, questionable government contracts – all have been enabled by offshore companies whose ownership and accounts are hidden from public view.

We believe everyone would benefit if all companies, everywhere in the world, had to publish basic information: their shareholders, directors, beneficial owners and accounts. But previous attempts to persuade or force this result have stalled.

We’re presenting an alternative. Companies across the world would be invited to publish their basic corporate information on Companies House. Companies that don’t would be subject to a 10% “transparency levy” on all payments received from the UK, and barred from public sector procurement contracts. Companies from countries with fully open corporate registers would be entirely exempt.

The UK could introduce the transparency levy unilaterally. We’d anticipate it would then be implemented by many other countries – OECD members and developing countries alike. We’d see a new wave of corporate transparency. All it takes is for the UK to take the first step.

The case for open company registers

Journalists frequently find their investigations stymied by offshore secrecy. We might trace a dubious business to Belize, or to Arkansas, but it’s then impossible to find out who owns it, who runs it, or what its business actually involves.

This is an obvious problem for journalists investigating malpractice and corruption; it’s also a problem for banks deciding whether or not to open a bank account for a company owned by an offshore entity.¹In practice the most important barrier to money laundering and other financial crime is the banks, and their anti-money laundering (AML) and “know your client” (KYC) teams. They, of course, have no special investigatory powers. Open registers would help them do their job more effectively, and that would benefit all of us.

On the face of it, law enforcement and tax authorities don’t need open registers. The Financial Action Task Force and the OECD have made considerable progress in ensuring that, in theory, law enforcement has full access to company information (including the identity of companies’ beneficial owners). But in practice it’s often hard to obtain cross-border access; formal requests have to be made, the process can be slow, and bad actors can use legal proceedings to slow things down further (giving them the time to move their assets elsewhere).

Worse still, many countries still don’t require key information to be filed at all. The US, Bermuda and Belize, for example, don’t require companies to file accounts. If the local authorities don’t have the information, it’s impossible for foreign authorities to obtain it, short of complex local litigation.

So offshore secrecy doesn’t just block investigations by journalists and financial institutions; in practice it’s a significant impediment for investigations by public authorities. That’s why there’s a strong public interest in open corporate registers.

The current problem

Anyone can go onto the UK’s Companies House and find all the filings made by any company. This includes its shareholders, directors, accounts, and the identity of its true human owners (the “persons with significant control”²It is unfortunate that UK company law uses the PSC concept; it would have been better to align with the well-understood “beneficial ownership” concept. This paper won’t go into the differences between the two, or “beneficial owners”). This is all searchable, for free, by any member of the public.

This is not typical. This interactive chart shows how open each country’s corporate registry is. All thanks to data from opencorporates.com, and you can click on a country to go to the individual assessment:

Many countries have public registers which show companies’ directors, shareholders and accounts. But important jurisdictions like the US and Dubai don’t, and tax havens almost never do (Gibraltar is an unusual exception).

The UK has one of the more open company registries in the world³Companies House has many problems, largely caused by a failure to check data and enforce the rules (which may be about to get better). We would also be cautious about assuming that the UK is worse than others, as opposed to just having more companies, and more widely publicised problems). (the best, in our view, is Estonia, where the company registry search is both comprehensive and user-friendly).

Fewer countries still have open registers of beneficial owners – the individuals who really run a company (sometimes hidden by layers of ownership, trusts and other arrangements).⁴Note that some sources, like openownership.org, conflate closed registers (open only to local law enforcement) with open registers). The EU introduced mandatory public beneficial ownership registers in 2020, but an unfortunate decision of the CJEU blocked this, resulting in a significant reversal of the progress that had been made. Under the new anti-money laundering directive, the registers will be open, but only to people with a “legitimate interest” in money laundering. So, for example, it may not be possible to search the French register when investigating tax avoidance.

There are around 35 countries with open beneficial ownership registers:⁵Data from openownership.org; code to display map by Tax Policy Associates Ltd, and available on our GitHub here.

There are other countries, like the US, where there is a register, but it’s only accessible by local law enforcement.

The problem is that bad actors will gravitate towards countries that don’t have open registers. There is widespread agreement that this needs to change. The question is: how?

The current solution

International efforts to persuade tax havens to open up their corporate registers have largely been unsuccessful.

