How are your crystal balls feeling today?
It seems like it’s that time of year when everyone leaps onto the bandwagon of trying to predict what’s going to happen in 2016. Not wishing to miss the party, here are my thoughts…
We face a lot of questions in 2016 around what I would call the tectonic plates of our society: How can we tackle radical extremism (of any flavour)? How should the rest of the world respond to North Korea’s nuclear activities? What will happen if Donald Trump becomes President of the USA? How will the EU handle the migrant crisis? Will tensions between Saudi Arabia and Iran take them beyond proxy wars and into direct conflict? Should we be concerned over the global increase in ‘nationalism’?
But wait, there’s more!
On the economic front – Will the price of oil continue its fall? Has China seen the best of its growth days? Will the Remimbi replace the US dollar as the world’s reserve currency? Has the Euro crisis really just evaporated because its not in the news? When will interest rates start to rise?
On the social front we face equally challenging questions: Is Donald Trump’s plan for a wall across the Mexican border just a way to stimulate the US construction industry? How do we handle mass migrations? When will reality TV go away? Are we going to be able to solve the problem of having too much food in the world (and it being in the wrong places at the wrong time)?
We also face major ecological challenges. Beyond low lying pacific islands, if the sea level rises by a metre or so due to global warming, where will all the Dutch go and what will happen when most of London is under water? Will we get global scientific consensus that there is such a thing as manmade global warming? How long will it take (and how much) to really protect any significant portion of humanity from increasingly frequent ‘one-off’ climate events? Is there a pandemic waiting in the wings in 2016 because we’ve become too reliant to antibiotics?
It seems to me that there are enough permutations of these questions to (i) make us really quite nervous about 2016 and (ii) quite unable to actually predict with any degree of certainty just what 2016 will actually be like.
Death and Taxes
I can’t speak to the issue of death (or rather I don’t want to), but one thing I do know a little about is taxes. When it comes to 2016, it would seem that the world is a little more settled on its position, although many don’t like that position. Even after the best part of a decade following the Lehman Brothers collapse, the world’s financial systems are still fragile and growth is weak. All the political, climate and social issues I just listed continue to create fiscal pressure on governments to find more and more money, and we all know where that leads – tax. The continuing focus on tax evasion will be stepping up this year as FATCA evolves into GATCA. The OECD’s initiative is going to have the effect of transitioning the current ‘one to many’ impact of FATCA into a ‘many to many’ impact for financial firms across the globe.
With around a hundred countries already committed or signed to CRS and AEoI, that gives around 10,000 permutations of automatic tax information sharing. What does that mean? It means if you thought FATCA was painful, CRS will be much more so and it will impact the bigger institutions much more than the smaller ones.
If you think about it, in principle, you’ll need to identify the ‘GATCA status’ not just the FATCA status of all clients. Instead of just trying to figure out which ones are Americans so that a report goes to the IRS, you’ll be segmenting your entire client base into GATCA buckets (GATCA meaning both CRS and FATCA combined). This will be transparency raised to the nth degree. You segment clients today based on the services you provide to them. By the end of 2016 you’ll also need to be able to take a completely different view of your data in order to aggregate the required information into up to a hundred different data buckets based on client tax residency, then export that data to your domestic regulator (plus the IRS if you’re not in an IGA jurisdiction). So, the impact on your firm will be directly in proportion to the number of tax residencies represented in your client base.
2015 was marked by some extreme reactions to FATCA from Americans located outside the US and several interest groups representing them. The main thrust of the argument being that FATCA was (and is) bad for America and damaging to Americans just trying to make a living outside the US. It is the proverbial sledgehammer being used to crack a nut – an argument with which I have some sympathy. Superlatives like ‘devastating’ and ‘catastrophic’ were common terms associated with FATCA in 2015 and its difficult indeed to see how the US will gain more tax dollars from seeing all this FATCA data (then pursuing those who didn’t declare it) than will have been spent by the industry in collating and sending it.
GATCA will level that playing field to a large extent, but again its difficult to see how the ends will justify the means – particularly the cost to the industry. My one tentative prediction is going to be that 2016 (or 2017, see I’m hedging my bets already) will finally see regulatory compliance costs being so great that they begin to get passed on to investors and bundled fees will start their well deserved slide into oblivion (until the next cycle). That prediction goes alongside my view that, at some point, investors will have to recognise (where it hurts) that you can’t keep forcing prices down while expecting higher and higher levels of service.
In comparison to the imponderable global social, political and economic questions and uncertainties of 2016, GATCA looks like the proverbial ‘piece of cake’.
Anyway, I hope you had a happy New Year and that 2016 brings you peace, health and prosperity, if not certainty.
Image Credit: Christian Schnettelker
Ross McGill is the CEO and subject matter expert for TConsult. Ross is a specialist in QI and FATCA operational compliance, cross border tax reclaims, relief at source and information reporting. He over 23 years of experience in financial services, including 19 years at C level; and 30 years’ senior management experience in blue chip FMCG, including sales, marketing and operations.