They know all about you!

They know all about you!

It is part of human nature that we are in a state of constant flux. Whether it is in the name of advancement, development, or progress of some form, the world never stands still. In recent years, the world I live in, that of finance, has seen some quite radical changes.

Back in the 1970s and early 1980s, many Maltese not only saved a meaningful portion of their income, but did so via bank accounts or investments overseas.  The political environment on the island necessitated that a nest egg was built outside the clutches of the then local autho­r­i­ties, for security purposes. It was also comforting to know that this nest egg was safe from being disclosed to the tax authorities.  Perhaps this secrecy, or confidentiality, also acted as an incentive for abusive tax planning.

Over time, the balance of incentive shifted away from the instability on the island.

Hiding one’s assets to avoid paying tax become the primary motivator. Realising this, various governments introduced a number of schemes to attract this capital back to the island in the hope that it could then be put to use in an economic acti­vity that would generate income, jobs and economic prosperity. 

To varying degrees, these repatriation schemes proved very successful, and over the years a very large part of this overseas capital found its way back to the island.

The introduction, in 1994, of the 15 per cent final withholding tax (FWT) regime proved im­mensely successful, promising confidentiality should one pay 15 per cent on one’s interest income.

The stability of this system, its simplicity, the level it was pitched at and the trust that had been slowly built over the years served to act as a strong platform to subsequently encourage local residents to repatriate their capital.

The tragedy of the Twin Towers in September 2001 set in motion a sea change that has today resulted in a complete removal of all bastions of confidentiality.  The notion that in order to have some form of success, terrorism needed a financier, led authorities to focus their energies on the money trail. With it began the in­troduction of a number of pieces of legislation through the deve­loped world that has required various degrees of disclosure.

While transparency should always be promoted as a principle of good business, care must be taken not to abuse of this transparency, especially now that tax authorities know so much about everything you do

Incentivised by the search for terrorist and criminal activity this new legislation focused on two touch points. At the outset, whenever a new account or investment is opened, ser­vice providers are required to sa­tisfy themselves of the source of funds and source of wealth of the individual or entity requiring this service or product. We all know the challenges faced when opening such accounts. Beyond this, service providers are then required to provide ongoing reporting to authorities.

The prime drivers of these disclosure reports come from FATCA (a US piece of legislation) or CRS, its European equivalent.  Essentially, holding an account or investment overseas no lon­ger comes with confidentiality. Service providers are required to exchange information with local tax authorities on almost all aspects of the particular service or product, whether it is the details of the account holder, the balance held or the income derived.

All this needs to be disclosed, and not on a need-to-know basis. The information is passed en masse to authorities. The world is now one where transparency and compliance are the driving forces. Witness what has happened in Swiss banking.

Locally our last bastion of such confidentiality was re­moved with, ironically, a rather ‘secret’ piece of legislation that was introduced earlier this year.  From 2019, all banks, investment service providers and payers of investment income will be required to disclose full details of the recipients of investment income, irrespective of whether 15 per cent FWT is paid or not.  In the past only details of those individuals who received investment income without deduction of tax were disclosed. This is being done in the interest of transparency.

Clearly, it is a good thing if this will lead to catching those who abuse of the system’s confidentiality. Nobody wants to assist in helping to hide capital that was sourced from illegitimate activity.

On the other hand the danger created is that the disclosure of this information leads to witch hunts of those individuals who built their capi­tal quite legitimately but always wanted to remain below the radar. This is no longer possible and the removal of confidentiality may also lead to the removal of confidence in the proper functioning of the tax collection system. 

While transparency should always be promoted as a principle of good business, care must be taken not to abuse of this transparency, especially now that tax authorities know so much about everything you do.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.

David Curmi is managing director at Curmi and Partners Ltd.

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