The UK has taken direct steps to require the Crown Dependencies (e.g. Jersey) and Overseas Territories (e.g. Cayman Islands) to have open beneficial ownership registers, overriding their local legislatures. This continues to meet resistance.

The moral case for requiring tax havens to have open beneficial ownership registers was seriously damaged when the CJEU blocked open registers across the EU on the basis they conflicted with beneficial owners’ right to privacy. If Cyprus and Malta don’t have open registers, why should Jersey? And why the focus on so-called “tax havens” (typically small islands) when the richest country in the world has some of the least transparent company laws in the world?

There are also obvious practical problems with forcing the CDs/OTs to adopt open beneficial ownership registers. Those with most to fear from transparency will move elsewhere. Increasingly that means Dubai, which has essentially zero corporate transparency. There is also a valid fear on the part of the Crown Dependencies/Overseas Territories that legitimate clients who wish privacy would also relocate to Dubai and elsewhere, putting them at a competitive disadvantage. And sometimes countries resist for darker reasons.

In any event, the project is limited in scope. There are no current plans to require “tax havens” (or indeed anyone) to publish other corporate information, in particular accounts.

We need something that is simultaneously more democratic (which doesn’t involve overriding self-governing territories), more ambitious (not just beneficial ownership) and fairer (not just “tax havens”).

An alternative model – FATCA

In the 2000s, following a series of bank secrecy scandals, the US Government resolved to require banks across the world to report their US accountholders to the IRS.⁶The US has a particular issue here, because it taxes US citizens no matter where they live. That “citizenship based taxation” is in our view unfair – more on that here – but that doesn’t change our view of the effectiveness of FATCA. The US couldn’t in practice enforce citizenship-based tax against some of its expats before FATCA – FATCA meant that it could. So most of the complaints about FATCA, are in fact complaints about citizenship-based taxation.

The US of course had no way to require this as a matter of law. So it did something much smarter.

Under what became known as “FATCA“⁷The Wikipedia article on FATCA is a pretty good summary of how things stood 10 years ago, but unfortunately is now mostly rather out of date, the US asked financial institutions worldwide to agree to report their US accountholders to the IRS. Financial institutions could freely choose whether to sign up to FATCA. But if a financial institution chose not to, it would be subject to a 30% withholding tax⁸A “withholding tax” is a requirement on a person making a payment to deduct from that payment an amount representing tax that is really the liability of the recipient. Withholding taxes are widely used in circumstances where it is easier for a tax authority to collect tax from the payer than the recipient. The case people are most familiar with is their own employment income, where in most countries the employer withholds the tax. But it is also very common for tax authorities to require tax to be withheld from cross-border payments, where the tax authority has little ability to tax a foreign recipient. on all its US income. So, in reality, financial institutions had no choice at all – they almost all ended up becoming compliant with FATCA.⁹This is a very simplified history. Data protection and bank secrecy laws meant that most banks feared they wouldn’t be able to voluntarily provide account information to the IRS. So they pushed their governments to enter into agreements with the US under which (e.g.) the French government would require its local financial institutions to make reports to the IRS (solving the data privacy problem) and in return the US would deem all French financial institutions to be compliant. This would never have happened if it wasn’t for the original promise/threat of a withholding tax.

This was highly controversial, but a brilliant innovation. The original idea was conceived by the Congressional Black Caucus, who saw it as both a more effective and fairer strategy than the previous approach of targeting small island tax havens for economic sanctions, and letting larger states off the hook. FATCA treated all countries equally.

OECD members eventually responded by creating a multilateral version of FATCA – the Common Reporting Standard.¹⁰CRS was entirely consensual, with no withholding obligation to prod people into compliance. But, once a country had accepted the principle of FATCA, it was very hard for it to refuse to sign up to CRS. Large countries acted out of self-interest. Small countries fell into line. Thanks to CRS, over €12 trillion of accounts are automatically reported between countries every year. If a UK resident opens a bank account almost anywhere in the world, it will be automatically reported to HMRC. That is all thanks to FATCA, and the revolution in cross-border reporting that it created.

Our proposal is inspired by FATCA – we believe the UK should use a unilateral measure to incentivise businesses and countries to move towards transparency.

