Beneficial Ownership Transparency Increasing
Last August we heard that the OECD’s Global Forum on Transparency and Exchange of Information was moving on to the issue of beneficial ownership of corporate entities in its fight against tax avoidance and evasion, and it certainly appears to be the case that once-reluctant jurisdictions are falling into line with this agenda as the next phase of global transparency boundary-pushing gets under way.
As with BEPS, the United Kingdom has set the pace here, having introduced its register of persons with significant control back in 2016. Now, all European Union member states are obligated to put in place procedures for the collection of beneficial ownership information under the Fourth Anti-Money Laundering Directive. Other countries, including Canada and Indonesia, are doing the same.
It was always thought that it would be difficult for the United States to toe this particular transparency line, given that companies are formed under state rather than federal laws. Nevertheless, the idea of greater transparency of beneficial ownership has bipartisan support in Congress, leading to the introduction of the Corporate Transparency Act of 2017 last year.
It is often said that if confidentiality is your thing, then you need look no further than a Delaware or Nevada corporation, and not necessarily to a BVI, Bermuda, or Cayman Islands company. But it is usually to the latter group and their peers that most fingers point when an international tax scandal breaks. But maybe that’s a little unfair. Most leading IOFCs now have systems in place to systematically collect and store company ownership information – unlike the majority of OECD and G20 countries. In fact, in 2017, Jersey received an international award from a professional association for its work to enhance the island’s central register of information on company beneficial ownership and control.
Offshore jurisdictions have resisted calls to make such data available to the public, pointing out that to do so would make the global transparency playing field decidedly uneven while the rest of the world caught up with their efforts, much to their detriment. Such calls are growing louder though, especially in the European Union, and this could well form the next battleground in the war for greater levels of tax and corporate transparency.
Still, policy makers might be ignoring a crucial question here – will registries of beneficial ownership actually reduce levels of tax avoidance, evasion, and financial crime? The evidence so far is quite inconclusive. Last week, the Isle of Man announced that two-thirds of those who were supposed to provide information under the Beneficial Ownership Act have done so. A remarkably similar proportion of companies made declarations under Jersey’s highly-rated beneficial ownership information collection system last year, with 35 percent of expected information returns due by the deadline not filed.
Now, I’m not suggesting that the one-third of company owners that failed to comply with beneficial ownership rules in these jurisdictions have anything to hide. But is it not the case that “clean” companies will have fewer reservations about these rules than dirty ones? After all, what self-respecting criminal is going to enter his details into a government register, to be viewed by the police any time they like, and potentially by the public too? Not to mention the fact that some unsavory types might welcome the chance to use publicly available company ownership data for nefarious purposes? So I think it’s fair to conclude that this is by no means a perfect solution.
Remaining on the issue of company formation, and it must be decision time for many business owners in the United States following the introduction of the Tax Cuts and Jobs Act: S Corporation, or C Corporation?
The TCJA was supposed to make tax so much easier for people, for companies, and for people who own companies. But for pass-through entities (S corps) – where business income passes through a company to be taxed at the level of the individual owners or members – things must feel like they have got more uncertain.
True, the TCJA may have cut tax for most pass-throughs by combining the lower top rate of personal income tax with a new 20 percent deduction on business income. But details of what exactly qualifies as business income, and how the deduction will work in practice, was not included in the legislation. And much-needed guidance from Treasury and the Internal Revenue Service is eagerly anticipated. However, the huge corporate tax cut included in the TCJA has added a new dimension to tax planning for SMEs.
The TCJA was designed to allow pass-throughs to be taxed at just below 30 percent, a significant improvement on the prior law, under which they could be taxed at the old top personal rate of 39.6 percent. But corporations, which used to be taxed up to 35 percent, are now subject to income tax at just 21 percent, and can take advantage of generous deductions on capital expenditure themselves.
It will be interesting, therefore, to see if there is a rise in conversions as a result of the TCJA. If it does, I wonder if that was really the intent of Congress at the legislative stage, given that much was made of how the reforms were going to improve the tax situation for pass-throughs.
For more information on this, and other topical international tax matters, please visit: https://www.cchgroup.com/roles/corporations/international-solutions/research/global-tax-weekly-a-closer-look