The proposal – the transparency levy

The following paragraphs summarise our proposal.

This is very much a “proof of concept”, and not a fully-worked-out technical proposal, but we’ve included some of the legal detail in footnotes.

Disclosed entities

The key concept is a “disclosed entity” – an entity that publishes “transparency¹¹Discussion can be impeded by the fact that “transparency” can, in a tax context, mean that an entity is not subject to tax itself, but whose shareholders, partners or members are taxed as if they were carrying on the business. The entity is then “tax transparent” or “fiscally transparent”. If, alternatively, it is taxed like a normal company, it is referred to as being “opaque”. When we use the words “transparent” and “opaque” in this proposal, we are using the more colloquial meaning of whether the company’s details are publicly disclosed disclosure” about itself. That means it lists its shareholders, directors and beneficial owners, and publishes annual accounts.¹²Thought would need to be given as to what standard is required for the accounts. The current standard for small UK companies – which is about to change – feels insufficient given that it doesn’t include the P&L.

As a policy matter, we want every company, partnership, trust or other entity¹³Whether or not strictly a legal entity under its local law. So, for example, unincorporated associations would also be included – past regulations that have omitted unincorporated associations have created loopholes. that has any dealings with the UK to be a “disclosed entity”. An entity that isn’t, is an “undisclosed entity“.

Where an entity is incorporated in a country (like Denmark, Estonia or the UK) which already has a free public register including “transparency disclosure” – then that company would be a “disclosed entity” automatically. It wouldn’t have to do anything. HMRC would publish a list of all such countries (“disclosing jurisdictions“).¹⁴It would have to be a little different for trusts and partnerships, which traditionally don’t register with company registries at all. Practically, a separate “disclosed trust/partnership” concept would probably be required. As of today, it’s possible that no country in the world would be a “disclosing jurisdiction” for trusts and partnerships – the UK certainly wouldn’t be. So all trusts and partnerships receiving payments, including UK trusts and partnerships, would have to register with Companies House. This is a feature, not a bug. Listed companies¹⁵At least those listed on major markets would also become “disclosed entities” automatically, given they don’t have beneficial owners in the usual sense, and already publish detailed accounts.

At the start, many countries in the world wouldn’t be “disclosing jurisdictions”, because they don’t have open company registries publishing transparency disclosure. A company in such a country could still opt to be a “disclosed entity” by filing its own transparency disclosure with Companies House in the UK. Companies House already registers plenty of foreign companies – little would be required in terms of systems/IT changes.¹⁶i.e. because Companies House already registers foreign companies with a UK branch, and foreign companies that own UK land.

So every company, trust and partnership in the world could become a “disclosed entity”. Why would it do this? Because of the transparency levy and the procurement rule.

The transparency levy

Anyone in the UK making a payment to an “undisclosed entity” would have to withhold a 10% “transparency levy“.¹⁷The levy of course wouldn’t have to be 10%. A levy that was too small (say 1%) could be regarded by some bad actors as an acceptable price for secrecy, and so fail to achieve change. 5% might be sufficient. 20% might be too high. But it is also advantageous to raise some funds in the short term to fund implementation in the UK and abroad. This would need careful thought.

So, for example, if a UK company was making a £100 interest payment to a BVI company which hadn’t registered with Companies House and become a “disclosed entity”, the UK company would deduct £10 for the transparency levy and the BVI company would only receive £90. The transparency levy would be paid to HMRC.

Payments to “disclosed entities” would not be subject to the transparency levy. It would be simple for UK payers to check if they were paying an entity which was disclosed.¹⁸Indeed much simpler than it is to apply current UK withholding tax rules, which are notoriously awkward.

The transparency levy could simply apply to all payments, regardless of their nature, but it would be simplest – at least at first – to apply it to the narrower category of payments that are traditionally subject to withholding tax. That means UK source rent, interest¹⁹The quoted Eurobond for listed bonds needs some thought. It’s not workable to e.g. require Marks & Spencers plc to identify individual bondholders, because it won’t be able to (there is a nice explanation here as to why that is). However simply excluding listed bonds creates a loophole. There would have to be an anti-avoidance rule so that, for example, the transparency levy applies to listed bonds issued between connected parties., dividends²⁰Listed shares would also need thought; again, they should be generally excluded subject to an anti-avoidance rule, royalties and annual payments. By limiting the levy to financial payments, there’s no impact, for example, on a small business supplying goods or services to the UK.²¹And if expanded to all payments, thought would need to be given as to how to avoid creating a barrier for small businesses, particularly those in developing countries.

The transparency levy therefore creates a powerful economic incentive for foreign entities to become “disclosed entities”, either by registering their own details with Companies House, or to pushing their government to upgrade their public register so the country becomes a “disclosing jurisdiction”.

Who applies the levy?

Where a bank or other intermediary is making a payment, they would be subject to an obligation to withhold the transparency levy (as they are at present for UK interest withholding tax). In other cases, the payer would withhold the levy.

The transparency levy would largely be self-policing, because all the risk of failing to apply would fall on the UK payer, but the cost of the levy falls on the recipient. UK payers are therefore incentivised to err on the side of caution and apply the levy even when the technical position is unclear.²²And to ensure this, any contractual term that purported to prevent the levy being withheld, or make the cost of it sit with the payer (a “gross-up” or indemnity) would be void. That’s fair given that it’s entirely within a foreign company’s control whether to comply and become a “disclosed entity”. Such a rule is not unprecedented – the UK has had a rule for over a hundred years that any attempt to make one party indemnify another party’s stamp duty is void. Other countries (e.g. Switzerland) have statutory rules that prevent any attempt to make the payer contractually liable for the cost of a withholding tax caused by the recipient’s status.²³There would need to be a refund mechanism, so that if the transparency levy is wrongly applied (e.g. the payer thought the recipient was an undisclosed entity when they were in fact a disclosed entity), the recipient can reclaim it. However, there should be no way for an undisclosed entity to be subject to the levy, become a disclosed entity, and then reclaim historic levies it had been subject to. That would enable people to play games with timing of disclosure. The transparency levy is not a tax, and standard refund mechanisms are not appropriate.

UK individuals and companies would list, in their tax returns, the foreign entities they’d made payments to, and whether they were disclosed entities or undisclosed entities.²⁴The fact a payment was made to an undisclosed entity should be of interest to HMRC, and other regulatory and enforcement authorities, given that (after the rules had bedded in) all legitimate parties would be expected to become disclosed entities. Consideration could also be given to publishing the number/amount of transparency levy payments each company makes.

The procurement rule

The “procurement rule” is simple – no supplier would be able to enter into a contract with UK central or local government (procurement, real estate or anything else) unless it is a “disclosed entity”.²⁵This goes further than the new requirement that contracting parties must declare their beneficial ownership.

What about avoidance and evasion?

There are two obvious approaches bad actors would take to avoid/evade these rules:

• First, by simply filing false information (as is currently endemic with Companies House reporting).
• Second, by registering one offshore entity, but having it secretly make payments “behind the scenes” to another undisclosed offshore entity. In tax terminology, the first entity is a “conduit“.

How to deter and prevent such behaviour?

There would have to be active enforcement by HMRC, to prevent the new register duplicating the existing problems with Companies House. But HMRC has the considerable advantage that (unlike Companies House) it has enforcement powers and expertise.

HMRC would have to be given additional powers. For example:

• If HMRC has reasonable grounds for believing that a “disclosed entity” has filed false information, or is acting as a conduit for an undisclosed entity, it would require the entity to remedy the situation. If the entity doesn’t, it would be put on a “bad list” of non-compliant entities.²⁶That mirrors the approach taken under FATCA, where (for example) a UK financial institution is automatically deemed to be compliant with FATCA, but in the event of “significant non-compliance”, they lose that status. Payments to an entity found to be non-compliant would become subject to the transparency levy, with an additional charge to make up for the period in which it was wrongly claiming to be compliant.²⁷There is a similar mechanic in the UK’s existing interest withholding tax rules; if a foreign company claims relief from withholding under a tax treaty, but wasn’t actually eligible, then HMRC can direct the UK payer to make “catch-up” withholdings so that the full amount of historic tax is collected.
• UK companies would be liable for avoidance by offshore “conduit” companies if they are in the same group.
• Making a false declaration would be a criminal offence for a company’s directors; dishonestly failing to withhold the levy would be a criminal offence for the payer’s directors (in the same way as for any tax). However, in most cases it would be the transparency levy mechanics which would incentivise compliance, not the (usually remote) prospect of criminal prosecution.

Would it be legal for the UK to introduce the transparency levy?

We don’t believe there are legal impediments that would prevent the introduction of the transparency levy:

• The levy would not be subject to (or contravene) the UK’s tax treaties, because the treaties only cover certain designated taxes, and the transparency levy is different from all of them.²⁸See e.g. Article 2 of the UK/France treaty. The question is whether the transparency levy is “identical or substantially similar to” income tax. It isn’t. The levy isn’t related to profit in any way (there are no permitted deductions), and wouldn’t be creditable against any UK tax liability the foreign entity might have). Note that the question isn’t whether the levy is similar to “withholding tax”, because there is strictly no such tax. Withholding tax is simply a particular collection mechanism for income tax, and it’s income tax which is designated in tax treaties. The transparency levy is nothing like income tax.
• The levy should be compatible with the UK’s WTO obligations, as it is being introduced to help counter tax avoidance, tax evasion, sanctions evasion, money laundering and corruption.²⁹See the WTO Appellate Body decision in the Argentina v Panama case, where the Appellate Body held that countries could restrict trade with tax havens for “prudential” reasons or to comply with national laws, as long as they did so in a consistent and non-arbitrary manner.³⁰There would need to be some form of “anti-conduit” rule, where a UK person making a payment to a disclosed entity which it knows will be on-paid to an undisclosed entity has to apply the levy.
• If adopted by EU Member States, the levy should be consistent with EU law, because it applies equally to all payments, depending on the objective status of the recipient, and is not discriminatory. So there should be no breach of the free movement of capital or the freedom of establishment.
• There should be no GDPR violation; in most EU countries, director and shareholder information is already published. Beneficial ownership information often isn’t, and in those countries we anticipate companies may need to obtain the consent of their beneficial owners before registering and becoming “disclosed entities”. There is an obvious economic incentive on beneficial owners to give this consent.

There have been a number of recent legal challenges to transparency initiatives – but a UK transparency levy would be introduced by primary legislation, and so wouldn’t be subject to legal challenge.

Implementation

It’s anticipated that relatively few payments would end up being subject to the levy, because most affected businesses would simply become disclosed entities. However the total amount of in-scope payments is so vast – likely in the trillions of pounds – that the transparency levy would still likely raise a large sum, particularly in the early years.

The funding raised from the transparency levy would be used to finance the additional work for Companies House and HMRC, and to help the Crown Dependencies and Overseas Territories build capacity for their own open registers (if that’s what they wish to do).

Implementation would be phased, with (for example) entities able to register as disclosed entities through the course of 2026, and the transparency levy and procurement rule both starting to apply from 2027.³¹Some delay is advisable to minimise “teething problems” with the new rules, as well as to give financial institutions time to build withholding and reporting systems. Delay may also increase the likelihood of international adoption – these processes tend to move slowly at first. The scope of the levy could potentially expand over time, from dividends, interest, royalties and rent in 2027, to include fees and sale proceeds from 2028, and all payments from 2029. But it is possible that, as was the case with FATCA³²FATCA was initially planned to extend to a much wider and more complex class of payments, encompassing gross sale proceeds and non-US source payments – but this ended up being deferred indefinitely because the standard withholding approach proved a sufficient incentive for widespread adoption. If that didn’t happen, and the UK remained the only country with a transparency levy, then it might be necessary to expand the scope of payments impacted by the levy to prevent avoidance by shifting one form of payment into another., global adoption would render an expansion of the rules unnecessary.

Wouldn’t the levy stop people from doing business with the UK?

The transparency levy copies the brilliant innovation at the heart of FATCA – the creation of a powerful incentive for foreign companies to voluntarily comply with a rule. There is, however, one very important difference: FATCA was complicated and expensive for financial institutions – they had to create entirely new systems to operationalise the reporting of all their US accounts, costing many billions of dollars. By contrast, it would take most companies less than an hour to register with Companies House, submit their corporate information, and update it once per year. The transparency levy should be no impediment to legitimate business.

And the basic concept here is nothing new. Businesses that operate cross-border are used to the idea that, if they want to escape withholding taxes, they have to register, or complete a form.

Won’t the UK come under significant pressure from other countries not to introduce the levy?

This is a complex question, and dependent on unpredictable geopolitical events (e.g. the outcome of the upcoming US Presidential election). A Kamala Harris administration might well welcome a global transparency initiative that requires no US legislation. And there is strong support for corporate transparency across the world, particularly in the European Union, South/Latin America and Africa.

The lesson from FATCA is that, when one country announces its intention to introduce a measure of this kind, the first reaction is complaints that it amounts to extraterritorial legislation. The second reaction is that other countries see the benefit and adopt similar measures.

The UK could be pushing at an open door.

Multilateral implementation

Whilst the UK could implement the transparency levy unilaterally, the ideal outcome is that other countries would adopt it, either creating their own registration system, or taking advantage of the UK’s own implementation and simply cross-referencing Companies House.³³An approach that would be particularly attractive for countries without the capacity or budget to implement their own systems.

The UK should therefore advocate for international adoption of a transparency levy at the UN and OECD, and in bilateral discussions with other countries.

The more countries that implement the levy, the greater the moral and practical³⁴i.e. because if many countries created their own registration systems then that could be quite burdensome for companies – i.e. because they’d have to make numerous separate registrations. The solution is for their home jurisdiction to create its own open register, so all local companies automatically become “disclosed entities”. pressure for widespread adoption of open registers. And the easier/cheaper it becomes for other countries to implement the levy, because they can “piggy-back” on existing implementations.

Why it works

The transparency levy is a radical new way of solving an old problem:

• It’s a path to worldwide corporate transparency that doesn’t require countries to act against their own immediate interest. We wouldn’t be begging Dubai to comply; we’d be giving Dubai companies a strong incentive to comply, if they want to continue to do business with the UK.
• We’d be creating an incentive for countries to create their own open corporate registers, to save their businesses the bother of individually registering with the UK’s Companies House.³⁵That’s a stronger incentive if many countries adopt, all with their own company registry. The burden of registering with many registries would push businesses to lobby countries to create open registries and become “disclosing jurisdictions.
• The transparency levy treats all countries equally – it doesn’t attack politically vulnerable small islands whilst ignoring the widespread secrecy problem in the US and EU.
• The transparency levy uses a well established pre-existing concept. Many countries impose withholding taxes on outbound payments unless procedural formalities are completed. The purpose and details of the transparency levy are different, but the basic idea is nothing new.
• The procurement rule avoids subjective judgment about tax avoidance, but ensures there won’t be a repeat of valuable contracts being awarded to businesses whose ultimate ownership is highly opaque.
• The disclosure, levy and procurement regime is reasonably straightforward for the UK to implement, building on an existing Companies House system and existing withholding tax mechanics.
• Once the UK has implemented, it becomes easy for others, particularly developing countries, to follow. They wouldn’t need to build any kind of complex registration/compliance system, just enact a transparency levy into their own local law, and cross-refer to the register kept by the UK Companies House.³⁶It would in many ways be preferable to create a new international register, of the kind suggested by some campaigners. Implementing such a register in the short term is likely to be difficult from both a political and a systems perspective. In the long term it’s conceivable that the transparency levy would begin a process that ends with such a register. However the important benefit of the transparency levy is that implementation isn’t dependent on international agreement or building complex new IT systems.

We welcome comments, criticisms and suggestions.

Many thanks to all the tax lawyers, trade lawyers, regulatory lawyers and transparency campaigners who contributed to this proposal.

Image generated with Flux AI: “A secure safe containing secret financial documents”

• 1
  In practice the most important barrier to money laundering and other financial crime is the banks, and their anti-money laundering (AML) and “know your client” (KYC) teams. They, of course, have no special investigatory powers. Open registers would help them do their job more effectively, and that would benefit all of us.
• 2
  It is unfortunate that UK company law uses the PSC concept; it would have been better to align with the well-understood “beneficial ownership” concept. This paper won’t go into the differences between the two
• 3
  Companies House has many problems, largely caused by a failure to check data and enforce the rules (which may be about to get better). We would also be cautious about assuming that the UK is worse than others, as opposed to just having more companies, and more widely publicised problems).
• 4
  Note that some sources, like openownership.org, conflate closed registers (open only to local law enforcement) with open registers).
• 5
  Data from openownership.org; code to display map by Tax Policy Associates Ltd, and available on our GitHub here.
• 6
  The US has a particular issue here, because it taxes US citizens no matter where they live. That “citizenship based taxation” is in our view unfair – more on that here – but that doesn’t change our view of the effectiveness of FATCA. The US couldn’t in practice enforce citizenship-based tax against some of its expats before FATCA – FATCA meant that it could. So most of the complaints about FATCA, are in fact complaints about citizenship-based taxation.
• 7
  The Wikipedia article on FATCA is a pretty good summary of how things stood 10 years ago, but unfortunately is now mostly rather out of date
• 8
  A “withholding tax” is a requirement on a person making a payment to deduct from that payment an amount representing tax that is really the liability of the recipient. Withholding taxes are widely used in circumstances where it is easier for a tax authority to collect tax from the payer than the recipient. The case people are most familiar with is their own employment income, where in most countries the employer withholds the tax. But it is also very common for tax authorities to require tax to be withheld from cross-border payments, where the tax authority has little ability to tax a foreign recipient.
• 9
  This is a very simplified history. Data protection and bank secrecy laws meant that most banks feared they wouldn’t be able to voluntarily provide account information to the IRS. So they pushed their governments to enter into agreements with the US under which (e.g.) the French government would require its local financial institutions to make reports to the IRS (solving the data privacy problem) and in return the US would deem all French financial institutions to be compliant. This would never have happened if it wasn’t for the original promise/threat of a withholding tax.
• 10
  CRS was entirely consensual, with no withholding obligation to prod people into compliance. But, once a country had accepted the principle of FATCA, it was very hard for it to refuse to sign up to CRS. Large countries acted out of self-interest. Small countries fell into line.
• 11
  Discussion can be impeded by the fact that “transparency” can, in a tax context, mean that an entity is not subject to tax itself, but whose shareholders, partners or members are taxed as if they were carrying on the business. The entity is then “tax transparent” or “fiscally transparent”. If, alternatively, it is taxed like a normal company, it is referred to as being “opaque”. When we use the words “transparent” and “opaque” in this proposal, we are using the more colloquial meaning of whether the company’s details are publicly disclosed
• 12
  Thought would need to be given as to what standard is required for the accounts. The current standard for small UK companies – which is about to change – feels insufficient given that it doesn’t include the P&L.
• 13
  Whether or not strictly a legal entity under its local law. So, for example, unincorporated associations would also be included – past regulations that have omitted unincorporated associations have created loopholes.
• 14
  It would have to be a little different for trusts and partnerships, which traditionally don’t register with company registries at all. Practically, a separate “disclosed trust/partnership” concept would probably be required. As of today, it’s possible that no country in the world would be a “disclosing jurisdiction” for trusts and partnerships – the UK certainly wouldn’t be. So all trusts and partnerships receiving payments, including UK trusts and partnerships, would have to register with Companies House. This is a feature, not a bug.
• 15
  At least those listed on major markets
• 16
  i.e. because Companies House already registers foreign companies with a UK branch, and foreign companies that own UK land.
• 17
  The levy of course wouldn’t have to be 10%. A levy that was too small (say 1%) could be regarded by some bad actors as an acceptable price for secrecy, and so fail to achieve change. 5% might be sufficient. 20% might be too high. But it is also advantageous to raise some funds in the short term to fund implementation in the UK and abroad. This would need careful thought.
• 18
  Indeed much simpler than it is to apply current UK withholding tax rules, which are notoriously awkward.
• 19
  The quoted Eurobond for listed bonds needs some thought. It’s not workable to e.g. require Marks & Spencers plc to identify individual bondholders, because it won’t be able to (there is a nice explanation here as to why that is). However simply excluding listed bonds creates a loophole. There would have to be an anti-avoidance rule so that, for example, the transparency levy applies to listed bonds issued between connected parties.
• 20
  Listed shares would also need thought; again, they should be generally excluded subject to an anti-avoidance rule
• 21
  And if expanded to all payments, thought would need to be given as to how to avoid creating a barrier for small businesses, particularly those in developing countries.
• 22
  And to ensure this, any contractual term that purported to prevent the levy being withheld, or make the cost of it sit with the payer (a “gross-up” or indemnity) would be void. That’s fair given that it’s entirely within a foreign company’s control whether to comply and become a “disclosed entity”. Such a rule is not unprecedented – the UK has had a rule for over a hundred years that any attempt to make one party indemnify another party’s stamp duty is void. Other countries (e.g. Switzerland) have statutory rules that prevent any attempt to make the payer contractually liable for the cost of a withholding tax caused by the recipient’s status.
• 23
  There would need to be a refund mechanism, so that if the transparency levy is wrongly applied (e.g. the payer thought the recipient was an undisclosed entity when they were in fact a disclosed entity), the recipient can reclaim it. However, there should be no way for an undisclosed entity to be subject to the levy, become a disclosed entity, and then reclaim historic levies it had been subject to. That would enable people to play games with timing of disclosure. The transparency levy is not a tax, and standard refund mechanisms are not appropriate.
• 24
  The fact a payment was made to an undisclosed entity should be of interest to HMRC, and other regulatory and enforcement authorities, given that (after the rules had bedded in) all legitimate parties would be expected to become disclosed entities. Consideration could also be given to publishing the number/amount of transparency levy payments each company makes.
• 25
  This goes further than the new requirement that contracting parties must declare their beneficial ownership.
• 26
  That mirrors the approach taken under FATCA, where (for example) a UK financial institution is automatically deemed to be compliant with FATCA, but in the event of “significant non-compliance”, they lose that status.
• 27
  There is a similar mechanic in the UK’s existing interest withholding tax rules; if a foreign company claims relief from withholding under a tax treaty, but wasn’t actually eligible, then HMRC can direct the UK payer to make “catch-up” withholdings so that the full amount of historic tax is collected.
• 28
  See e.g. Article 2 of the UK/France treaty. The question is whether the transparency levy is “identical or substantially similar to” income tax. It isn’t. The levy isn’t related to profit in any way (there are no permitted deductions), and wouldn’t be creditable against any UK tax liability the foreign entity might have). Note that the question isn’t whether the levy is similar to “withholding tax”, because there is strictly no such tax. Withholding tax is simply a particular collection mechanism for income tax, and it’s income tax which is designated in tax treaties. The transparency levy is nothing like income tax.
• 29
  See the WTO Appellate Body decision in the Argentina v Panama case, where the Appellate Body held that countries could restrict trade with tax havens for “prudential” reasons or to comply with national laws, as long as they did so in a consistent and non-arbitrary manner.
• 30
  There would need to be some form of “anti-conduit” rule, where a UK person making a payment to a disclosed entity which it knows will be on-paid to an undisclosed entity has to apply the levy.
• 31
  Some delay is advisable to minimise “teething problems” with the new rules, as well as to give financial institutions time to build withholding and reporting systems. Delay may also increase the likelihood of international adoption – these processes tend to move slowly at first.
• 32
  FATCA was initially planned to extend to a much wider and more complex class of payments, encompassing gross sale proceeds and non-US source payments – but this ended up being deferred indefinitely because the standard withholding approach proved a sufficient incentive for widespread adoption. If that didn’t happen, and the UK remained the only country with a transparency levy, then it might be necessary to expand the scope of payments impacted by the levy to prevent avoidance by shifting one form of payment into another.
• 33
  An approach that would be particularly attractive for countries without the capacity or budget to implement their own systems.
• 34
  i.e. because if many countries created their own registration systems then that could be quite burdensome for companies – i.e. because they’d have to make numerous separate registrations. The solution is for their home jurisdiction to create its own open register, so all local companies automatically become “disclosed entities”.
• 35
  That’s a stronger incentive if many countries adopt, all with their own company registry. The burden of registering with many registries would push businesses to lobby countries to create open registries and become “disclosing jurisdictions.
• 36
  It would in many ways be preferable to create a new international register, of the kind suggested by some campaigners. Implementing such a register in the short term is likely to be difficult from both a political and a systems perspective. In the long term it’s conceivable that the transparency levy would begin a process that ends with such a register. However the important benefit of the transparency levy is that implementation isn’t dependent on international agreement or building complex new IT systems.